Crisis In The Garden Of Eden

What are we to make of Eden Hotels' application for insolvency protection? The company is stressing that it would be only a short-term measure to combat a lack of liquidity and that it is otherwise very much business as usual, but does it represent a wider issue for Mallorca's hotel industry and indeed other parts of the island's tourism industry?

Without knowing the ins and outs of Eden's financial affairs, one can guess at the sort of problems it faces. There are four hotels in the chain, one in Menorca to add to the three in Alcúdia and Muro. None of these hotels is open in the off-season.

The blame for its liquidity problem is placed firmly on the seasonality which denies the company the opportunity of opening hotels through the winter or earlier. But this is nothing new. When it says that it is looking at negotiating with its banks and at seeking to arrive at refinancing, it may well be alluding, though I am guessing, to the fact that credit has become so difficult to obtain.

Even if hotels are closed, the business carries on. There are still staff to pay, maintenance and improvements to be carried out, stock to be invested in, marketing to be undertaken. Depending on arrangements, hotels can be forced to wait into the season to start receiving payments from tour operators. Whatever arrangements they may have, there is not a great deal of revenue to be derived in winter, and there is even less if, as is the case with Eden, there is no international business.

Much attention is granted to the major hotel chains in Mallorca, such as Iberostar or Meliá. These are genuinely global businesses. Regardless of how they might be structured, they generate good cash flows all year which can benefit those parts of the overall business that might be subject to the negative consequences of seasonality. They are also of sufficient size and with strong assets on the balance sheet to be well capitalised, be this through the markets or banks or both. What is perhaps forgotten is the fact that Mallorca also has smallish hotel businesses, and Eden would fall into this category.

If credit is at the heart of the problem, then it is one shared with others in the tourism industry. For businesses which are seasonal (and even for those which aren't), credit has been a natural way of doing business and a natural way of investing prior to the start of the season. It has become the devil's own job to try and get this credit. It isn't just hotels, it is also restaurants, car-hire firms, you name it.

The hotels, as we all know, are central to the regional government's new tourism law and to its provisions, in keeping with the government's wish for modernisation, for re-development and conversion. There is one potential flaw with this, and it is one that was revealed when the government's plans were first being mooted; many of Mallorca's hotels are, if only unofficially, up for sale and many hotel owners would struggle to find the funds to proceed with the type of modernisation the government would like. Meliá can introduce a project to transform part of Magalluf, but Meliá has the wherewithal and the connections to bring in the necessary investment.

Let us suppose that there are hotel businesses in Mallorca which have run up against the double whammy of seasonality and a lack of credit. If they are meant to undertake modernisation, how are they going to fund it? An option might be to sell (and Eden is said to be on the point of selling one of its establishments), assuming buyers could be found. One acquisitive chain is Luabay, itself part of the giant Orizonia group, but there is only so much acquisition that can be financed or be advisable.

This wider issue of finding the means for modernisation can be set in the context of a wider issue still. Despite the constant reference made to tourism being the motor of economic growth, the Mallorca-based Economy Circle of the great and good of the business world reckons that it is precisely the dependence on tourism that will mean the Balearics is the last of the Spanish regions to get out of economic crisis. This means a protracted period of bank reluctance to extend financing, but worse still is what the former finance minister, Carles Manera, has said about there being "systemic crisis" in the Balearics. This can refer to all sorts of things, but fundamentally it is a lack of finance, a one-product economy and a one-product economy that survives on six months business a year. And there are hotels which can probably confirm this.


Any comments to andrew@thealcudiaguide.com please.