final cases

This case was written by ______from class of Cases in Finance leaded by Professor _____.

Tourism Company Finance\ Hilton Hotels

Monday, April 26, 2021

Abstract

Tourism started way before all the technology before airplanes and cars. It started with basic needs. They are looking for food and water, for instance. Nomads, even though tourism is not their purpose, traveling and not having a fixed home can look like a type of tourism, nowadays people instead travel and do tourism than being home.

Getting to meet new cultures and beliefs, look at new sights are part of a touristic journey and together, comes to the money invested on it.

Tourism is one of the world’s major economic sectors. It is the third-largest export category, after fuels and chemicals, and in 2019 accounted for 7% of global trade and is also highly affected by Covid 19.

This case aims to provide an insight into how tourism enterprises are and will be affected by covid 19 in the economy. It will illustrate the benefits of tourism and what to expect after being highly affected by the pandemic.

Key words: Tourism, economy and enterprises

TOURISM COMPANY FINANCE

10

Introduction

According to United Nations World Tourism Organization (UNWTO), 1.4 billion people traveled to international locations in 2018. The research results conducted 68 years before estimates only 25 million people traveled to international locations.

Due to Covid 19, this number dropped. Companies all around the world are suffering from a lack of tourism. For this Case Study we will focus on Hilton Hotels one of the hotel chains that has branches globally. The financial report focuses on Income Statements and shows a summary of the cash flow and the difference in the financial records because of Covid 19.

COVID 19 has had adverse effects on the economy of most countries, especially in the tourism sector. The economies of scale show a change of the supply and demand curve where the supply is more than the demand. Several countries depend on tourism to improve the economy and contribute to the country's GDP. Tourism is the third-largest income generating in most countries, and the pandemic has affected the industry globally (Bakar et al, 2020).

Problem Situation

The pandemic caused an immediate halt to the economic activity and functions in the industry. The tourism industry is among the industries that have the most adverse effects because of the pandemic, with the significant effect being the loss of jobs due to redundancy. Tourism sectors such as hotels, airlines because of the reduced number of clients. The loss of clientele is contributed by the lockdown and cessation of movements, hence making people stay indoors and making their food at home instead of eating out in hotels and restaurants. The industry depends on clients who bring revenue; hence, revenue loss means no income to the employees. Most of the tourism facilities are private companies that do not have the government's support; hence, this means that the government cannot cushion the businesses as they wait to recover. Most of

the managers did not have other plans or alternatives on sustaining their financial obligations apart from an immediate reaction to stop employees from carrying out their roles because of the possibility of lack of income. The loss of livelihood by the people working and depending on tourism has increased at an all-time high in the last year due to the adverse effects from the COVID 19.

The travel ban placed by various countries means that there is a limitation of tourists from different countries. The pandemic hit worse in the European countries, which affected the economy in Europe and had a ripple effect in developing countries in Africa that highly depend on foreign tourists to boost their economy (Bakar et al, 2020).

There is an effect in finance because companies have resulted to increasing on their expenses to comply with the regulations set by the government in the countries. The employee's safety is vital in sustaining their health. as a measure to protect the staff members and clients, the management needed to install and implement hygiene points in various sections of the business such as hotels and restaurants. Despite the costs incurred installing the safety measures, the businesses in the tourism industry and not in a position to increase the client's prices because of the low demand from clients (Bakar et al, 2020). Therefore, the financial reports show an increase in the loss is contributed by cost increase and reduced prices as a way of attracting clients. An additional cost incurred, such as an increase in furniture to cater for clients and allowing for social distance, means that most of the tourists' sector was affected by the installation and implementation. For example, a restaurant with a sitting capacity of 30 people meant reducing the number of sitting capacity due to the issue of social distance (Bakar et al, 2020).

Some of the tourist sector investments, such as hotels and restaurants, are owned by foreign investors. Due to the adverse effects caused by the pandemic, most of the investors resulted in disposing of their investments as a risk mitigation strategy and avoiding losses in the future. Some investors experienced the challenges of raising capital to resume the business or reinvest when the curve began to flatten because of the increase in financial institutions' restrictions (Bakar et al, 2020).

The increase in the rate of infection affects the performance of work for employees. A reported case of a single person results in the closure of a facility to stop the spread of the virus. If there is an instance an employee contract the virus, the facility may have an option to close for a duration that costs the business revenue during the downtime. Employees spend money on their treatment in the case where health insurance does not apply. The cost of treatment is high, and this reduces the purchasing power for an individual. In the case of a potential client, tourism is considered a luxury item; hence when a person does not have the purchasing power, they automatically do away with the luxury items (Bakar et al, 2020).

The economic projection of the drop in revenues is likely to continue because of the lack of employment from many sectors due to the pandemic's adverse effects. In some cases, some affected industries may choose to forgo taking a holiday in the next two to three years as a way of trying to recover their finances (Williams et al, 2021).

The productivity in some countries in Europe and America depends on seasons. In summer, most people take breaks and are more productive in other seasons, including winter. The COVID 19 reported cases in several European countries reached the peak from March to August, during which Summer falls in between these months. The tourism sector was highly affected in 2020 during these months because it is the norm to take a break and visit tourist

destinations in their home countries or foreign countries. There was a limitation of movement for most people due to lockdowns and cessation to stop the virus's spread. There was a low probability of recovery in the tourist peak seasons. Most potential customers resolved to keep their money in case of an emergency or resulting from different waves or strains of the disease (Williams et al, 2021).

Hilton Worldwide Holdings Financial Statements 2018-2020
Income Statement
Year		2020	2019	2018
Revenue		4,307.00	9,452.00	8,906.00
Cost of Goods Sold		620.00	1,254.00	1,332.00
Gross Profit		3,687.00	8,198.00	7,574.00
R & D Expenses
SG & A Expenses		311.00	441.00	443.00
Other operating income of Expenses		(3,422.00)	5,754.00	5,374.00
Operating Expenses		4,725.00	7,795.00	7,474.00
Operating Income		(418.00)	1,657.00	1,432.00
Total Non-Operating Income / Expense		(506.00)	(413.00)	(354.00)
Pre - Tax Income		(924.00)	(1,244.00)	1,078.00
Income Taxes		(204.00)	358.00	309.00
Income After Taxes		(720.00)	886.00	769.00
Other Income		-	-	-
Income from continuous operations		(720.00)	886.00	769.00
Income from discounted operations		-	-	-
Net Income		(715.00)	881.00	764.00
EBITDA		(41.00)	2,048.00	1,800.00
EBIT		(418.00)	1,657.00	1,432.00
Basic Shares Outstanding		277.00	287.00	302.00

Shares Outstanding		279.00	290.00	305.00
Basic EPS		(2.58)	3.07	2.53
EPS - Earnings Per Share		(2.56)	3.04	2.50
		(2.56)	3.04	2.50

Cash Flow Statement

Hilton Worldwide Holdings Cash Flow Statements 2018-2020
Cash Flow Statement
Year	2020	2019	2018
Net Income / Loss	(720.00)	886.00	769.00
Total Depriciation And Amortization - Cash Flow	377.00	391.00	368.00
Other Non-Cash Items	97.00	(35.00)	21.00
Total Non-Cash Items	474.00	356.00	389.00
Change in Accounts Receivable	488.00	(105.00)	(161.00)
Change in Inventories	-	-	-
Change in Accounts Payable	-	-	-
Change in Assets / Liabilities	880.00	148.00	110.00
Total Change in Assets / Liabilities	954.00	142.00	97.00
Cash Flow from Operating Activities	708.00	1,384.00	1,255.00
Net Change in Property, Plant and Equipment	(46.00)	39.00	(72.00)
Net Change in Intangible Assets	(46.00)	(124.00)	(87.00)
Net Acquisitions / Divestitures	-	-	-
Net Change in Short-term Investments	-	-	-
Net Change in Long-term Investments	-	-	-
Total Net Change in Investments	-	-	-

Other Investing Activities	(15.00)	(38.00)	28.00
Cash Flow from Investing Activities	(107.00)	(123.00)	(131.00)
Net Long-term Debt	2,469.00	653.00	671.00
Net Current Debt	-	-	-
Total Debt Insurance / Retirement Net	2,469.00	653.00	671.00
Net Common Equity	(296.00)	(1,538.00)	(1,721.00)
Net Total Equity	(296.00)	(1,538.00)	(1,721.00)
Total Common & Preffered Stock	(42.00)	(172.00)	(181.00)
Financial Activities	(99.00)	(56.00)	(69.00)
Cash Flow from Financial Activities	2,032.00	(1,113.00)	(1,300.00)
Net Cash Flow	2,633.00	146.00	(186.00)
Stock-Based Compensation	97.00	154.00	127.00
Common Stock Dividends Paid	(42.00)	(172.00)	(181.00)

According to the world tourism barometer, the tourism industry reported a decline of up

to 65%. The revenue for the last three years shows a major decline. For example, Hilton Hotel, a

hotel with global recognition, shows the annual report as follows. $ 4,307 in 2020 down from

$8,908 in 2018 and $9,452 in 2019, respectively. The projections in the next coming year range

from $ 4,378 to $4,518 (Williams et al, 2021).

Most of the countries gave travel restrictions to their citizens to increase the safety of their citizens. In the first few weeks after the cases, the hotel industry received an income from the foreign people traveling due to the various government's restrictions on mandatory quarantines or isolation in facilities provided. Most of the facilities were hotels and institutions. The revenue collected was from accommodation and meals. Some countries introduced

nighttime curfews and limits to essential movement. Several businesses thrive at night in the tourism industry, which means that the nighttime curfew makes the facilities out of business.

The loss of jobs and pay cuts for employees in tourism is a risk to the security and livelihoods of people because there is a desperate need for the basic needs; hence there is an increase in the crime rate because of the effect in the loss of jobs translates to the loss of income in other sectors of the economy. Countries that depend on wildlife in tourism have recorded an increase in poaching of wild animals because of the decrease in tourists and a decrease in employees taking care of the parks and reserves.

The tourism industry stakeholders must understand and forecast their finances in the future and find ways of working around the pandemic in ways that enable the businesses to remain sustainable. One of the expectations is there is a likely change in consumer behavior. The level of physical interaction has significantly reduced because of the need to have social distance and reduce exposure. Most clients try to avoid interaction with other people and visit different places as a precautionary measure and question the sanitization of the places visited. The precautionary measure means that the consumer behavior is likely to change because most consumers opt for preferences that avoid covid in place (Jones et al, 2020).

Other sectors affected.

Several sectors depend on the thriving success of the tourism industry, which means that the effects of covid 19 affect businesses directly and indirectly and eventually affect the country's economy.

Positive impact from Covid 19

Insurance

Despite the adverse effects globally, the insurance industry is one of the industries that have had significant effects because of the pandemic. Insurance companies have adjusted their policies are created new policies that cover the effects of the pandemic and cushioning clients from the losses faced. Since insurance companies have gained the additional business, the tourism sector businesses have had to risk their expenses to cater to the additional premiums for the additional covers (Jones et al, 2020). While the tourism industry's income is negative, the insurance industry, especially health and life insurance, is generating more revenues because of the need to save money from hospital bills. Besides, potential clients are changing their choices and decisions, and money that would be spent on tourism is channeled to other industries such as insurance. Most people in developing countries are becoming more aware of the importance of having health insurance for themselves, and they are dependent. For instance, this means the money saved trips either as a domestic or foreign tourist is taken to paying premiums for health insurance to cater for any disease or complication arising from COVID 19 (Chang et al, 2020).

Pharmaceuticals

Adapting new healthy lifestyles and improving hygiene has seen a rise in the pharmaceutical industry's revenues through the sale of products such as masks, hand sanitizers, and health supplements. There has been an increase in the demand for health supplements to increase the immune system. Most of the clientele are people who seek medical assistance through over-the-counter medication and prefer home care treatment methods. There is a decline of people seeking medical attention in hospitals due to the fear of contracting the disease or being diagnosed with the disease and the treatment process that follows. The availability of such treatment procedures helps the tourism industry because the clients may use various facilities while being cautious hence avoid contracting or transmitting the disease (Jones et al, 2020).

Online platforms

The ICT industry has recorded a rise in the design of new applications and software to help businesses that have changed the working strategy and embraced the remote working strategy for their businesses. As a precautionary measure, most people and organizations have transformed their mode of handling business and work. There is an increase of people working from home to avoid exposure and increasing the risk of contracting the disease. Organizations had to invest in online meeting platforms for video conferencing such as Zoom and Teams to allow people to work from home and work effectively, especially organizations that transacted in different countries. The online platforms have increased their revenues due to the increased number of customers (Jones et al, 2020).

There is also an increase in online business and product delivery by people because of avoiding public spaces. Restaurants and other commodity businesses use this to capitalize on gaining revenue because they meet the customers' needs through online sales and purchases. The tourism industry may use a digital platform as a marketing strategy to create awareness of available destinations and services offered in such areas (Chang et al, 2020).

Negative impact

Agriculture

Many businesses in the tourism sector deal with food, such as hotels, restaurants, and airlines. The success of the tourism industry relies heavily on agriculture because of the food requirements for the clients. Due to the covid 19 effects, most of the agriculture businesses have been negatively affected because of the reduced demand from the tourism business. Most of the produce in Agriculture is perishable commodities; therefore, for farmers to reduce the losses incurred, some resulted in selling their commodities at a lower price than the usual market rates

because there was a higher supply than the market demand. Alternatively, farmers had to increase the commodities' prices to cover the losses of producing the food, which means that the businesses in the tourism industry increase the price of commodities to an already suffering economy due to the reduced number of clients (Chang et al, 2020). The cessation of movements and border controls have also made it difficult for the agricultural produce to reach the destination in good conditions. In most countries, especially the developing countries, most tourist business is in the urban centers while agricultural business is in the rural areas. There is a definite requirement of transportation for the commodities to the destination within the shortest time. To solve the challenge, the farmers require permits to allow them to transport food to other destinations. In most cases, getting the permits takes long and costs them more; hence, most farmers opted not to transport their produce, especially small-scale farmers.

There will be a decline in agricultural production in the long run because the losses mean that farmers might not have the capital in the next season for crop farming or food supply for the animal farmers. Without proper strategies, the food shortage is likely to affect more people than the tourism industry (Chang et al, 2020).

Local financial institutions such as banks have recorded a decline in revenues due to the low customer numbers and low revenues. The institutions are at risk of running losses, especially from bad debts due to unpaid loans invested in the tourism industry.

Initially, when the pandemic started, there was a decrease in the price of fuels. However, with the stabilization of the economy, the fuel prices gradually increased, making it difficult for the transport sector in tourism to make profits. The high fuel costs mean an increase in electricity prices, which is an essential factor in food, beverage, and accommodation.

The real estate sector has seen adverse effects, with people opting for other investment forms that may be easier in liquidity. In the tourism industry, most businesses closed; hence the real estate investment was repossessed due to lack of payment for rent or leases. Businesses with a high amount of fixed assets than current assets have lower liquidity or solvency ratios, making it difficult to access financial leverage because the liquidity ratios determine the business's leverage ratios. There is a decline in real estate investments, including investments in the tourism industries such as hotels' construction.

Long-term expectation for regaining profit

The recovery of the tourism industry highly depends on the collaboration between the government and other stakeholders. The government and shareholders of the business need to team up and come up with strategies to help the people from further losses. Tax relieves one of the ways the government helps the industry recover from the increased expenses and losses during the pandemic period. Tax relieves ensures that the revenue collected helps in rebuilding and investing in the facilities and attract customers. The tax levies can be made to a specific duration.

Similarly, the government may also offer to assist businesses in the industry with financial aid such as grants and loans with minimal interest. They strive to put the businesses back to the market rates. Minimal interest in financial aid also means that the industry does not charge clients high amounts as previously but focuses on increasing the demand.

The recovery process requires changes in the financial policies following the guidelines set in place to recover an economy, such as the national recovery act. The policies based on the multiplier effects that tourist industries have in the country may help in the recovery of the country's general economy. The ratio of the fiscal multiplier in tourism is high because some

industries and sectors depend on the industry, such as infrastructure and agriculture. Innovating new marketing strategies such as advertising tourist destinations and showcasing how conversant facilities are in line with covid 19 is a crucial way to attract customers. The strategy is achievable both physically and virtually (Jones et al, 2020).

Invest in training more people who will work in the businesses in the tourism sectors, especially on the digital platform, to revive the industry. The stakeholders must be conversant with the business's recovery strategies to capitalize on the business opportunities for the clients. Some of the strategies may be creating awareness for the clients and offering information on the benefits of why the clients need to engage in the business (Jones et al, 2020).

The government and financial institutions need to seek financial leverage from international organizations such as WHO or IMF to boost the economy and help revive back the sectors that might take a while to get clients. Financial aid helps to assist the staff members in these industries with an income as they seek other alternatives to earn a living. The financial assistance also helps the businesses to invest in materials and equipment that meets the safety regulation, such as the purchase of sanitizers, masks, and thermometers to be used in the facilities by both employees and clients (Chang et al, 2020).

Conclusion

The pandemic effects may affect the economy for several years, and in some instances, some businesses may never recover to the level they were before the pandemic. The management or business owners need to think of new strategies to keep their financial status on a going concern and have a promising future. The pandemic will see a change in most clients' social behavior; hence, the businesses need to come up with innovative ways that cater to the different forms and client needs.

Sensitization on COVID 19 will help the tourist business to allow clients from various destinations without stigmatization. It is also essential to train the staff members on the importance of their safety and handle the related crisis.

Questions

1. How does Tourism support the economy?

Tourism supports the economy through job creation and purchases of products from various industries such as agriculture, infrastructure energy and insurance.

2. How has the company financially been affected by the pandemic? Where, can we clearly see the differences? When did started?

The business has had to downsize the number of employees because of the reduced number of revenues. The effect is clearly seen from the month of June especially during summer.

3. Estimate the annual growth rate in Hilton Hotel. dividends over the

2018-2020 period using the data given in the case. Calculate arithmetic average.

$8,908 in 2018 and $9,452 in 2019 4,307 in 2020

=8,908+9,452+4,307

= 22,667 22667/3

Arithmetic Average - =7555.67

4. Calculate the expected return for Hilton Hotel in the next x years.

Yr 1 Probability 0.15 Rate 11%

Yr 2 Probability 0.2 Rate 16%

Yr 1 Expected return - 0.15 * 11% = 0.0165%

Yr 2 Expected return – 0.2 * 16% = 0.032%

5. What is the estimated recovery rate?

The estimated recovery rate is a period of two years because the hotel records the highest sale in the summer season.

6. What strategies can the business use?

The strategies the business may use is apply the uses of technology to advertise the business and the products available. Most of the businesses are leaning to technology hence investing in technology is important.

Work Cited

“Hilton Worldwide Holdings Cash Flow Statement 2005-2021: HLT.” Macrotrends, www.macrotrends.net/stocks/charts/HLT/hilton-worldwide-holdings/cash-flow- statement.

“Hilton Worldwide Holdings Income Statement 2005-2021: HLT.” Macrotrends, www.macrotrends.net/stocks/charts/HLT/hilton-worldwide-holdings/cash-flow- statement.

Bakar, Nashirah Abu, and Sofian Rosbi. "Effect of Coronavirus disease (COVID-19) to tourism industry." International Journal of Advanced Engineering Research and Science 7.4 (2020): 189-193.

Chang, Chia-Lin, Michael McAleer, and Wing-Keung Wong. "Risk and financial management of COVID-19 in business, economics and finance." (2020): 102.

Jones, Peter, and Daphne Comfort. "The COVID-19 crisis, tourism and sustainable development." Athens Journal of Tourism 7.2 (2020): 75-86.

Williams, Colin Charles. "Impacts of the coronavirus pandemic on Europe's tourism industry: Addressing tourism enterprises and workers in the undeclared economy." International Journal of Tourism Research 23.1 (2021): 79-88.