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Losses mount for 5-star hotel chains due to COVID closures

Peninsula operator makes first staffing cuts even as open properties lack guests

Mandarin Oriental, like other hotel operators, has been eager to reassure guests that it is taking measures to prevent the spread of COVID-19 but few are checking into its properties in Bangkok and other cities.    © Reuters

HONG KONG -- Peninsula Hotels has long prided itself on having a higher ratio of staff to guests than other luxury chains.

Amid the coronavirus pandemic, with few guests to go around, the Hong Kong-based group has been cutting staff for the first time and now looks set to post its first net loss since the Asian financial crisis in the late 1990s.

At rival Mandarin Oriental International and other hotel groups, the outlook is just as bleak.

"The first half of 2020 has been one of the most challenging periods our group has ever faced," said Clement Kwok, chief executive of Hongkong and Shanghai Hotels, operator of the Peninsula chain. Half of the group's 10 hotels have been closed since March, including its properties in New York, Chicago, Paris, Bangkok and Manila.

As of June 30, the company employed 7,198 full-time staff, down 3.4% from six months earlier. A spokeswoman said the decline included both voluntary and involuntary departures and that Peninsula "unfortunately cannot rule out further staff cuts across the group, especially in the U.S."

At home in Hong Kong, the company kept doors open at its flagship hotel, but occupancy dropped to 14% and 13%, respectively, for the first two quarters, from 70% and 61% a year earlier.

The Peninsula Hong Kong. The hotel's revenue per available room, a key industry metric, between April and June slipped 89% from a year earlier to 352 Hong Kong dollars ($45.40). (Photo by Shinya Sawai)

The second quarter marked the lowest since the company began releasing quarterly operating data in 2011, and it was only slightly better than the first half of 2003, when the figure dipped to single digits under the SARS pandemic.

Even more stunning was the sharp drop in the key industry metric, revenue per available room, or RevPAR, for its flagship Peninsula Hong Kong. The figure between April and June slipped 89% from a year earlier to 352 Hong Kong dollars ($45.40).

All in all, total revenue for the first half dropped 52% to HK$1.33 billion, while the company recorded a net loss of HK$1.2 billion compared with HK$254 million in net profit a year earlier.

At an operating level, Kwok said he expects the company to post a loss for the full year, too, "unless there is a material change to the current circumstances." Adding in finance costs, taxes and other overheads, the company looks unlikely to avoid its first net loss since 1998.

Peninsula Hotels is not alone. Mandarin Oriental International saw total revenue during the first six months from its 33 managed hotels dip to $276.4 million, a 57% decline from the same period a year earlier, while its net loss reached $435.5 million, widening from $12.2 million a year before.

Even leaving off one-time accounting charges for valuation changes, the group recorded an underlying loss of $101.8 million versus a gain of $10.6 million a year earlier.

Chairman Ben Keswick said in a statement on July 30 that all of its 33 hotels in 23 countries and territories were "either closed or operated at single-digit percentage occupancy levels for much of the second quarter."

While all hotels in Europe and the Americas have been closed since late March, the chain's flagship Hong Kong hotel remained open but at an average occupancy of 10.4%, compared with 75.9% a year earlier.

A company spokesperson said that the figure slid down to single digits in July. The key metric, RevPAR, for the first half dropped 88% to $44, also comparable to Peninsula's.

The deteriorating performance of the hotel was a major culprit for its parent Jardine Matheson Holdings' first-half results turning red.

Keswick, who doubles as the chairman of the mother company, said in a separate statement on July 30: "With the notable exception of Mandarin Oriental, the group's major businesses remained profitable in the first half."

He expects a substantial underlying loss for the hotel group for the full year. "A material recovery in business levels is not expected until 2021 at the earliest and a significant further loss is, therefore, likely in the second half of 2020," Keswick said.

The other top luxury hotels in the territory are undergoing a similar fate.

The Murray Hong Kong -- the newest flagship hotel of Wharf Holdings -- saw its average occupancy during the first half tumble to 15%, while its overall hotel portfolio dug deeper, "plunging to single digits," according to Kevin C.Y. Hui, its company secretary.

The hotel segment revenue, including mainland China, nose-dived 72% to HK$256 million in the first half, resulting in an operating loss of HK$243 million from a profit of HK$139 million in the same period last year.

It was a double whammy for hotels in Hong Kong, with anti-government protests last year and the novel coronavirus pandemic hitting at the beginning of the year.

CK Asset Holdings announced on Thursday that revenue for its hotel and service suite operations during the first half was HK$992 million, a 58% decline from the same period last year.

"In addition to the ongoing social incidents since June 2019, the hotel sector was impacted further by the pandemic, which caused visitor arrivals to plummet during the period," Chairman Victor Li said in a statement.

The hotel and service suite segment barely avoided a loss, but profit fell 96% to HK$33 million, as the average occupancy hovered at 23%.

"Hotels are taking the full brunt of decline in visitors to Hong Kong," said Britton Russell, director at AlixPartners in Hong Kong, who specializes in the retail sector. "[The] hotel industry right now is reliant on local consumers," which apparently is not providing sufficient stays and traffic for the industry.

Incoming travelers to Hong Kong in June totaled 14,606, a staggering 99.7% drop from a year earlier, when 5.14 million arrived, mostly from mainland China.

Most incoming arrivals are Hong Kong citizens and other legal residents. The government for months has restricted most nonresidents from traveling to Hong Kong in an effort to control the spread of the pandemic. 

"Its future is going to be dependent on travel restrictions being lifted," said Russell, especially counting on the return of mainland Chinese, who totaled more than 4 million arrivals during June in 2019, but this year dropped 99.8% to only 6,682.

Kwok of Peninsula Hotels said the company has been "navigating geopolitical instability in some of the regions we operate in, including our home market of Hong Kong, [and] we are concerned about the effect this political uncertainty will continue [to] have on our results, considering the majority of our group's interests are based in Hong Kong."

Mandarin Oriental CEO James Riley said: "Whilst we will certainly not return to anything like normal levels of occupancy by the end of the year, I do hope we will have some semblance of operating normalization beginning to come back to many of our properties." 

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