Balancing a founder’s vision with the future

Jetwing Hotels’ net assets topped Rs30 billion following a growth spurt. It now expects recent changes to its organisation’s structure to maintain momentum

On a side board by a suite’s door at Jetwing Symphony’s new hotel fronting Colombo’s Ward Place is a hard bound brief biographical sketch of the group’s founder, Herbert Cooray.

In a space without adornment, it’s impossible to overlook the slim volume tracings of the founding of the Jetwing Hotels group in the early 1970s when tourism industry here and elsewhere in Asia was only beginning to accept foreign visitors from Europe.

If net assets (shareholders’ funds) were the measure, Jetwing’s Rs30 billion makes it the largest hotel company in Sri Lanka. Listed Aitken Spence Hotel Holdings’ net assets at Rs26.4 billion and John Keells Hotels’ at Rs23.6 billion trails that of the family-owned firm.

Being a private group, Jetwing does not publish its financial statements, but provided some ballpark figures to Echelon for the purpose of this story. For comparison, the net asset value of JKH, the largest listed company in Sri Lanka, was Rs167 billion, which includes most of the assets of its 80%-owned subsidiary John Keells Hotels.

Jetwing Founder Herbert Cooray was a pioneer and a risk taker. During the 1970s, when Cooray built his first hotel, Blue Oceanic, which had just six rooms, the dichotomy of Sri Lanka’s economy was pronounced.

Hotels have been around for as long as people have travelled. However, the age of the grand hotel, which commenced at the end of the 18th century and was soon introduced to Ceylon then under British occupation, saw the launch of hotels now known as Grand Oriental, Galle Face Hotel and later Mount Lavinia Hotel. Grand hotels were built near main ports because these were the main points of entry to a country up until the jet age.

Encouragingly, the jet age made corners of Asia accessible to middle class European travelers, and Sri Lanka’s topical climate, peace and beauty were getting noticed. However, the country’s insular economic policies were shutting out much of the prosperity that globalisation could bring.

Around the time Herbert Cooray entered the trade, the hotel industry was seeing its second stage of evolution – the industrial approach that spawned hotels that delivered standard facilities efficiently across many locations. Soon enough, a star rating system was devised that guided visitors about available facilities.

Herbert Cooray’s legacy weighs heavy on Jetwing Hotels, which has now been led for decades by his son Hiran Cooray. The junior Cooray joined the family hotel business in 1989 and was appointed managing director. Soon enough, he was playing a pivotal role by adding hotel assets, “but only with my father’s blessings,” he says.

“I would never have done something of any magnitude without him giving the nod first,” says Hiran Cooray, who was a 25-year-old fresh graduate when he was appointed to the helm of the group. Hiran is fond of the analogy of him being the orchestra’s conductor but Cooray senior, who was Jetwing Hotels’ chairman, being the composer.

A few years after Founder Herbert Cooray’s passing, Hiran was appointed chairman of the group. By this time, he had been managing Jetwing Hotels for two decades, and his influence and vision was unmistakable. Jetwing was also at the cusp of a new era.

Jetwing Colombo Seven – a property of 70 rooms and 28 serviced apartments – the group’s first hotel in the capital, is also a departure from Founder Herbert Cooray’s vision.

Colombo Seven is the fourth hotel opened under the group’s new subsidiary Jetwing Symphony. According to Cooray, all new hotel additions will come under the Jetwing Symphony subsidiary, where Jetwing group’s ownership is 60%. Other shareholders, both from Sri Lanka and overseas, were attracted by a private placement.

Cooray admits that Jetwing’s Rs1.5 billion pre-tax profit isn’t adequate. “Ideally, we should beat two and a half to three billion.”

In addition to Colombo Seven, Jetwing Yala, Jetwing Kaduruketha in the Uva Province and Jetwing Lake in Dambulla were investments by the new subsidiary. It’s a departure from the founder’s vision because Jetwing Symphony intends to be listed following an IPO in a few years. Herbert Cooray didn’t believe in public markets.

“If he was alive now and changed his mind, it would be fine; but since he is not here, we didn’t want to change his original thinking,” says Cooray of the family’s desire to keep the nearly 20 hotels and villas under Jetwing Hotels’ ownership.

“There is less of an emotional attachment to what we are creating newly with Jetwing Symphony,” he says, referring to a decision his sister Shiromal Cooray, who heads the group’s inbound travel company, and Jetwing’s executive directors agreed on with him.

“Jetwing Symphony will be the vehicle of growth for the future, except for a few plans with some existing partners,” he confides. A Symphony hotel is under construction in Pottuvil in the Eastern Province. The firm also owns land in Kandy, 14 acres in Uppuveli in the Eastern Province and four acres in Negombo, behind the site where Herbert Cooray ’s first hotel was located.

Jetwing’s Executive Director Sanjeewa Anthony says Symphony’s net assets now top Rs5 billion. Jetwing has invested mostly cash and transferred some real estate including the property in Yala and the one in Colombo. A perch of the Ward Place property was vested to Symphony at Rs6.5 million; since then, real estate prices in the area have gone up nearly three-fold.

The end of Sri Lanka’s long-drawn-out conflict was a watershed for the group. While business in general and hotels in particular benefited from the economic turnaround that ensued, growth at Jetwing Hotels was off the charts. Jetwing group’s revenue increased six times from 2009 levels of Rs1.7 billion to Rs10 billion. Revenue segmentation among its businesses was unavailable.

Other large hotel groups have also witnessed rising revenue, but not at the same pace. At John Keells Hotels, the largest hotel operator measured by room inventory, revenue doubled from Rs5.1 billion in 2009 to Rs11.6 billion in the financial year ended March 2016. At Aitken Spence Hotel Holdings – where most of the assets are in the Maldives – revenue also doubled from Rs6.6 billion in 2009 to Rs13.3 billion at the 2015/16 financial year-end. In the nine months to December 2016, John Keells Hotels’ revenue rose 6% and Aitken Spence Hotel Holdings’ was up 10%.

Jetwing’s annual 34% revenue growth since 2009 – far higher than industry growth – can’t be identified with any one factor. Hiran Cooray says the group’s investments of Rs10 billion in upgrading its legacy properties under Jetwing Hotels, higher yields, higher occupancy and the new hotels have all contributed to rising revenue.

Cooray forecasts that these gains by Jetwing are at an end now. “I can’t see rates going up until the overall destination is positioned and marketed well,” he says. “If we get our marketing and positioning strategy right, then 2-3 years down the line, we can go for a 10-20% increase in prices.”

Revenue per available room (RevPAR), a popular industry benchmark, is Rs10,000 net at Jetwing (excluding service charges and taxes). Comparative figures for John Keells Hotels and Aitken Spence Hotel Holdings were unavailable in their annual reports.

Acritical change is underfoot at Jetwing, which can elevate the business by separating the property business from the business of looking after its guests. Getting others to build and pay for hotels has let big hotel groups expand much faster. John Keells and Aitken Spence own 80% and 73%, respectively, of their hotel holding firms. Building and other real estate tie up capital, something the big hotel chains are reluctant to do even in the most sought-after locations. In rich countries – where debt capital markets are developed – buildings can be spun off to different owners. This frees up capital for expansion and allows the management to focus on serving their guests.

While Jetwing Hotels is privately held, its strategy of an IPO and listing Symphony stock sets it on the fastest course compared to others to separate the property business from the business of looking after its guests. In some cases, owners also manage the property.

Given the separation of functions in asset ownership and management with brand ownership, hotel chains have devised contracts and franchising arrangements to make sure every property under their brand delivers a minimum standardised service.

This industrial-scale franchise model has been a remarkable triumph. Jetwing Symphony hopes to develop a similar model and invest in hotels or take over management of properties in emerging Asian tourism markets like Laos, Cambodia and Myanmar.

In Sri Lanka, Jetwing Hotels already manages four properties that it doesn’t own: Sunrise in Passikudah, Calamansi Cove, Amaloh and Jie Jie Beach in the outskirts of the capital. Revenue and profit without tying up capital also improves shareholder returns.

Cooray admits that Jetwing’s Rs1.5 billion pre-tax profit isn’t adequate. “Ideally, we should be at two and a half to three billion. We are not going to hit that next year, but maybe three years down the line.” Jetwing’s post-tax profit or its return on equity cannot be estimated. Its industry peers – who operate asset-heavy hotel firms – have also been struggling with ROE at around 8%. However, unlike Jetwing’s legacy business – where only the Cooray family are major shareholders – listed firms cannot keep disappointing shareholders. Hiran Cooray is circumspect about his ability to meet similar shareholder expectations when Jetwing Symphony is eventually listed.

“I may not be comfortable, sometimes,” he responds to a question about shareholders demanding outsized returns ahead of anything else. “That’s something I have to adapt to, or convince the board or shareholders otherwise. That’s where the shareholders also have to be responsible. If judgments are made by just the financial performance, it’s a poor show.”

Jetwing Founder Herbert Cooray had an uncanny knack for staying out of the way, which allowed Hiran to chart his own course for the business from early on.

Cooray contends that Jetwing’s environmental credentials are not mere green washing. He is optimistic about his ability to convince current and future shareholders to stay the course. However, he laments that no balance sheet gives credit for the value you add to society.

He appreciates that he will be challenged. Family firms – especially large asset-rich ones with few direct dependents – are easier to manage when the owners aren’t overly ambitious about returns. When they are large, even low returns are adequate to sustain the lifestyle of a few.

Family firms are also fashionable because they are capable of taking a long-term view rather than similar public companies. Jobs created by these firms are also secure. The public is fond of them because they are often more in touch with local communities than firms with anonymous shareholders.

Cooray is keen that his three children join the firm. Two of his kids are already working for the company. While usually successful entrepreneurs struggle to interest the next generation in the family business, Cooray is perhaps lucky. Jetwing Founder Herbert Cooray had an uncanny knack for staying out of the way, which allowed Hiran to chart his own course for the business from early on. “My sister and I have to decide sooner or later when we are going to back off,” he says without setting a timeline.

But he also leaves large shoes for his children to fill. Jetwing’s resilience and success is in part owed to his informal leadership style, a hard act to follow when many siblings and cousins are in the family management team.

The next wave of challenges confronting the industry is already clearly identifiable. While the cookie cutter design, standard operating procedures-driven model has been remarkably successful, resistance to its baldness is also mounting. Jetwing’s imaginative approach to hotel design, its resort hotel focus and the relatively small size of its properties will insulate it from the indifference of travellers. The largest-owned property is Jetwing Blue, which has just 120 rooms.

The scale of digital disruption in the industry is also unprecedented, which has had the effect of making prices even more transparent, and enabled free and independent travellers to shop around for the best deals.

The many epochs of hotels are about to be accelerated by the forces shaping the future of travel for holidays. Its amid these challenges that Jetwing group is attempting to transform itself by building a new business with external shareholders and accepting the next generation of the family joining the business.