Mexican Hotel Sector: Weathering the Storm Through the PandemicBy Alberto Moreno | Wed, 08/17/2022 - 09:00
The hotel sector was one of the most affected globally during the COVID pandemic, jointly with restaurants and entertainment. Mexico was not the exception. In 2020, hotel occupancy declined to 26.2 percent, from an average of 60.5 percent from 2015-2019, according to the Ministry of Tourism (SECTUR). International tourist arrivals declined 46 percent compared to 2019. In contrast, total room capacity declined only 0.2 percent in 2020. The travel restrictions and social distance measures completely disrupted the sector’s dynamics. This affected demand and had repercussions on the supply side of the sector.
Mexico is one of the most visited countries in the world. Colonial cities and beach destinations along the Pacific and Atlantic Ocean coasts and in the Caribbean Sea provide a wide offer for local and international tourists. In addition, Mexico’s vibrant economy (2021: 11th according to the OECD) attracts numerous business travelers to its main cities and industrial hubs.
The tourism sector is considered one of the pillars of the Mexican economy; it is a destination for foreign direct investment (FDI), a generator of foreign currency inflows from international travelers and generates a large number of jobs.
Mexico heavily invested in recent years in the hotel and services sectors. The country ranked sixth in the OECD’s proportion of global tourism FDI during 2015-2019, and ranked first by job creation in the sector in the same period.
In 2021 and the first half of 2022, hotel activity has recovered gradually in Mexico, following the evolution of the pandemic; vaccine rates in Mexico are high with 61 percent of the population having a complete initial protocol as of July 15, 2022. Occupancy rates in 2021 recovered to 41.4 percent and as of May 31, 2022, the national occupancy rate was at 54.1 percent. By destination, beach properties have outperformed urban destinations; the reduction in social distancing measures allowed travelers to resume tourism activity after several months of confinement.
Occupancy for beach destinations reached 63.9 percent in May 2022, which is very close to that registered in 2019, at 66 percent. On the other hand, occupancy in city destinations was 43.4 percent, way below the 55.1 percent in 2019. Northern border cities are outperforming the rest of the country with occupancies of 62.3 percent (61.7 percent in 2019). Mexico’s export-driven manufacturing platform is attractive for nearshoring, with North American and Asian companies establishing manufacturing facilities in the country to serve the US market.
The recovery of urban centers depends on the dynamics of the business traveler; during the pandemic virtual meetings replaced in-person activity. While the latter has resumed, many companies and travelers have retained online meetings as part of their outreach strategies. Fitch believes that the recovery of occupancy levels in large cities (Mexico City, Monterrey and Guadalajara) is key to returning to pre-pandemic levels. As of April 2022, occupancy was 55.1 percent, still below the level of 62.5 percent in 2019.
In terms of revenues, according to INEGI, Lodging and Food & Beverage Preparation real GDP fell 71 percent in the second quarter of 2020 compared to the same period in 2019. The recovery has been gradual; during 2021 and in the 12 months to March 2022, this indicator was still 24 percent and 17 percent lower than in 2019, respectively.
The hotel sector in Mexico suffered a big crunch in revenues as occupancy levels fell due to the lockdowns and started to recover at a very slow pace. Usually, hotel managers do not reduce tariffs according to occupancy because when the latter recovers it is difficult to adjust tariffs at the same speed.
During the pandemic, hotels efforts were directed toward cost and expenses reduction; these initiatives included capacity rationalization, labor and overhead reduction and supplier negotiations. The objective was to reach a breakeven level with occupancy in order to have headroom to weather the storm and avoid closing. In addition, hotel operators negotiated waivers and extensions of debt maturities with creditors to preserve cash and maintain operations. In some cases, hotel property owners accessed financing, providing security to creditors in the form of mortgaged assets; the funds were used primarily to enhance liquidity to support operating cash burn.
Property, operation and financing cost occupancy breakeven points vary by each entity, depending on scale, diversification, capital structure, etc. Publicly traded hotel operators in Mexico, on average, stated that they reduced their operating breakeven levels from around 30 percent of occupancy to around 25 percent during the pandemic using a combination of the aforementioned factors.
To reach the breakeven point in financing, that is, sufficient operating profit to cover financing cost (interest expense), Fitch calculates an average of at least 45 percent occupancy. This means that from the start of the pandemic until at least the end of 2021, most properties were burning cash or had to enter into some debt-relief program.
As of July 25, 2022, Fitch has in its Mexican national ratings portfolio the hotel owners Fibra Hotel (A+(mex), rating outlook stable) and Fibra Inn (BBB+(mex); rating outlook stable). In Fitch’s opinion, the credit quality of these entities deteriorated rapidly at the beginning of the pandemic and started to show some signs of recovery until the second half of 2021. The rating agency does not anticipate that these issuers will recover to 2019 occupancy rates until 2023.
Furthermore, Fitch believes that inflation pressures in 2022 will represent a challenge for the sector to reflect it in daily tariffs, as the disposable income of the population will be affected. Cost control efforts will be paramount for hotel operators to maintain or return to pre-pandemic profitability margins.