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Sunday, August 18, 2013

Hotels catch 'deflagging' fever as owner, operator lose love

This story first appeared in DNA Money edition on Tuesday, Aug 6, 2013.

The bonhomie between hotel operators and the owners of the respective assets is starting to fade as the ongoing economic stress shows no signs of letup.

Indeed, in some cases, the cracks have reached a stage where a parting of ways appears to be the only option left. After the spate of flag-hopping – where a property rebrands under another operator either at the end of the agreement period or on termination of the deal – seen last year, therefore, it’s time to ‘deflag’.

Take Hilton Worldwide’s partnership with Eros Resorts & Hotels Ltd (ERHL), part of realtor Eros Group, founded by J R Sood and currently run by his son Satish Sood. The global hospitality major is understood to be ending the association – inked in 2011 – with ERHL to manage their two new and one already existing hotels.

A Hilton Worldwide spokesperson brushed aside the claim. “These are speculations. We have no comment.”

However, an industry source said one of the management agreements between the two parties has been allowed to expire already, while the other two will expire by September-October this year.

“The Soods are unlikely to renew the three management contracts as hotels in the Delhi-NCR region are not doing well as was projected earlier. In fact, the asset owners had earlier roped in InterContinental Hotel Group (IHG) to manage the three hotel assets before bringing Hilton on board. And now Hilton is on its way out as well,” said the source, requesting not to be quoted.

ERHL couldn’t be reached for comment. The two Mayur Vihar hotels (located next to each other) are being managed under Hilton and Double Tree by Hilton brands, while the Nehru Place property is being operated as Eros Hotel, managed by Hilton. The three hotels will, in all likelihood, be operated as standalone properties branded and managed by Eros after October this year.

However, Eros may also be looking to divest the 160-room Hilton hotel at Mayur Vihar and is believed to have already given a ‘sell’ mandate.

But as if losing three hotels wasn’t bad enough, Hilton appears to have more pain in store.
The five-star Hilton Hotel at Janakpuri, owned by Piccadilly Hotels, may go out of its network as well, said the earlier-quoted source. “The asset owners are in talks to bring in a new operator. Hyatt Hotels Corp is seen as a strong contender for the property.”

A Hyatt spokesperson said there was no official communication from the company on the said development.

Yet another instance of de-flagging involves a Starwood Hotels & Resorts brand – the 240-room Sheraton Udaipur Palace Resort & Spa. Earlier operated as a standalone property under Rockwood Palace Resort & Spa brand, it was re-branded by Starwood under a new management contract with the asset owners (Rockwood Hotels & Resorts Ltd) in August 2010.

Starwood’s India office said it had no comment to make on Sheraton Udaipur at this point.
The source, however, insisted that “Sheraton Udaipur will get deflagged by the end of this fiscal.”

The economic slowdown, industry experts said, is the key factor driving the deflagging trend. Hotel asset owners are getting impatient and unwilling to foot the bill for operational expenses when hotels are not making money.

“Given the liquidity crunch, asset owners have started intervening in the management company’s ways and means of operating the hotel. Some have started dictating terms as well by asking hotel operators to cut costs by reducing the number of expat personnel in their respective hotels. So positions like expat chefs and general managers are being carefully watched for cost rationalisation purposes,” said a top industry official.

But there’s another side to the problem, too, feel a section of industry experts. According to them, hotel operators sometimes tend to over-promise and under-deliver. What makes the situation worse is that the gap between revenue and expenditure gets significantly highlighted in stressed market conditions.

“Imagine being promised average room revenues of Rs 8,000-9,000 in a Tier II market when the maximum one can get is Rs 4,000-4,500. When the situation prolongs and expenses continue heading north, asset owners get in the damage control mode and take matters in their own hands,” said an official in charge of hotel development for a leading domestic chain.

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