Welcoming recovery: Strategies for the hospitality industry

BEFORE the pandemic unexpectedly hit, holidays meant a time when people went on staycations and resorts were filled with families looking to have a good time, sipping drinks by the pool or wading at the shore of a beachfront. Both foreign and domestic hospitality industries were booming since virtually everyone had easy access to accommodation discounts and promos.

High spirits dwindled as the Philippine hospitality industry took a severe blow when the Covid-19 pandemic took off. Travel restrictions prevented people from booking hotels and resorts, leaving these establishments struggling for room occupancy and consequentially, stable revenue. According to Colliers, in the first half of 2020, hotel occupancy in Metro Manila fell from 71 percent to 25 percent due to a sharp decline in foreign arrivals. Moreover, a significant number of hotels closed their doors and laid off hospitality professionals and personnel.

While the impact of the pandemic to the hospitality industry is undeniable, some hotels managed the blow by converting into quarantine facilities where overseas Filipino workers and foreigners can undergo their 14-day isolation before heading to their destinations.

Hotel rooms were converted as places where frontliners can stay as they remain exposed to the coronavirus. Some of these establishments even turned large function rooms into Covid-19 research hubs where health workers and decision makers can map out their next moves to quell the spread of the virus. Although there have been workarounds, these initiatives where still not enough to pull the hospitality industry out of the water. Business projections remain dim, and with the implementation of another community quarantine, business optimism remains sluggish.

Areas to work on

There are specific aspects to the business that hotel owners can focus on to slow down the effects of the pandemic. These are employment, debt and restructuring, financial planning and reporting, and entering into contracts and agreement.

Many hotel managements were able to decrease labor costs by reducing their business hours and using available government wage subsidies. To achieve sustainable recovery, owners and operators will need to analyze their return on investments. Optimizing staffing levels and placing effective internal risk management and approval processes can help spur recovery and enable companies in the hospitality sector to be more profitable.

For debt and restructuring, it is recommended that hotel owners identify areas that lack funding and support. Even if lenders and suppliers extend deadlines for payments, pinpointing financial difficulties early on may be the best course of action. As hotel operators look at restructuring their debts, private equity owners with cash reserves are presented with opportunities. Taking part in restructuring efforts implies that a hotel is still capable of operations even with reduced occupancy for long periods of time.

Guidelines and strategies on financial planning and reporting are expected to evolve continuously. Measures regarding tax relief and financial assistance are changing constantly, so owners and operators should make sure that they are updated on available options. They must also contemplate on the real impact of asset impairment and consider how to address concerns on their future cash flow and earnings potential.

Further, contracts must be revised according to a company’s financial, while preexisting business agreements must be revisited to optimize them for the future.

Government relief

To provide hotel owners and operators with access to customers, the Department of Tourism has allowed selected hotels to operate as venues for workshops, training, seminars, among others, provided that venue capacity is capped at 30 percent. While small gatherings have been allowed, hotel operators are still expected to follow guidelines set by the Inter-Agency Task Force.

Moreover, President Rodrigo Duterte signed the first national stimulus package, the Bayanihan to Heal as One Act, into law last March 2020. The legislation, supported with P275 billion of funding, granted a P10 billion allocation for the tourism industry and micro, small and medium-sized enterprises (MSMEs). Some P6 billion of this amount was reserved for a loan program. In addition, P3 billion of the remaining assistance was earmarked for financial aid for displaced and unemployed tourism workers.

Recently, the President has signed into law the Corporate Recovery and Tax Incentives for Enterprises (Create) Act, which primarily provides businesses, especially MSMEs, with cuts in corporate income tax (CIT) rates (from 30 percent to 25 percent or 20 percent depending on the taxable income and total assets) and redesigned incentives with the intention to attract investments and create jobs. The law acknowledged the unfortunate circumstances brought about by the pandemic to businesses and provided an enhanced net operating loss carryover (Nolco) from the existing succeeding three years to succeeding five years immediately following the year of the loss. Such enhanced Nolco allows businesses to deduct incurred losses from tax payments for a longer period in the hope that this will provide more time for them to reorganize their financial standings.

Uncertainties in the future

As hotel owners and operators’ decisions become increasingly difficult to make, navigating toward recovery will entail a need to seek assistance from business advisors and experts.

With the pandemic causing a significant shift in customer experience across the hospitality industry, the effects are expected to be long term. Uncertainties also arise as to whether the Create Law’s reduced CIT rates, tax relief measures, and redesigned incentives will attract more investments and translate to more tourists and creation of jobs.

Hotel owners and operators must revisit their strategies, assess their options and make the right decisions to secure a more certain future. Staying updated on the latest subsidy offerings of the government, seeking helpful advice and remaining optimistic can usher smoother recovery.

Meg Punay is the senior manager of the Audit & Assurance, Davao Branch of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing firms in the Philippines with 23 Partners and more than 900 staff members. We’d like to hear from you! Tweet us: @GrantThorntonPH, like us on Facebook: P&A Grant Thornton, and email your comments to pagrantthornton@ph.gt.com. For more information, visit our website: www.grantthornton.com.ph

As published in The Manila Times, dated 14 April 2021