Hotel chain's high cost base will both attract and put off potential buyers, writes Emmet Oliver

A press advertisement this week reads, "there's so much to do for everyone at a Great Southern hotel that you'll want to come back again and again".

The exciting copy accompanies the latest offer from the State-owned hotel group, aimed mainly at parents and children taking a few days off for mid-term next week.

Unfortunately for the nine-strong hotel group, people have not been coming back again and again. While the chain's ultimate owner, the Dublin Airport Authority, has not disclosed the occupancy rates at individual hotels, it is understood from industry sources that several of them suffer from low occupancy rates, particularly during winter.

To be fair, this is an industry-wide problem. Occupancy rates have been in steady decline for several years. It's hardly surprising. Capacity has increased hugely throughout the Republic. The key measure of this is not the number of hotels, but the number of rooms, which increased from 38,084 in 2000 to 45,480 in 2005, a rise of over 19 per cent.

A major contribution to this rise in capacity has been the generous capital allowances for the hotel sector, ironically presided over by the State, which indirectly owns the Great Southern group.

A closer look at the figures for rooms shows why the Great Southern, in particular, has fallen on hard times. Leaving aside the Derry property, the majority of its hotels are in the four-star category - a market segment that has seen a 62 per cent increase in capacity between 2000 and 2005.

Even the five-star segment has been better protected from the aggressive new levels of competition with capacity up by the slightly less alarming figure of 19.7 per cent.

Earlier this week, consultancy group Indecon examined the impact of capital allowances on the hotel sector. Its conclusion was unambiguous. "There has been a considerable increase in the number of planning applications for hotel developments since 2002. A majority of hoteliers consider that the tax incentives have led to over supply in the sector."

The tax breaks are certainly not a side issue - according to the Indecon survey 60 per cent of hotels have availed of the incentives over the last five years.

Some of the most powerful players in the tourism and travel trades have been drawing attention to the consequences of this. In November, Fáilte Ireland chairwoman Gillian Bowler said the number of hotel rooms had reached a "sufficient level" and Government endeavours should now switch towards attractions and activities for tourists.

She called for an end to tax breaks for hotel developments. "They are past their sell-by date."

The attractiveness of the hotel sector, underpinned by the tax breaks regime, has certainly attracted the support of the banks. Indecon found that lending by financial institutions to the hotel sector was €223 million in 2003, but had surged to €386 million just one year later.

The increase in financial support and room capacity has produced a very competitive market. Average room rates have been relatively static for several years, although Dublin has been an exception.

The rise in tourist numbers has helped to absorb some of the capacity increases, but not everyone has escaped the highly competitive environment.

A closer look at the Great Southern's own accounts suggests its business has been limping along, rather than excelling. Sales at the nine hotels were €43 million in 2002. In 2003, they were just €1 million higher and they inched ahead again in 2004 to €45 million. In the private sector this would not be regarded as stellar growth.

In recent years the company was able to post modest profits but the new and expanded hotels cropping up all around the company appear to have dented its ability to make money. In 2003 the group made a profit of €2.8 million but, by 2004, it had slumped to a loss of €2.2 million - a figure that is expected to worsen to €6 million for 2005 and then €8 million in 2006. At these levels, the loss equates to almost one-third of the entire profits of the Dublin Airport Authority, its owner.

Clearly this is not sustainable. While there is evidence that the Government's tax breaks for hotel developments contributed to the woes of the group, the chain's high cost base has cut its chances of coping with this.

Again the figures are stark. The Great Southern Hotel chain posted sales in 2004 of €45 million. Payroll costs at €20.7 million, represented 45 per cent of turnover. The industry norm is believed to be about 32 per cent.

Industry sources say well-run hotels could expect to produce profit margins of between 7 and 8 per cent. With staff costs so far out of line with the industry average, the Great Southern had no chance of producing sustainable returns.

Even the sales figures appear to be low for a group with nine properties situated mainly in reasonably large towns and cities. The Gresham Hotel group, which has six properties, had sales of €37 million in 2004 compared to €45 million for the nine hotels owned by the Great Southern.

The group's high cost base will both attract and put off potential investors. It may attract some private sector buyers who believe they can cut back these figures significantly. Others, however, won't fancy taking on an overwhelmingly unionised workplace where old-fashioned demarcation rules still hold sway.

The disclosure this week by Minister for Transport Martin Cullen that the hotels may need €80 million in fresh capital funding will also do little to enhance their saleability.

The other problem the hotels face is brand recognition. The Great Southern brand, while well known to generations of Irish visitors, is a minnow on the international stage. Dr Alex Gibson, head of DIT's department of tourism, believes accessing internet booking sites is the key to growing business. This is much easier when your brand is operated throughout the world.

Another source says Great Southern has not invested enough in health, fitness and spa developments, which other hotels have made their centrepieces.

Séamus McGowan, chief executive of the Travelodge group, believes travellers expect each hotel group to stand for a very specific set of characteristics. "The reality is brands give comfort."

He says the market has tended to become polarised between budget operators and high-end five-star type properties. The market in between is becoming a tough place to operate. But he does not believed the increase in industry capacity will go on forever. "I think there will be a levelling off period," he says.

Ironically this period will probably come too late for the Great Southern group. Ministers appear to support a sale, although some backbenchers may yet try to have their voices heard. Last night PD senator Tom Morrissey called for a debate on the future of the group so that the reluctance of some Fianna Fáil backbenchers to support the Government's wish to see the hotels sold into private hands could be aired.

Ultimately, the chances of one buyer purchasing all nine hotels are slim. That means the group is likely to be broken up. The tax breaks of recent years are only likely to reduce its value in a somewhat saturated market.