HOTEL MARKET:Occupancy levels in the industry have dropped from 66 to 61 per cent while the all-important domestic market is expected to contract sharply in 2009

THE HOTEL industry is facing the first downturn in business in seven years. Following on the massive increase in hotel numbers over the past 10 years, the market is expected to contract in 2009. Already this year there have been some closures and receiverships.

Figures from Tourism Ireland released last week show a projected drop in tourism numbers for 2008 of up to 3 per cent, bringing visitor numbers to 8.2 million.

Occupancy in the industry dropped from an overall 66 per cent to 61 per cent by the end of September. There are 925 hotels in the country with more than 60,000 bedrooms - an increase from 27,000 10 years ago and 12 per cent more than last year.

In 2007, 20.8 million guest nights were spent in Irish hotels with 12.7 million derived from the domestic market. The industry is very dependent on the domestic market and changes in spending patterns will have a significant effect.

Serious cash flow problems are already beginning to affect hotels with access to seasonal finance having almost dried up. Many are operating with minimum staff while casuals and part-time staff are being let go. Many hotels are overexposed to high gearing and are in danger of running out of cash. Outside factors affecting the industry are the global credit crunch, and the weakening of the currencies of the biggest markets: the US and UK.

Many new hotels were built on the back of the capital allowances scheme which allowed developers to write off costs over seven years. Some of these hotels will have to continue operating or face claw-backs of allowances.

One of the more high profile closures this year was the Capella Castlemartyr after only 14 months in business. Hailed at the time as Ireland's most expensive hotel, its rates had to be cut almost immediately and, from an expected €545 per night, it ran all through the summer on special offers of €179 per person for two nights bed and breakfast and dinner one night.

Kinnity Castle in Co Offaly, a popular venue for weddings, was put into receivership and is now for sale. The Woodstock Hotel in Ennis and the Ballymun Plaza closed their doors. The Watermarque in Cahirciveen opened last year but is already for sale, at €6 million, and Chief O'Neill's in Dublin's Smithfield is also on the market.

Other planned hotel ventures - such as Humewood in Co Wicklow, Dunboy Castle, Co Cork, Marlbrook, Co Tipperary and Killeen Castle, Co Meath - will be opening at later dates than originally thought.

Problems between hotel owners and branded management companies have surfaced in the media. The owners of the Shelbourne and management company Marriott appeared in the Commercial Court over disagreements on how the business is run.

And Hilton Hotels is no longer managing the Mount Wolseley in Carlow or the Hilton Limerick, which has changed its name to the Strand Hotel. In the industry it is believed that there are other disagreements but they have not become public yet.

In Dublin, D4 Hotels and the Burlington have brought over 1,000 rooms back into the market at greatly reduced rates, putting pressure on full service hotels.

Around the Naas Road and Tallaght it is, according to hotel consultant Weldon Mather, "a bloodbath, with Louis Fitzgerald offering 1,000 rooms at €10. It is a good gimmick, but indicative of where the rates are going with all selling around €55 per night except the Ibis which is €40 and Travelodge are offering €29 if you book a month in advance."

While the next year or so is not looking good for the industry, there is some optimism that the opening of the National Convention Centre, due in autumn 2010, will bring business to Dublin. So, too, will the O2, formerly the Point Depot, and the new stadium being built at Lansdowne Road.

While Dublin will survive on the back of events and slashed rates, around the country the picture is not too good. Resort hotels will feel the chill winds of recession and some will close early for the winter or reduce opening to three-day weeks. The increase in the minimum wage will also affect business.

John Toner, CEO of the Irish Hotel Federation, believes that there are "some very good hoteliers running properties, getting their heads down, reacting to economics, and surviving.

"Costs have been slashed and there is severe pressure on income: 2009 will be a difficult year for all."