After Mumbai, India's Hotels Brace for a Sharp Downturn

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Jayanta Shaw / Reuters

Men work on the damaged part of the Taj Mahal hotel in Mumbai. The hotel is set to reopen its doors on December 21.

It's late evening outside the Taj Mahal hotel on Delhi's Mansingh Road, and the row of cars lining up for security checks at the entrance is fast lengthening into a small traffic jam. Coming just as the wedding and party season was starting up, the brutal Mumbai attacks last month (which devastated a more famous Taj Mahal hotel in that city) have led to heightened security measures, which are proving to be an enormous inconvenience for high society. Cars carrying designer-clad, bejeweled guests have to stop to let security guards peek under the hood and into the back compartment. That done, all baggage must be passed through X-Ray scanners — suitcases containing wedding outfits and jewelry, wedding gifts wrapped in glittering paper, even personal handbags. It feels more like an airport than a hotel famed for hospitality. "I'm not coming back here in a hurry," declares Diya Singh, a fashion designer who has come to meet friends at Rick's, the hotel's famous bar. "It took me 20 minutes to drive here, and 45 minutes to clear the security checks!" (Click here for photos of the siege of Mumbai.)

The Mumbai attacks targeted two of India's iconic hotels, the Taj and the Oberoi, where terrorists shot and killed guests indiscriminately and held hundreds hostage for nearly 60 hours. This has proved a deadly blow to an industry already wounded by the worldwide economic downturn. Big hotels across the country have had to invest in beefed-up security, including metal detectors and baggage scanners, and Ratan Tata, chairperson of Tata Sons which owns the Taj group of hotels, has announced that the group will undertake its own anti-terror and security arrangements. But, as P.R.S. Oberoi, chairperson of The Oberoi Group, pointed out at a press conference in Mumbai days after the terrorists' siege was over, "Unfortunately, hospitality and security don't go well together." (See the Top 10 News Stories of 2008)

Anxious guests are choosing to stay away, and industry associations say room occupancy in the large cities is down to 60% occupancy, even as room rates are being pared down by as much as 25%. According to event managers in Mumbai and New Delhi, many Christmas and New Year's bashes at leading hotels have either been cancelled or scaled down. "We've seen 30% to 40% cancellations for New Year's eve in our Goa property," says Anjali M. Chatterjee of Bharat Hotels, who run the Lalit Goa Resort, "Usually there's a spike in bookings for December 23 onwards, but at the moment, things are pretty flat."

India has been trying to build toward 10 million foreign tourist visits in 2010, the year New Delhi hosts the Commonwealth Games. It is an ambitious goal: this year's statistic is just about half that. The 'Incredible India' campaign, launched in 2002, has spent millions of dollar advertising India as a land of great diversity, offering beaches and ski slopes, teeming with man-made and natural wonders. Last year foreign tourists spent over $10 billion in the country. But since last month's attacks, in which foreigners were among the more than 180 people killed, about a dozen countries have issued negative travel advisories on India. Bookings by foreign travelers, particularly from Europe and the U.S., are down by 40% to 60%, according to the Federation of Hotels and Restaurants Association of India. "The entire tourist season of 2008-09 is totally ruined," says FHRAI secretary-general Harish Sud, "We're expecting a 25% fall in the number of tourists. Large-scale layoffs loom on the horizon."

This is dire news for the tourism industry which employs 53 million people directly or indirectly. It is also a complete about-face for the hotels sector which was enjoying positive forecasts until just months back. In the last few years, while the economy was projected to grow at 8% to 9%, top names in hospitality like Four Seasons and Aman were making forays into India to fill the huge supply gap in the top-end executive and leisure travel segments. Five-star room rates in key cities had grown by 40% year-on-year in 2007, and a report by Jones Lang LaSalle Hotels, the hotel investment and advisory service provider, had predicted India would need to add 150,000 new rooms in the next four years to keep up with demand. Now, much like other formerly glowing sectors like retail and real estate, things are rapidly rolling downhill. "Things will slow down primarily due to three reasons," says Sudeep Jain of Jones Lang LaSalle Meghraj, "Due to the economic slowdown, demand has already dipped. The terror attacks led to bookings being cancelled. And due to the credit crunch, fewer deals will be struck so fewer people will be traveling."

Effects of the slowdown have led to less extravagance and a more severe emphasis on economy. "Earlier, the sky was the limit, but now people are holding smaller events with fewer guests," says Sneha Tejwani, who runs the event-planning firm Occasionz Unlimited in Mumbai. "No Bollywood stars performing at over-the-top bashes this time. Business is down to a third of what it was." Even flower suppliers in Bangalore, India's floriculture center, are reportedly withering due to decreased demand for flowers for decorating weddings and other events.

Some industry watchers, however, say the slowdown may help existing hotels to stay afloat by delaying commissioning of newer competitors. "Projects that have only just got underway, which are aimed at opening in 2010-11, will be put off," says Jain of JLLM, "They will face constraints in terms of financing and ability to complete projects, as well as downbeat forecast for the sector. This will reduce the pressure on [room rates] by keeping competition down." That may be a relief to some players, but will be small consolation for the industry as a whole.

Meanwhile, those still keen to travel can take advantage of falling prices and discounted packages, though they may still have to put up with security scanners and sniffer dogs. But while the shock of the Mumbai attack may wear off soon, the economic downturn has only just begun to bite, and many expect next year to be worse. "We are all aware of the Bali and Madrid incidents and how things have looked up after that," says Sud of FHRAI. "But yes, the economic meltdown may last a bit longer."