Dubai: Some hotel industry players reckon that it's time for operators in the region to take on more risk as the balance of power in their relationships with the owners could be shifting to the latter.
It is time to adjust management contract rewards accordingly, said Michael Scully, managing director for hospitality at Seven Tides, which owns several large hotel developments in Dubai.
"There should be a ‘get out' clause for owners if the operator can't fill the hotels and compete with on equal footing with other hotels in the market," Scully said.
He explained that the market has changed since contracts were signed at a time when there was no oversupply of rooms and with that performance was less of an issue between operators and owners.
During the GCC real estate boom, operators had to compete with each other for management contracts but equally there were many upcoming properties available.
Now that most international brands have descended on the region managing a myriad of hotels, it is harder and costlier to fill seats and beds, Scully said.
Specialisation
"Many operators were willing to take contracts in areas that they weren't specialised in, leisure specialists took on business hotels and vice versa. Now neither can fill the property eating from the existing cake (of guests)," he said.
In addition, some operators had an existing client base, which didn't work as effectively as it could have for the Middle Eastern region. Particularly in the downturn many operators are not meeting owners' expectations.
Hotel operators mainly live off the management fee and are driven to do well via a performance bonus, which usually forms part of the contract with the owner.
Kirk Kinsell, president for EMEA at the InterContinental Hotels Group (IHG) speaking at the Arabian Hotel Investment Conference (AHIC), doesn't believe it is fair for owners to penalise operators for an economic downturn and third party competition the operator has no control over. He cites Abu Dhabi, where the group operates hotels as an example.
"Hotels in Abu Dhabi with the addition of rooms are under pressure. Our hotels sit with other glass towers, third party hotels, around it. As operators we have no control over investments. We should be rewarded for not letting revenues slide too far," Kinsell said.
However, Scully reckons that operators not investing their own capital, but owners are taking the main risk, is exactly why the former should be held more accountable.
Contributions
Indeed, he believes that operators should be contributing to the tourism sector in general.
"The tourist boards should enforce an element of investment into hotel companies operating in the market. They could take a percentage of the fees operators make in order to drive tourism into the market," Scully suggested. He compares hotel management contracts to the military business in the GCC, where arms deals attract huge management fees.
"Hotel operators have been taking a lot of dollars out of the country during the good time. Everyone else took a risk — it is time they do so as well."
This idea would obviously cut into operators' profits and they are rather risk averse. According to Accor Hospitality, they as an operator make around 25 to 30 per cent profit of their management fees. The rest goes for operating costs.
Christian Karaoglanian, chief development officer at the group, doesn't think it's the operator's responsibility to take on board losses as they do not participate in the profits.
"You don't ask an advertising company after they have done the campaign and it didn't work to take the hit, so why should hotel operators. It is the same thing, we have the incentive fees. We make sure before we take an asset on that the project isn't a dream, but financially sound and will work well."
Hotel operators, according to Scully, are not doing enough to drive in customers, despite owners bearing the marketing costs.
"The operators' mindset is very much cost management, but owners are only interested in the bottom line: they need cash to pay banks back."
Have your say
Do you agree with this? Should hotel operators reinvest money in the country’s tourism industry? How will such investments help? Tell us.
