2009: Hotel ice age

  • 2009-04-22
  • By Adam Mullett

TAX BURDEN: Many hotels complain that the government's decision to increase their tax rate from 5 percent to 19 percent will damage an already struggling industry and force many of the smaller players on the market to close their doors.

VILNIUS - Hotels in Lithuania are predictably doing poorly, with very low occupancy rates caused by higher taxes, almost no connections to the capital by plane and the economic crisis in full swing. Hotels outside the capital are reporting just 10 percent occupancy rates.

Experts in the business though, can't agree on what is the worst of the three factors.
Prior to the onset of the crisis, people had pegged a lot of hope on the Vilnius European Capital of Culture 2009 (VECC) event because it was supposed to draw a big crowd for the city this year.
But the new government's austere changes to the tax system and massive budget cuts, along with the continuing debacle at Vilnius International Airport (VIA), has landed hoteliers on a downward spiral leaving many circling the drain.

Tax exemptions previously given to hotels on Value Added Tax (VAT) and property taxes have been lifted, bringing their previous 5 percent tax rates in line with other goods and services at 19 percent.
Lithuania and Latvia were the only two countries in the European Union to raise taxes significantly on hotels after the onset of the crisis 's a move that Juha Mahonen, country manager for Reval Hotels Lithuania, thinks was foolish.

"In Estonia, they raised the VAT by 4 percent, in Lithuania, they raised it by 14 percent. When meeting officials in different ministries, they refuse to understand that the hotel business industry is an export," Mahonen said.
Rima Jakyte, the head of the Information, Analysis and Control Division at the Department of Tourism under the Ministry of Economy, thinks the effect of the VAT increases shouldn't be exaggerated.

"Five years ago the VAT was decreased from 18 to 5 [percent] and we saw that the prices didn't decrease 's it was 13 percent less and prices didn't change. It is my opinion that this tax isn't important for hotels," she said.
Evalda Siskauskiene, President of the Lithuanian Hotels and Restaurants Association said the result of the tax increase is that many hotels simply can't do business the way they used to. She expects the fallout to be a 20 percent layoff rate in the industry, coupled with many smaller businesses converting their staff to the shadow economy, whereby a large portion of their salaries would be under the table payments.

"This will make a shadow market, definitely yes 's especially in smaller cities, everybody will go black 's it took so long to put everyone in daylight and then they will just go back."
Siskauskiene reported that occupancy rates in Vilnius hotels are looking sickly at between 20 and 35 percent. Hotels in other cities or in smaller resort destinations are reporting just 10 percent occupancy rates.
The government is single minded in its taxation strategy, saying that everything is going according to plan.
"[About] the initial decision to abolish the VAT exemption 's the VAT exemptions are a loss for the government. We have very little space to maneuver and it is not something the government could afford," said Mykolas Majauskas, the prime minister's advisor for economic affairs.

"It is not an increase, but an abolition of the exemption. Hotels are not having a bad time because of the VAT, but because of the whole downturn 's people travel less. This is the external environment," he said.
Jens Branden, the general manager of the Radisson Hotel in Vilnius, said that even though they knew it would happen, the VAT increase has been a shock to the industry.

"It is a big disadvantage 's everybody in Western Europe is lowering taxes and we are raising them. It is anti-competitive 's probably businesses also have loans and liabilities and so if they can't pass on this 14 percent increase, it disappears out of the bottom line."
"This was implemented overnight 's it has hit the industry very hard and there has also been the collapse of FlyLAL," he said naming the disappearance of the country's main airline a twin evil to the tax hikes.


FlyLAL, Lithuania's former flagship airline, which previously had direct flights to many European capitals, bankrupted after the turn of the New Year, leaving many people without a means of reaching Vilnius.
Hotel managers say that conference tourism, which was a major staple of their clientele, has simply moved on to other countries, including Estonia.

"In Vilnius, the airlift is not sufficient 's it hits one element of our business, which is international conferences 's it is very difficult to sell Vilnius as a conference destination because there is no airlift," Mahonen said.
Despite demanding changes on the VAT policy of the government, Siskauskiene agrees it is a significant problem.

"The main problem is connections 's our national carrier is gone and we are always looking at the cancellations of direct flights 's forget conference tourism and business tourism because no one wants to have connecting flights. They are instead going to Estonia because of better taxation."
"We can't compete with any European country 's we have Belarus, Russia and Poland," Siskauskiene said, referring to the origin of the country's hotel guests.

"There is no question about it 's there have been a lot of unwise decisions in the tourism industry in Lithuania 's some things the tourism industry can only blame themselves, like with VIA 's it's a local mess," Mahonen said
Hoteliers will still be praying for a good summer following an announcement by the Ministry of Transport that an agreement has been made to cover the routes previously run by FlyLAL and airBaltic. Swedish airline Skyways will start flights to Vilnius from May 18 (see story Page 6).


Not everyone is panicking and predicting the end of the world. Mahonen said Reval had the foresight to anticipate the crisis and began trimming its waistline with layoffs and a tightening of business practice.
"There is always something positive in the economic downturn 's we are more efficient and stronger 's when the hardship is over, we will be a more profitable business unit. Of course in Vilnius and Kaunas, it will be a dog fight and the big dogs fare better than the poodles," he said.
He thinks that after the crisis is done, they will be better for it, but not without the loss of some smaller players.

"These coming summers will be like before. At the moment there is panic, but Vilnius hoteliers are very unintelligent 's they only look at price and don't look at the other tools to improve their business."
He sees the impending race-to-the-bottom price war that many hotels are engaged in will only lead to more hardship for the competition.

"Price dropping leads to bankruptcy, grey workers and then people losing their jobs."
"The worst part is that the private industry will turn into the shadow [economy] 's when I get asked what is the biggest competitor, I say the shadow economy because it hurts those who are playing by the book."
"Prices will go lower and you try to get what's out there 's the market isn't increasing, so people are fighting for the little supply. It's a desperate game," Branden said.

Bigger hotels, however, expect to come out on top at the end of the crisis.
Even if VECC is not wildly successful, Mahonen thinks it will have a trickle down effect.
"This VECC, even if it hasn't been a great success, it might bring things in the long run 's from my previous experience with culture capitals, it's not just the year, it makes it more attractive for organizers in the years to come."

Rural areas in the country could be the only sector of hotels that see any increase during this year, because less connections mean more people making local holidays.