Unhappy endings

More disputes between hotel owners and operators are likely. Raini Hamdi finds out why and the impact on tour operators 


WHEN hotel management changes hands acrimoniously, tour operators are left to pick up the pieces.

Clients are owed an explanation, and the reassurance that what they booked is what they will get, even though the brand has changed and a new management may mean different styles and standards. Marketing collaterals have to be amended, relationship with the new management rebuilt all over again.

In the worst-case scenario, the tour operator-hotel ties are simply severed. David Kevan, partner, Chic Locations UK, recalled years ago being advised by a well-known brand in Hong Kong on December 28 that the owner had brought in a new management/GM and the rate would increase effective January 1, take it or leave it. “As we had several clients arriving in the first two weeks of January, we had no option but to accept, but it left a sour taste, both professionally and financially,” said Kevan. “We absorbed the cost but moved clients to other hotels from February onwards as we no longer had confidence in the new management.”

Last year saw a string of break-up announces in Asia, including Mandarin Oriental Dhara Devi, Chiang Mai, Le Méridien Khao Lak, Hilton Iru Fushi, Maldives, Shangri-La Hotel, Mumbai and, perhaps the most bitter of this lot, the takeover of The Chedi, Chiang Mai and its rebranding to Anantara.

“The change at Dhara Dhevi (now managed by the owner) was a concern for many of our agencies as it’s an expensive hotel and clients wanted to be confident it would be managed to the same level,” said Hamish Keith, COO and co-owner, Exotissimo Thailand. In the case of Chedi, the agencies seemed less concerned as Anantara is a strong brand, he said.

Roger Haumueller, managing director, Asian Trails Thailand, said in many cases, upmarket clients are worried when a well-known brand becomes a local brand, even though there are locally managed hotels that do an outstanding job, he said.

One of the most common causes of hotel break-ups is sub-par performance, according to people close to the matter.

But this begs the question, what is sub-par performance?

Sometimes it is outright incapable management, where the hotel is performing at levels below what its competitive set is able to achieve, making the owner see red. But at other times, it can be downright relative: unsatisfied owners who think the hotel could perform better even if the management already is producing results.

And when markets become challenging due to an oversupply or unforeseen crises, tensions run high, particularly if an owner is in financial difficulty. Disputes then arise between owner and operator on how best to address the issue.

“In Asia, it is more common for business groups to have full control over their businesses and the contracting out of management to another party is not well understood or accepted. It fact, generally in Asia, expertise is not well-respected without ‘skin in the game’,” said Mark Edleson, president, Alila Hotels & Resorts.

“(Therefore), it is important during the contract negotiation to go over the major points of control as well as the financial issues to try to ensure a full understanding by the developer/owner of the relationship being entered into.  Even then, it is not certain that they will be well internalised or respected.”

Robert Hecker, managing director of Horwath HTL Asia-Pacific, said this management/alignment of expectations between the two parties is “definitely not always done properly”, causing issues to arise. “In some cases, it’s what the operator expects from the owner, not just what the owner expects from the operator,” he said.

Then, some marriages are just wrong to begin with. In this, Giovanni Angelini, hospitality consultant, noted that most hotel operators, in their eagerness to expand, do not do proper feasibility studies, including thorough market analysis, background check of the owner and expectations of the partnership.

“The drive to expand is so strong,” said Angelini. “ROI is dropping in most areas, except Hong Kong and Singapore, and some owners are facing financial difficulties. The blame then goes to the operator who in most cases has promised too much in order to get the contract but cannot produce the numbers.”

Kevin Hall, managing director of Questus Hospitality Consultants Thailand, which represents a string of owners, said some chains are over-stretched in certain markets, causing revenue to be cannibalised and less experienced and qualified managers hired at hotel level. Others, new to certain markets, over-estimate their knowledge/capability to manage the hotel in those markets.

He added: “Owners are also objecting to ever-increasing central services charges and forced purchases under the guise of brand standards.

“They are objecting to loss of control over their assets and their employees.”

More break-ups expected
Graeme Dickson, partner at Baker & McKenzie, said he is not seeing rising disputes in Asia currently. Horwath’s Hecker also said the recent spate of break-ups is not indicative of a trend.

Above, from left, Mark Edleson, Giovanni Angelini and Robert Hecker

“Sometimes you see increased activity of such disenchantments when market conditions become challenging or when expectations may be unrealistic or unaligned. I supposed when such instances hit the press, it may also encourage those with simmering disenchantments to finally take steps, so these spurts of activity might appear to be a trend, but are really just cycles of occurrences,” he said.

Going forward, however, several consultants believed unhappy endings will be a trend, specially when they look at the hotel landscape today.

Said Bill Barnett, managing director of C9 Hotelworks: “There is such a rise globally of hotel brands, that disputes become inevitable. Tack on nearly a decade now of the meteoric rise of new-build properties, so hotel operators have had the luxury of being in a seller’s market. This has driven hotel contracts away from what is often the trigger of disputes – hotel performance clauses – which means disputes now often escalate quicker and fast track to legal action and arbitration.”

Angelini too believed the industry has to get used to hotel break-ups in future as “we will see more of those”.  Asked if there are particular areas which will see more divorces than others, he said: “Most brands are present in Thailand and the country will see several rebrandings in the future, with no renewal at the end of the agreement as many operators are prepared to offer their services at a much lower fee than 10-15 years ago.

“Another country where we will see changes of hotel operators will be China, as business in general is weak due to overbuilding and owners are hunting for better deals, or decide to run their own properties.”

Alila’s Edleson said: “Our experience is that it is more likely to occur in Thailand than in other destinations.”

Asked if the legal/regulatory framework, especially in tertiary markets in Asia, is viable for owner-operator relationship, Edleson said: “The legal framework in Asia generally favours the ‘home’ party.  This generally means the international operator is disadvantaged. As such, it is probably a good idea to avoid litigation as a solution. In most cases, only the very largest of management companies are financially able to defend themselves in cases of premature break-ups.”

Hecker noted that particular legal/regulatory environments could indeed “influence where and the frequency of such occurrences (i.e. where it is easier to accomplish)”.

Brand importance
So tour operators may well brace themselves for more hotel break-ups.

Asked how their clients react when they slept the night in, say, a Chedi or Setai one night and woke up to an Anantara or a self-managed hotel the next, most tour operators said clients do not really care – provided the incoming brand is of equal status and quality, facilities and pricing remain the same.  The exception is the extremely loyal clientele of brands, such as Amanresorts or Four Seasons junkies.

Said Chic Locations’ Kevan: “When we advise clients of the change, the first thing they want is an assurance on the pricing, facilities and the general style of the resort, which in 90 per cent of the cases will remain at least in the first year.”

mar28_3mugshots2(Left, Kevin Hall)

For tour operators, that’s the issue – the uncertainty in the long run if the hotel or resort

will remain the same, and the terms just as good, especially if the new management is an unknown.

“If the hotel is taken over by an unfamiliar brand or a weaker brand, we would usually adopt a wait-and-see approach before we support the new brand,” said Country Holidays Singapore general manager, Jess Yap.

Ganneesh Ramaa, manager, Luxury Tours Malaysia, recalled that when The Datai, Langkawi was taken over by Archipelago Hotels & Resorts in July 2011, the short-term impact was minimal as the new management honoured the terms and clients of the unique beach resort in the heart of a tropical rainforest didn’t care who was managing it. However, said Ramaa: “We suffered when getting new bookings. Our overseas wholesalers had never heard of Archipelago and the terms became unfavourable. For example, we didn’t get as many room allotments and room rates were not as competitive as before.

“As the hotel was not supportive, we didn’t support them in return.”

As it turned out, Destination Resorts & Hotels (DRH), which bought The Datai, disbanded Archipelago in 2012 and the resort is back on its feet under general manager Anthony Sebastian, who is also DRH’s SVP hotel management overseeing the expansion of Datai Hotels & Resorts,  two properties of which are opening in Desaru Coast.

It may be a happy ending in the case of The Datai. For others, who knows how the chapter will unfold after a separation?

Additional reporting from Paige Lee Pei Qi and S Puvaneswary

This article was first published in TTG Asia, March 28, 2014 on page 3. To read more, please view our digital edition or click here to subscribe.

Sponsored Post