Cash flow crisis looms for hotels

MANY IRISH hotels are heading into a severe cash flow crisis because of an oversupply of bedrooms and pressure on rates, according to Weldon Mather, managing director of the Naas-based tourism experts WM Consultancy.

He said that with tax breaks running out, the downturn in the economy and a number of "put on call" deals due to mature, he was aware of many businesses in financial trouble. The industry was facing into a period of consolidation, restructuring and closures and, in some cases, a change of use from a hotel to nursing home.

Mather traces some of the problems to the fact that the number of hotels has increased from 717 in 1996 to 973 this year. Bedroom numbers rose even faster in the same period from 26,000 to 64,500.

The rush to build hotels was largely triggered by the availability of tax breaks but, according to Mather, many of these investments are now due to mature and the prices operators agreed to pay after the seven-year tax period overvalued the assets.

Moreover, banks are not lending money. "Add into the mix a weak dollar, US election year, weaker sterling and soaring energy costs, and you have a so-called perfect storm where just everything has come to pass as well as savage pressure on the room rate."

He said that by the end of this year many hotels exposed to high gearing would run out of cash and creditors and staff would suffer. Poorly located resort hotels had no chance of attracting new business, particularly when those in urban areas were slashing rates. The lead-in time for lucrative conferences and weddings was now longer and, if a hotel was doing less than two weddings a week, then it was hardly cost-effective to have a dedicated team employed.

Mather said they were getting more and more calls from worried owners and managers wondering if it was just their hotels that were experiencing a downturn in occupancy and revenue.

Unfortunately, he said this story was being played out all over Ireland, even in the last week in July, the high season when traditionally hotels were full.

"You can only imagine what will happen in Q3 and Q4 of 2008 when cash and turnover runs out, creditors are demanding payment, including Revenue, and staff wages must be paid. Of course, the second highest minimum wage in the EU does not help but it's hardly the staff's fault. They have to live too."

He suggested that hotel managers and owners engage with their staff and suppliers immediately and outline what the next nine months trading will look like and draw up a realistic plan that everyone can be aware of and buy into. "It's too late to call for help when the bank refuses to extend the overdraft and cash runs out."