September issue 2002
Hard Time Hotels
The Beach Luxury in the 1960s: an opulent world of glamour and elegance – the ultimate testimony to an upscale lifestyle. Tall palm trees rustle over the waterfront cafÃ©, whilst watchful waiters dance attendance to the city’s elite. It’s a popular spot for the young and trendy, attracted by the lure of nightclubs and parties – and an ideal venue for the entertainment of the rich and powerful. Flash forward a couple of decades to the mid ’80s and the top-brass hotel repackages itself from Beach ‘Luxury’ to something more to the tune of Beach Budget, refashioned to suit the pocket and needs of the middle-class traveller. Gone is the grandeur of the bygone era, courtesy fierce competition from the emergence of a new class of 5-star international chains in the city centre, and the creeping in of stricter social codes. But an indisputable charm still lingers, evident even while adhering to the dictates of commercial viability, as ballrooms are remodelled into conference rooms for industry, and entertainment lobbies transformed into bustling tea-rooms frequented by weary travellers and businessmen for the quick cup of high tea.
Twenty years on, a visit to the hotel, speaks of a marked reversal of fortune. Through the metal security detector at the entrance, the lobby sports a deserted look, and the rusty bell at the reception desk beckons a lethargic gofer. Is a room available? A rather facetious question given the deserted hotel lobby. Rents, the bellboy will have us know, are now at their lowest ever. But even slashed prices are hardly attracting customers.
Elsewhere in the hotel industry, similar trends are visible. Hotels all over the country — big and small – sport a deserted look and future prospects appear bleak if staff predictions are anything to go by. And it’s not just the older outfits that have borne the brunt of the slippery-sloped yield curve. Five stars may still boast of luxurious environs, and an array of expensive sporting facilities – jacuzzis, pools and whirlpools – but faced with the ‘tidalwave’ of 9/11, the Pakistani hotel industry is barely holding its head above water. Demand has declined drastically with a deluge of nervous international travelers fleeing the country, and resultantly, local hotels have sustained huge losses over the year.
The ripple effect of September 11 struck the Pakistani hospitality industry hard on several counts. Travel into Pakistan took a nosedive with all international airlines announcing an immediate suspension of operations. Then came the escalation of troops on the border and fears of a possible nuclear playoff, further intensifying the instability in the region and resulting in yet another exodus out of the country. Hot on the heels of these fears, came an even more terrifying blow: terrorist attacks clearly targeting foreigners. In January, US journalist Daniel Pearl was kidnapped from Karachi. On March 5, a number of people, including two Americans, were killed when a church inside the diplomatic enclave of Islamabad was attacked. And then on May 8, French naval engineers were killed in a suicide bomb attack in Karachi, right outside Sheraton Hotel, whilst the US Consulate, next to Marriott hotel was bombed in June, killing 12 Pakistanis. Following this there was a much publicised attack on a missionary school in Murree.
The message was on the wall: foreigners were urged by various embassies and their corporate bosses to leave Pakistan as soon as possible or risk their lives. Dependent for its success, if not its basic functioning, on high interconnectivity meant that the hotel business would be a natural victim.
“Before 9/11, we enjoyed an occupancy of 75 per cent on average. This number would go up in peak seasons,” says Yaqoob Maung, Executive Assistant Manager, Pearl Continental. “After 9/11 we were badly hit — our room occupancy went down to about 25-30 per cent which is much below break-even figures.” The same happened at the Sheraton. Samra Muslim, Manager Public Relations, states that it was in fact the first blow that was the hardest. “After September 11 and the May 8 bombing, the hotel industry was hard hit. But perhaps contrary to expectations, we were hit much worse after 9/11 then we were after May 8. It was the first shock we suffered, and people were scared. There was an instantaneous impact -Sheraton’s foreign guests moved out of the hotel that very same night, as soon as they could. As a result, our occupancy levels went down to about 30 per cent. By October and November, our occupancy level fell further to about 20 per cent.”
For the big players, Sheraton, Marriot, Avari Towers and Pearl Continental, the downturn burnt a sizeable hole in a rapidly decimating kitty. For the four months following 9/11, each hotel incurred a loss to the tune of 10-15 million rupees per month. “We incurred a loss of at least 10 million rupees a month during this time,” admits Maung. “To run a hotel we need 25 million rupees a month, and whatever we make above this is profit. But 25 million is not an easy target in this climate, and there are a host of heavy expenses like electricity and salaries that need to be paid.” Adding to lost revenues from plunging occupancy rates were the one-off expenses required to repair the hotels that had sustained damage in the attacks. The May 8 bus bombing in Karachi, damaged the glass of hundreds of rooms in the Sheraton and the Pearl Continental. The attack outside the US consulate in Karachi, shattered the glass of more than 190 rooms at the Marriott Hotel. Glass, however, was not the only thing shattered – so was consumer confidence. Ironically, in trying to contain further damage, the defensive dykes erected by the authorities around hotels proved to be something of a double-edged sword – serving also as an obstacle to luring customers back. With paramilitary soldiers in bulletproof jackets holding assault rifles pointed at would-be-guests at hotel premises, as well as private guards positioned near main entrances in sandbag bunkers wielding machine guns, the hotels appeared under siege — and definitely the last place to frequent for purposes of relaxation or entertainment.
Says Byram Avari, CEO of the Avari Group, “We tried to initiate damage control, but there is very little you can do about people’s perceptions. Take the example of the ‘bake n take’ restaurant which overlooks a street corner — we had to shut that down because people do not feel safe there any longer. Similarly Avari Towers’ roof restaurant had to be closed down because of a lack of business. Other restaurants in the city are doing very well, but we cannot attract customers because people identify terrorist attacks with hotels. Security measures also put people off, as for a while, cars were not allowed to park near hotels which greatly inconvenienced our clientele.” Samra corroborates Avari’s contentions, pointing out the drastic effect on the food and beverage business. “Sheraton’s restaurant business really suffered as people did not appreciate having to walk all the way from the offsite parking lot. ‘The Pakistani,’ which was previously very popular and boasted about 70 to 80 covers every night went down to about 10 or 20 covers following the attacks. It has been difficult trying to lure people back.”
Small wonder then, that industry estimates reveal that approximately 80 per cent of the country’s 35,524 hotel rooms stood empty in May. Although the market had rebounded somewhat at the start of the year, with the city’s major hotels experiencing a room occupancy rate of about 60 per cent, some 40 per cent above that of the latter half of 2001, business once again plunged to about 15 to 20 per cent occupancy after the blasts. According to employees, the Avari group had managed to restore a measure of market confidence by mid-January, 2002. “Mid-January is a good time for the food and beverage business because it follows the month of Ramadan. We tried to compensate for the lack of executive clientele with the sale of food and beverages, which peaked to its highest ever level of the preceding 10 years in January 2002,” says Byram Avari. However, terrorist activities once again derailed our efforts.”
The good news, however, was that the slump, post May, was not as prolonged as after September 11. Two months later, after concerted crisis management on the part of the industry’s managements, occupancy rates in most hotels reached the 50 per cent mark — the breakeven figure. “As soon as we cleared up the mess and the road was reopened , our customers came back to us,” says Samra of Sheraton. “The main problem we faced at this time was the fact that we lost our airline crew. The Singapore Airlines crew had been staying with us at the time of the blast, and they immediately announced a suspension of operations in Pakistan. Similarly, a lot of the other airlines also went offline, as they had after 9/11. Singapore Airlines, Swiss and Saudi stopped operating after May 8. Unfortunately, even though some of them have returned now, the crew do not stay overnight in Pakistan any longer — turnaround times are arranged in such a manner that crew on Pakistan-bound flights stay in Dubai or another conduit. We have lost a lot of good business because of this. However, despite these shocks, the market has rebounded to some extent. At the moment we are running at approximately 50 to 55 per cent.”
This has been no easy achievement. And the challenges ahead are quite formidable. In order to fully understand the magnitude of the adverse conditions facing hotels today, it is important to go back a little in history. Avari explains the hotel association’s dilemma. “Hotels in Pakistan were visualised as a tool to attract tourist traffic in Ayub Khan’s time. By the time the hotels were built and ZA Bhutto was out of office, alcohol was banned. With this prohibition in place, the nightclub business, which was another source of income for hotels, also died. In order to compensate for these losses, the concept of capitalising on the food and beverage business in the form of banquets and buffet dinner parties was introduced. Business started to pick up slowly during Zia’s era, and hotels started to focus on attracting business travelers, as by now, the tourist traffic had completely dried up. So, hotels took steps to cater to their executive clientele — even the furniture was changed towards that purpose with dressing tables becoming desks, and the introduction of computer plugs and jacks. The tourist that generally comes to Pakistan is a very low level tourist who treks through the northern mountains — he is not the type who will spend money on our services. So executive travel became our main business. Then came another blow to our profitability — Nawaz Sharif declared a ban on the serving of meals at weddings. We were then only left with the room occupancy business. This is a condensed history of the problems faced by the hotel association pre 9/11. After September, executive traffic dried up completely. The one lucrative business hotels were dependent on, is now hard hit, putting the entire industry in a precarious position.”
The same is true of the smaller hotels in Karachi. Cantt Railway is home to a large number of hotels — most of them bustling enterprises until a year ago. Yet recent developments in the international arena as well as local restrictions have left them short of customers and cash, which has, in turn, fostered illegal activity. The Plaza Hotel’s owner, Naeem Khan, was recently arrested on charges of electricity theft. Suffering from huge liabilities, smaller establishments without the backing of international chains, are now encouraging what used to be an anathema to reputable establishments : the booking of rooms by the hour. The stellar reputation once enjoyed by even international chains such as that of the Best Western Plaza Hotel, for example, was compromised when it was discovered that it was allowing the premises to be used for prostitution. The Plaza closed shop three months ago, with huge liabilities on its books. A few decades ago it could have sold for 40 crore rupees. Today the asking price is down to six crores, and that includes the two crores that have been amassed in unpaid utility and tax bills. Not surprisingly, there is no buyer in the market.
It is not just Karachi that has suffered. Islamabad hotels too are beginning to feel the heat. Mansoor Akbar Ali, Director of the Hashoo group of companies which manage the Pearl Continental and Marriot hotels countrywide, maintains that while the upcountry hotels in Islamabad, Pindi and Peshawar did not feel the pinch post 9/11, now even these are being affected. “Islamabad is also running at 25 per cent occupancy as there are few foreign delegations visiting the country and very few government meetings. The guests that do arrive prefer to stay at government guest houses,” says Avari. September 11, in fact proved a boon to hotels in Peshawar and Afghanistan. When the US attacked Afghanistan, hotels in the Pakistani capital and Peshawar played host to an army of foreign journalists, charging rents as high as 150 US dollars for even a cot in the hallway. “I was sharing a single room with a colleague which didn’t even have a window and I was charged 250 dollars a night,” claims the bureau chief of an American daily newspaper. Rooftops, and parking lots – in fact any space available at all — was rented at exorbitant rates to foreign journalists to set up satellite transmission equipment. But the windfall was short-lived. The reporters have long departed but their stories of Al-Qaeda members and terrorist activities in Pakistan have lived on, and continue to scare away any potential visitors to the country.
Whilst top-hotels in Islamabad can afford to plug back some of the profits earned in the Afghan war days to break even, the hotels in the country’s remote areas have no such saving grace. Shirin S Walji, Chairwoman, Walji’s, the country’s top tourist agency which accounts for roughly two-thirds of Pakistan’s inbound tourism business, issued a statement on the dismal figures of inbound tourist travel recorded this year. She stated that the business had “now hit ground zero.” Sales staff at Walji’s, which is currently being sustained by its division that sells outbound airline tickets, state that even low prices have not managed to attract a nominal amount of interest.
Travel agents and hotel managers scoff at the inflated tourism statistics cited by the Pakistan Tourist Development Corporation, which recorded 4,99,700 visitors into the country in 2001, down from 5,56,800 a year earlier. Byram Avari is equally vociferous in his criticism. “This figure must include every two-humped camel which comes across from Afghanistan as two tourists!” he exclaims. “There is no tourist traffic into Pakistan in these beleaguered days. Unfortunately, included in these calculations are figures of incoming expatriate Pakistanis who come to the country to visit their relatives. This is clearly erroneous as these travelers cannot be classified as tourists.”
The Walnut Heights Hotel in Swat formerly used to be a haven for international and local tourists alike. But now even local patronage has declined in this ‘Switzerland of the East.’ Mehmud Khalid, the hotel’s owner has not seen a single western tourist since last September. “We had a lot of bookings last year in September, but from the third week onwards people just stopped coming. We used to play host to lots of diplomats but now there isn’t even a single booking from the embassies,” he laments.
Hard times are certainly here, and the hotel industry has had to devise new rules of the game merely to stay alive. Given the conditions on the ground: reduced income from the catering arm, falling revenue from the restaurants and shops, and the reluctance of international businessmen to travel to the region, the hotels’ business strategies have had to conform to changing ground realities. “Hotels are taking it one day at a time,” declares Samra. Previously local business formed about approximately 20 per cent of the pie in Karachi and Islamabad and 30 per cent in Lahore. But now the ratio of local to foreign clientele has shifted in favour of the former, reaching 80:20.
However, given the depressed economic climate at home and the uncertainty in the market, especially in light of upcoming events — the state elections in October and Ramadan in November – even the industry’s best efforts are unlikely to boost profit margins.
Anxious to attract back quality customers and build up sales volume, all the country’s major hotels have entered into price and quality wars. “We are offering low rates but at least we have the flow of business coming in,” states Avari. “The business has rebounded now, and we are experiencing a good resurgence of occupancy – but it must be borne in mind that these are at very low rates. At the moment, I’m happy to announce that room occupancy at Avari Towers is at 77 per cent. We have to remember that it’s the slice of the cake that counts. If the cake increases then the slice of the cake increases as well. However, right now we are just eating into someone else’s slice which is not a healthy sign. Hotels are now attracting business at any rate that they can. We are covering our costs but are not able to cover the previous losses.” According to Maung of the PC, “The current occupancy rate at the PC hotels is above 50 per cent at present, but then occupancy is determined by the rate being charged. At the moment local demand cannot replace the loss of the foreign market and therefore hotels were not really able to cut their rates by much, as they have to cover their costs.”
Rate cuts often translate into throw away packages. Room charges at the PC, for example, dropped to a paltry 2500 rupees per night, and to 1600 rupees at Sheraton, and these packages included a variety of discounts on hotel restaurants and facilities. Industry insiders will have us know that rooms at the big five hotels are, at times, also being offered at a mere 1300 rupees per night. Other marketing gimmicks have also been introduced, the most popular of which was the Sheraton’s lucky draw round trip — a six-night stay in Florence, Venice and Rome, in conjunction with PIA and Sheraton’s affiliate hotels. In times of crisis such as now, efforts to bolster business have been made through deals between local industries. “The local market must support us through these tough times,” says Maung. “We are an industry just like they are, not a charity facility. We are trying to survive by tapping into whatever opportunities exist. This is a buyers market and we cannot dictate rates at present, but at the same time we have to maintain our rates within a minimum band, or else we would be running into a large deficit.”
So will the hotel industry weather the storm? The Hotel Association is quite vociferous in denouncing the role of the government in this regard. Hotel Metropole is perhaps one of the most outspoken members. In a letter to the Pakistan Hotel Association, they state, “the governing body of our association needs to do more, rigorously and post-haste, failing which the industry as a whole will collapse.” The bone of contention: provincial tax which calculates room occupancy at 70 per cent, regardless of the actual bookings. Given that hotels are nowhere near these levels at present, this tax, collected at 7.5 per cent of room cost, has meant a large outflow from an already diminished kitty. The provincial tax department has pressurised Metropole to meet its outstanding dues, or have the hotel sealed. “Though we have made partial payments under the present circumstances, we cannot come up with the total demand and have in fact closed down a portion of our hotel under intimation to the tax department,” it reads. “If immediate steps are not taken we will have no option but to close our accomodation division shortly.” Speaking at a conference in May, the Pakistan Hotels Association chief, Syed Arshad Ali, called for the implementation of the announced government policy of non-resident hotel users paying bills in foreign exchange. He also called for the recognition of the hotel industry as a valuable ‘export’ industry, to be granted similar facilities as those industries categorised as ‘invisible exporters.’ Calling for a reduction in taxes (at present 30 different levies are gathered by 20 government agencies), he also stated that hotels in Pakistan earned between 120 to 150 million US dollars a year, which could be increased if these bottlenecks were removed.
Some of these demands have been met by the government, others are clearly on hold. Although the bed tax was reduced after the occupancy figures were revised from 70 per cent to 40 per cent for a few months after 9/11, it was reimposed once occupancy rebounded at the start of the year and has stayed in place despite the drop in business following the terrorist attacks. With no appreciable bailout in sight, the industry has had to rely on its own resources. Already hotels have undergone a process of streamlining operations and cost-cutting, making their business leaner and meaner. Departments have been amalgamated and costly extras eliminated. Whereas the restructuring has entailed job losses and the doing away with temporary and daily wage workers, the logic of the market dictates that competition in itself can actually make a business stronger. While the Avari Group announced a moratorium on wages of 200 of its executives for four months, and the slashing of 200 jobs, wages were back to their regular levels after three months, after the effects of cost-cutting became tangible. “Our workers were rewarded with a bonus of 10 per cent in recognition of our team’s support in seeing us through the tough times,” states Avari. “The 200 employees, however, were terminated on a permanent basis, as we were already in the midst of a restructuring and rationalisation drive.” Sheraton and the PC also terminated temporary workers, but a number of these were reemployed as occupancy increased and the wedding season approached.
“All operation has to be profitable so job-cuts and rationalisation also come into play when business declines because there is excess capacity. We are not running a recruitement agency — we are a business!” states Ashfaq Mashadi, General Manager, Carlton Hotel, Karachi. The newest entrant in the market, the Al-Rahi group, which took over the management of the 79-room boutique hotel in July of this year, states the importance of good management in overcoming a crisis. “The hotel industry here is suffering, by virtue of various reasons-not just because of lower inflow of traffic here. Whatever traffic is available will be capitalised on, and the best services possible offered,” Mashadi states.
“The most important thing that determines the success of a hotel is who is running it. You have to be very aggressive from the point of a hospitality outfit and give as much comfort and value for money as possible. This is very important – personalising your services. You have to know who is staying at your hotel, and place a call to each of them to find out how they feel about it. Guests need to know who the general manager is and that he cares about their experience.”
So what is the general consensus on how hotels are functioning in the current situation? Most luxury hotels in the region are improving their services, cutting costs and marketing aggressively. The PC has invested heavily in upgrading its services and introduced a new Thai restaurant as well as a steakhouse in Karachi. Similarly, Sheraton took the opportunity afforded by the bomb blast to refurbish the damaged Al-Bustan, increasing its capacity from 250 to 300 covers. Avari Towers introduced a food court on Sundays and is promoting high-tea at very low rates. The Carlton chose to concentrate on the yuppie, moneyed party crowd. Its location away from the city centre, has converted into an advantage in the wake of security concerns, and it has successfully managed to lure customers frightened of staying in a hotel in the heart of the city. Currently, it’s running a full house. “This is the only hotel which offers boat rides, fishing cruises and dinner on board, open to tourists, in-house guests and the general public. We also hire out speedboats and provide a host of other innovative services,” states Mashadi. “Our main focus is in the hospitality sector — i.e. accomodation, but we place equal importance on our other entertainment products. The hotel industry has suffered but you have to put it in a global context. There is a slump being experienced throughout the world. Take even America, its hospitality industry as well as its aviation industry were hard hit after September 11. And the government has offered them bailouts. People shy away from Pakistan unnecessarily, it is not really as bad as the general perception is. We do have problems but many other countries have similar problems. Once guests stay with us, they realise that things here are actually quite good. We are suffering purely because of the image being projected by the media.”
So all is not lost. The industry can survive given it recognises the needs of the hour and works itself around them. Pakistan can take cues from Egypt when foreigner tourists were targetted by extremists. Egypt’s hotel industry weathered the storm and managed to bounce back. Industry insiders also stress the need for a relaxation of the strict moral code introduced in the Zia era. “Hotels have a lot of potential; they just need to be allowed to take advantage of it,” believes PC’s Yaqoob Maung. “Right now they need a boost desperately. Revenue could be boosted if we were allowed to run discos and clubs — there are at present some illegal ones running in the city. The government would also benefit by this measure from the tax receipts generated. If the UAE can have a club culture, Pakistan should also be allowed to explore this avenue. Public event management needs to be encouraged, so that travel to the region and occupancy rates picks up.”
The current government seems cognisant of the needs of the industry — at least to some extent. Says Mashadi,” the government has taken certain steps to encourage business. The Export Promotion Bureau is also doing a lot of work to attract people to Pakistan. The ITCN conference was held in Karachi, and even though it did not bring in as much business as expected, at least a start was made. Ideas 2002 which is a defence show is also scheduled for the upcoming month. So, in all fairness, we cannot say that the government is not doing anything to help.”
The Sheraton staff also express a measure of optimism. “Right now the industry is really trying to make ends meet,” says Samra. “We have to work within the constraints of our environment. Although ideally we would love the problems to disappear, we just have to live with them. We are trying to survive and tap into whatever opportunities exist. We are optimistic about 2003 as 2002 started off on a high note. The occupancy rate we saw in April and March was much better than that of the previous year, and eventually business has to endure. Common sense and logic dictate that the slump cannot last forever.”
Given that the celebrations on 14 August generated an inflow of approximately 600 guests at each hotel, these are indications that there is cause for some optimism. The statistics demonstrate that some degree of consumer confidence has returned. Ultimately, however, the fate of the hotel industry will be dictated by internal and global events in the post-September 11 world order. Hotels cannot afford much more of a beating, particularly since insurance companies are unwilling to offer terrorism insurance, as they have for the past 25 years. Nobody recognises the situation better than the movers and shakers from the industry — but they’re not willing to say die.