Since the Covid 19 crisis broke out, hotel companies, both small-scale and large international chains, have had to prioritise cash management in order to be able to continue as a business.

The liquidity position has always been important in the financial assessment of companies, but with the pandemic, it has become a determining factor. In fact, the first thing that executives did when the crisis appeared was to forecast the cash flow in view of various scenarios to be able to assess how long they could last after adjusting income and expenditure downwards.

The progress of the crisis has undergone various phases since April 2020. Initially, it was seen as something short-term; later on, with the successive waves of the pandemic, it turned into a fluctuating curve which still persists. It has been this factor of uncertainty that has brought with it the worst consequences. Depending on the countries and their labour regulations, companies have been able to reduce staffing costs, which in this sector is the most significant item of expenditure. However, decision-taking has been marked by openings and closings, depending on the healthcare situation, making management a veritable chaos. In fact, in some hotel chains, the losses have been greater in those hotels that opened prematurely than in those that remained closed.

For executives, maintaining a minimum amount of cash became the central focus of their management. On the one hand, by not opening establishments and reducing the staff, and on the other, by seeking external financing.

In view of this situation, with an average loss of income ranging between 70% and 80%, depending on the country and area, cost reductions have been favoured by the specifics of the sector, which enables the closure of activities in holiday areas, offering seasonal hotels opportunities while prejudicing those in cities. This is one of the first conclusions we have already gathered from the Covid effect.

In terms of financing, the aid provided in general by governments with secured and subsidised loans has been a determining factor in the solution for obtaining liquidity. Many companies would not have survived today if it had not been for this aid. Herein lies the issue of the medium and long term, and to what extent the increase in indebtedness will affect solvency from the financial year 2021 onwards.

In hotel chains, there is a dichotomy of management: hotels under ownership vs under management. The specifics of the balance sheets when the hotel is owned involve a greater investment and degree of leverage for financing it, i.e. a long-term risk balanced by the revaluation of the properties. However, there is another component, as it provides a guarantee for financial institutions, depending on the level of indebtedness. Therefore, for those hotels with assets subject to revaluation well financed before the crisis, it has not been difficult to obtain additional financing which, on being recorded in the long term, has not conditioned the working capital. This is the second conclusion: balance sheet structures with assets have been favoured to bear the impact on solvency better and therefore to obtain a greater and better cash flow.

We are passing the peak of the pandemic and therefore the perspective has to be placed in the medium and long term, analysing the situation for the forthcoming summer season.

2021 revenue forecasts are for greater activity with more hotels open and a higher average occupancy than in the financial year 2020. This seems obvious, but it also involves a damaged balance sheet and the difficulty of making new, possibly more optimistic, cash-flow forecasts, but which are in any case worse than two years ago.

The search for liquidity is now not such a priority, and solvency has taken centre stage, both in order to maintain lines of financing and to be able to invest. The 2020 results were catastrophic, with generalised negative results. In view of this, we will find two cases: those companies with healthy own funds and those which the crisis has left dismantled and which must try to rebalance their financial structure. Depending on the case, this could be through divestments: the lease-back or sale of assets.

The situation of liquidity is currently the most significant risk for hotel companies. Its appraisal and management are determining factors in their continuity. This is something to reflect on in the future when we prepare a risk matrix: the structure of the balance should always allow for a supplementary level of indebtedness to face contingent situations that might suddenly occur without warning, and faced with this, companies that own assets will always be in a better situation to weather the storm and perhaps afterwards, when the storm dies down, they might grow at the expense of others whose business model was to grow quickly by being heavily leveraged.

Ignacio Esteban, Co-ordinating Partner for Auren Tourism Spain