Hotels Rethink Tariff Hike on Slowdown, Increase in Supply

Oct 09, 12 | 12:03 am

By Moulishree Srivastava

Indian hotel companies won't be able to bump up room tariffs as much as they usually do every October with the onset of the peak season as the global economic slowdown has depressed demand amid an increase in supply.

The increase in tariffs at this time, which then lasts for a year, may be about half the usual 10-15% rise.

"We are looking at an increase of only 5-7% in room rates from hotels across India," said Kamlesh Barot, former president of the Federation of Hotel and Restaurant Associations of India lobby group.

The lobby collates tariffs from hotels across India and publishes a guide with revised rates every October end. While leisure and business travel demand has slumped, the number of rooms has increased, analysts said.

"Markets are weak right now with minimal increase in demand. With the large supply pipeline in several markets like NCR (National Capital Region), Ahmedabad, Bangalore and Chennai, among others, pricing power in the industry is muted," said Pavethra Ponniah, a hospitality analyst at rating agency Icra Ltd.

"The ability of hotels to push for higher tariffs in such a scenario is limited." Apart from India's slowing growth, increased service and luxury tax may also discourage corporate and leisure travellers. Service tax has risen to 12.5% from 10% last year and luxury tax on rooms is about 12% on average as it varies 5-15% depending on the state, Barot said.

"The (total) tax levied on rooms is around 24%," he said.

This comes as costs of fuel, power, water and human resources are rising and are likely to dampen profitability by 5-15%, according to the industry estimates.

"In an inflating cost environment, such as the current one, inflation-adjusted revenue per available room or average room rates could be negative, which can erode margins of hotel companies," Ponniah said.

With supply exceeding demand, more is chasing less, said Pradeep Kalra, senior vice-president, sales and marketing, Sarovar Hotels Pvt. Ltd, which has brands such as Park Plaza, Park Inn and Sarovar Premiere. "We are less buoyant this year in terms of rate increase as compared with the last few years when we could hike rates by 10-20% depending on demand and supply situation," he said.

"Summer has been challenging for hotels in major cities with lower room rates and more or less stable occupancies." Dipak Haksar, chief operating officer of ITC Hotels, said, "an upward revision in rate is always market specific and based on supply dynamics. The revision would vary between 8-12% across the board at ITC Hotels." Foreign travellers contribute around 60-65% of revenue for major hotel chains, according to industry estimates.

Source: Live Mint