Can Spanish tourism survive a second Covid summer?

Gabriel Escarrer hopes that foreign tourists will come back to Spain this year — but he knows how much his company and his industry will suffer if they do not.

As chief executive of Meliá Hotels International, the 326-hotels, €1.4bn-valued group that takes pride in its beach resort roots, Escarrer is all too aware of the wounds left by last year’s drastically shortened summer season.

“If we lose this summer, we would be talking about practically zero activity from October 2019, when [travel agent] Thomas Cook collapsed, to June of 2022,” he said, noting that about half of Spanish tourism revenues normally come between June and September. “It would be devastating for the fabric of the tourist industry.” 

According to the country’s main business federation, some 500 Spanish hotels have closed over the past year — and many more would fold with the loss of a second consecutive season.

Such difficulties are particularly significant for Spain, the world’s second most popular tourist destination, whose economy shrank 11 per cent last year.

In a normal year, the industry accounts for 12 per cent of GDP and 13 per cent of employment. In the words of Ramón Aragonés, chief executive of NH Hotel Group, the urban hotel chain: “Tourism is the petrol of Spain.”

Pandemic’s impact on hotel performance by region

As the sector struggles with the impact of the latest travel restrictions in the EU, the UK and the US, both Escarrer and Aragonés acknowledged that people will initially be more likely to travel in their own country before they venture abroad. But their two companies are making very different bets. Meliá believes that foreign tourists will want sun and sea this summer; NH that the main theme will be “tourism of proximity” — trips closer to home. 

“We know that 2021 will be a difficult year and that we have complicated months ahead, but there is a perspective of medium-term recovery,” said Aragonés, whose 360-hotel company also has a market value of €1.4bn, a third lower than pre-pandemic levels. “The figures for 2021 will be better than 2020, and 2022 will probably be more like 2019, with a full return in 2023.”

The crucial question is the pace of the recovery, which will be determined by infection rates, vaccinations and politics. And until it arrives, the tourism industry will continue bleeding cash. As of the third quarter last year, Meliá was burning about €34m a month and NH about €25m. Things are even more difficult now, with both groups keeping about half their hotels closed. 

“I did not think that the third wave going to hit us so hard,” said Escarrer, adding that “the first quarter [of 2021] will probably be very bad . . . the worst since the second quarter of last year, when there was a very tough lockdown”.

An empty square in Barcelona, Spain © Nacho Doce/Reuters
A closed entrance to a hotel in Barcelona © Finbarr O’Reilly/Getty

The first nine months of last year were hard enough for his company. Meliá’s revenues slumped by 69 per cent to €430m compared with the same period in 2019 and the group tumbled to a net loss of €485m. Net financial debt, excluding lease liabilities, increased by €533m to €1.1bn.

For the same period, NH’s revenues fell 64 per cent to €458m, taking it to a net loss of €295m. Net financial debt increased by €377m to €556m, although Aragonés argues that his company’s cash position was improved and its room for manoeuvre increased by action he took to cut debt before the crisis. Nevertheless, he plans to sell assets this year to reduce it further.

Both groups say that their holdings of cash and other liquid assets, respectively about €440m and €485m at the end of September, will allow them to see through this year’s difficulties.

NH and Meliá hit hard by lack of travellers

But their problems are just one part of a much more widespread malaise. The year 2020 was easily the worst in the tourism industry’s history. According to the World Tourism Organisation, a UN agency, 1bn fewer people travelled abroad than in the previous year — a fall of 74 per cent compared to a 4 per cent decline during 2009 in the aftermath of the financial crisis. It calculates that the pandemic reduced the sector’s revenues by $1.3tn and has put between 100m and 120m jobs directly at risk.

But both Escarrer and Aragonés hope that the current restrictions, coming in low season, will help bring infections under control and pave the way for recovery. 

The Meliá boss thinks that foreign tourists will return by July and expects healthy demand for his beach hotels, particularly from the UK, traditionally the biggest source of tourists for Spain.

“In summer, if we begin to see group immunity [because of vaccinations], which we expect in the third quarter, we will see a change based on reservations: Europeans will be travelling in Europe, Americans in the Americas and Asians in Asia . . . although I don’t anticipate much long-haul tourism,” he said.

Gabriel Escarrer of Meliá Hotels © Soni Martinez
Ramón Aragonés, chief executive of NH Hotel Group © José A Rojo

“We are in places that aren’t so urban, where there isn’t such a business traveller aspect, where it’s more about holidays,” he added, noting that video meetings had largely replaced corporate travel and that this may be a long-term change. “As a result, I am convinced that we are one of the companies [in the industry] that will exit the crisis first.” 

By contrast, Aragonés thinks that this summer will be all about domestic tourism and that, as a result, NH’s chain of city hotels, which normally earn half their income from business travellers, will be well placed to take advantage.

“The first thing that is going to recover is city breaks, because the easiest thing is to just get into a car and spend a weekend at a hotel,” he said. “It is very likely that this summer a lot of people stay in their own countries, but that could suit us.”

Indeed, travel agents in the UK have reported that customers are delaying summer bookings for foreign trips to as late as October.

Europe feeling impact of second lockdown

Aragonés added that there will be exceptions — the over-70s, for example, who in countries such as the UK will soon be vaccinated en masse, “will be desperate to get out after being practically locked up for a year [and] could be a very good potential target in May or June”.

But if this summer does indeed involve large-scale substitution of domestic for foreign tourists it is bad news for Spain as a whole.

“In Spain’s case, the capacity of domestic tourism to compensate for external tourism is relatively little,” Pablo Hernández de Cos, the governor of the country’s central bank, recently remarked.

He added that the difference between what foreign tourists normally spend in Spain and what Spanish tourists customarily spend abroad is equivalent to more than 3 per cent of GDP — three times as large a gap as in Italy.

Both Meliá and NH point out that most of their business is outside Spain — almost two-thirds in the case of Meliá and about three-quarters for NH. “If Spain did represent 100 per cent, the truth is it would be worrying,” said Aragonés. “The problem in Spain is that the pandemic is probably going to combine with a very foreseeable economic crisis.”

Both chief executives call for Spain to spend some of the €140bn it expects from the EU’s coronavirus recovery fund on helping revive the tourist industry — and for the bloc to increase its relatively slow vaccination campaign; about 3 per cent of Spaniards have so far been inoculated compared with about 18 per cent of the UK. Both hoteliers would also like to see new international measures, such as health passports, to make it easier for countries to reopen. 

“If before the summer, we don’t have 50-60 per cent of the population vaccinated, Spain will not be considered a safe destination — this is the problem,” Aragonés said. “But Israel is going to have a very good summer, because it will be considered safe, the countries of the Middle East, [such as] Dubai are going to have lots of demand, because they are vaccinating massively . . Everything, everything is going to depend on the vaccines.”

Additional reporting by Alice Hancock