The travel and leisure industry is desperately trying to get up from the COVID canvas, yet continues to face a wave of economic headwinds.
Last week’s webinar, hosted by Bird & Bird, proved to be a fascinating afternoon of discussion and debate, assessing the outlook for the hotel sector, lending landscape and anticipated trends on the horizon.
We analysed the most pressing challenges faced by operators with staff availability, cost inflation (including salary spikes) and unpredictable demand dynamics appearing to be at the top of the list of issues to contend with.
Lower leverage levels and resilient valuations coming into COVID, plus the wave of government support that propped up businesses through loans, grants, tax reductions, waivers and deferrals have all contributed to surprisingly low levels of restructuring activity in the sector.
However, a tipping point may not be far away as pandemic support falls away, and global travel trends unlikely to stabilise for some time. Business travel is likely to be three or four years away from resuming anything like “normal” service, and that will likely be some way from what it was before.
With such continued difficulty in forecasting with any degree of certainty, we discussed a number of additional factors that may contribute to tipping the balance, including:
- The instability of government policy, affecting certainty in the regulatory environment and making near/medium-term forecasting challenging
- Overleveraged balance sheets – higher gearing increases on debt servicing will stress cash flow, and with leverage covenants coming back into play, could we see this trigger refinancing efforts, restructuring and potential disposals?
- Reductions in discretionary spend – the impact of inflation and tax rises on consumer spending could dampen demand. Potential interest rate rises will only add further stress to cash flows, and a pinch point could arrive next summer driven by a race between room rates and inflation.
The lending landscape and future outlook will differ from one operator to another and thorough analysis will be required to find the right way forward. However, scenario planning will be crucial in navigating the months ahead and conservatism and realism must be the watchwords during lender dialogue, as operators seek to establish a firm financial footing and find the right route to recovery.