Tough macro-economic conditions, which stifled business and leisure travel, compounded by huge supply additions took a hard toll on the premium hotels (5-star and 5-star deluxe) segment in 2012-13. More importantly, the current fiscal will remain equally dire for the industry, and no major positive headwinds appear to be on the horizon.

Growth in room demand was muted at 8 per cent year-on-year. So was growth in foreign tourist arrivals (4 per cent year-on-year), the main demand driver for premium segment hotels. The slowdown in demand growth was exacerbated by the 11 per cent year-on-year rise in room additions.

Hurt by this double whammy of demand slowdown and supply additions, there was a decline in occupancy rates (to 61 per cent in 2012-13 from 62 per cent in 2011-12), and average room rates (5 per cent y-o-y to Rs.7,350). As a result, revenue per available room (RevPAR — revenue from rooms occupied divided by the number of rooms available) fell by 7 per cent to Rs.4,450 in 2012-13.

The continued weakness in domestic and global economies will sustain this pattern in room demand growth in 2013-14 across leisure and business destinations in the 12 cities (accounting for 80 per cent of the country’s premium hotel rooms), which Crisil Research analysed. We expect aggregate occupancy rates (ORs) to hit decadal lows of 58-59 per cent in 2013-14 and 2014-15 as 10,400 premium hotel rooms will get added to the existing inventory of 51,600 rooms in these cities.

Much of this upcoming supply was conceived and commissioned after operating margins peaked to 40 per cent in 2007-08, following a surge in business travel and foreign tourist arrivals during 2004-05 and 2007-08 coupled with a dearth of supply, which caused a sharp spike in ORs and RevPARs.

Intense competition will cause average room rates (ARRs) to dip further at 2 per cent CAGR to Rs.7,100 in 2014-15 from Rs.7,350 in 2012-13. The aggregate RevPARs of the 12 cities will decline at 3 per cent CAGR to Rs.4,200 in 2014-15 from Rs.4,450 in 2012-13.

Among business destinations, RevPARs will drip in the National Capital Region (NCR), Chennai, and Kolkata by around 7-10 per cent CAGR over the next two years. During this period, a divergent trend will be seen in Goa, a leisure destination; RevPARs in the State will rise by around 7 per cent annually due to limited supply additions.

Room demand

As far as room demand is considered, the situation may take a marginal turn for the better from 2014-15 only. Room demand is expected to grow at 10 per cent CAGR over the next four years as economic growth in most countries, including India, gradually returns to levels seen earlier in the decade.

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