COUNTING PENCILS AT TASHKENT'S INTERCONTINENTAL

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 000428 SIPDIS SIPDIS E.O. 12958: DECL: 03/15/2017 TAGS: PGOV ECON UZ SUBJECT: COUNTING PENCILS AT TASHKENT'S INTERCONTINENTAL HOTEL Classified By: Amb. Jon R. Purnell for reasons 1.4 (d). -------------- Summary -------------- ¶1. (C) Tashkent's Intercontinental Hotel is experiencing very low occupancy rates as the result of fewer foreign visitors, a situation that has caused cash flow and other problems for the hotel. The hotel is restructuring its rates to attract additional business travelers and mid-level government officials from Russia, China, and other Asian countries. Meanwhile, the Ministry of Foreign Economic Relations, which owns the hotel, is of little help, refusing even to intervene in what Intercontinental management characterizes as a clearly illegal "money grab" by tax authorities. According to the hotel's Finance Manager, the Intercontinental is now only one of two non-Uzbek managed hotels in Tashkent, as Radisson SAS has pulled its expatriate team out of Tashkent. The Intercontinental's situation is typical of the problems experienced by other businesses that cater to foreign, primarily Western, visitors for the majority of their revenue. End summary. -------------- Barely breaking even...at least in February -------------- ¶2. (SBU) A sharp decrease in the number of American and European visitors is wreaking havoc on the Intercontinental Hotel Tashkent's bottom line. Finance Manager John Davy told poloff that the hotel's average occupancy rate has fallen steadily since early 2005 and now stands at just 18 percent, far below the hotel's break-even point of 39 percent. According to Davy, the hotel's food and beverage sales ordinarily would contribute only a relatively small amount to overall profits. Presently, however, food and beverage sales at the Intercontinental account for as much revenue as, or in some months even more than, the sale of rooms. For example, the hotel was able to break even in February as the result of several trade expositions that brought higher than normal food and beverage sales. However, the hotel is still operating at a net loss in 2007 as there were no expositions in January. (Note: In 2007, there will be approximately 27 international expositions, the majority of which will take place at the Intercontinental. End note.) The low occupancy rate is causing increasing cash flow problems, which has led the hotel to cut back on purchasing and other discretionary expenditures. Internal hotel supply stores are only open once per week for requisitions, and Davy said, only somewhat tongue-in-cheek, that he is to the point where he is concerned about how many pencils the staff takes each week. -------------- When 90 percent is not enough -------------- ¶3. (SBU) The Intercontinental currently has no competition for Western travelers. Davy estimated that 90 percent of American and European visitors to Tashkent stay at the hotel. The significant drop in the number of Westerners, particularly businessmen, coming to town means that there are simply not enough to fill the hotel. Senior government delegations from the former Soviet republics and Asian countries also stay at the Intercontinental, Davy said. However, most businessmen and lower level delegations choose to stay elsewhere because of the Intercontinental's higher prices. The General Manager has restructured room rates to attract additional mid-level visitors from Russia, China, and other Asian countries and hopes to see higher occupancy rates as a result. Intercontinental's Vienna regional office has resisted the move, and wants to see the hotel's average daily rate remain above $100. (Note: The average daily rate is used to measure a hotel's pricing scale, and is calculated by dividing the actual daily revenue from room sales by the total number of available rooms. End note.) -------------- No help from the Government -------------- ¶4. (SBU) The hotel is fully owned by the Ministry of Foreign Economic Relations. The Ministry pays Intercontinental an annual management fee for running the hotel. The fee is based entirely on net operating profit; thus, Davy said it is conceivable that if occupancy rates do not rise over the next ten months, Intercontinental could receive nothing for 2007. He declined to disclose Intercontinental's fee in 2006, TASHKENT 00000428 002 OF 002 saying only that it was less than his annual salary. ¶5. (C) According to the management agreement, the Ministry has no role in hotel operations. In practice, Davy said, interference is not uncommon, although the Ministry typically backs down if Intercontinental stands its ground, which it does in most cases. He said that Minister of Foreign Economic Relations Elyor Ganiev has little interest in the hotel other than the perceived prestige that it brings him and his ministry and whatever money he can squeeze from it. For the most part, this "benign neglect" is good for Intercontinental; however, it also means that the Ministry is of little help in resolving problems when they crop up. For example, Ministry officials refused to intervene in a 2006 tax case -- a "clearly illegal money grab," according to Davy -- until Intercontinental informed them that it would pull out of Uzbekistan if its bank accounts were not unfrozen. (Note: Intercontinental subsequently prevailed against tax authorities in court. However, the hotel was audited again in August 2006, and Davy suspects that it is only a matter of time before tax collectors are again knocking on the hotel's door. End note.) -------------- And then there were two -------------- ¶6. (SBU) Davy said that the Intercontinental and the Dedeman Silk Road are now the only non-Uzbek managed hotels in Tashkent. The Radisson SAS Tashkent is a Radisson hotel in name only, he said; the company has pulled its expatriate management staff out because the Tashkent city government, which owns the hotel, stopped paying management fees. The Radisson sign remains on the building only because the company has not yet made an issue of removing it. (Comment: Rumors of Radisson's departure have circulated for almost a year, but Davy is the first person from the hotel industry to corroborate the reports. His information may well be true, but as of March 13, poloff was able to make a reservation at the hotel through Radisson's worldwide website. Radisson may hope to work out its issues with the city and resume managing the hotel in the future. End comment.) Davy said that Intercontinental is in Tashkent for the long run, and will not pull out as long as it can squeeze out at least a small management fee from the hotel. -------------- Comment -------------- ¶7. (SBU) There is little doubt that the downturn in Uzbekistan's relations with the West has hurt the Intercontinental's bottom line. Closing the base at K2 was a major blow to the industry. Poloff recalls staying at the Intercontinental during a 2003 visit and having breakfast each morning in a relatively full dining room. In contrast, on a recent Saturday morning, he was the only patron in the restaurant. Post has heard similar accounts from other businesses that depend on foreign, primarily Western, visitors for the majority of their income. It is ironic, and somehow appropriate, that in the case of the hotel, an abysmal business climate is responsible for the Ministry of Foreign Economic Relations losing money. The Intercontinental's plight demonstrates that in addition to running selected companies out of town, the GOU is doing nothing to help those that remain. PURNELL