The role of capital structure management in maintaining the financial stability of hotel firms during the pandemic

15 Dec The role of capital structure management in maintaining the financial stability of hotel firms during the pandemic

Due to government reactions such as border closures, travel restrictions, and quarantines, the hotel industry all over the world is dealing with the worst destructive period ever in its development history (García-Gómez et al., 2021, Gursoy and Chi, 2020, Jiang and Wen, 2020). The length, impact, and scale of the Covid-19 pandemic could surpass all previous crises, including the 9/11 terrorism attack, 2008 global financial crisis, and SARS epidemic (Le and Phi, 2021). Hotels face a huge drop in their revenues, leading to a shortage of cash to cover operating costs, which puts them in the hardest fight for survival (Courtney, 2020, Sobaih et al., 2021). Given its unexpected nature, long-lasting, and global-scale effects, this global pandemic hits the reset button for hospitality research, emphasizing the necessity of advancing our current understanding of crisis management in the hotel industry, and providing theoretical guidance for hotel recovery and prosperity in “new normal” conditions (Rivera, 2020). More importantly, critical crisis management lessons should be explored to build a more resilient and adaptive hospitality sector in the future (Marco-Lajara et al., 2021, Pathak and Joshi, 2021).

There are four main crisis management models proposed in pre-Covid studies: (1) the life-cycle crisis management approach (Faulkner, 2001, Fink, 1986); (2) the “action-based” or 4Rs (reduction, readiness, response, and recovery) approach (Wilks and Moore, 2004); (3) the proactive crisis management approach (Preble, 1993) and (4) the integrated crisis management model that recommends proactive strategies (reduction and readiness plans) and reactive strategies (response and recovery actions) in each specific stage of crisis management (Huang et al., 2008, Moe and Pathranarakul, 2006). Responding to this pandemic, a chaotic approach to crisis management is proposed for the hotel industry, focusing on its self-organization process to adapt to an unpredictable, complex, and evolving environment where the pandemic may be followed by a global recession (Le et al., 2021).

pre-crisis proactive strategies (crisis plan, crisis preparedness, early-crisis signal detection and warning) is important to build hotel resilience capacity besides reactive/responsive strategies in the crisis and post-crisis stages (impact assessment, crisis communication, recovery marketing and stakeholder collaboration) for the best crisis management outcomes (Jiang et al., 2019, King et al., 2021, Nguyen and Dinh, 2021).

Two key managerial implications are proposed for hotel firms to be more financially stable and resilient in current pandemic crisis situations as well as in future crises: (1) maintaining a low-debt capital structure and (2) utilize short-term financing offered by business partners (rather than long-term debts) to avoid the financial burden during crisis periods. These two policies are necessarily included in crisis management strategy, specifically for hotel firms located in countries where governments have strict travel restrictions to control the pandemic. Also, the owners and managers of vulnerable hotels that are relatively small, less diversified, and slow growing, must pay close attention to financial control and the maintenance of a healthy capital structure, with low-debt and small proportion of long-term debt (Thi Mai Nguyen et al, 2023).

Reference

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