What are the prospects for a rebound for the hotel industry?
by IAIN SHAW
With the coronavirus pandemic and the ensuing lockdowns forcing the United States into recession, there’s no question that 2020 will be a rough year for the industry. It remains impossible to forecast exactly what the economic fallout will be, but what are the prospects for a rebound in Q3 and Q4? And what can hoteliers do to prepare for every eventuality?
ASKING THE PROS
Economists and analysts say an economic rebound is possible, but far from certain. Aran Ryan of Oxford Economics says the firm has been looking at three potential models that will shape the remainder of the year for hotels. Each model assumes a greater or lesser impact on travel resulting from a combination of economic and virus-related drag. The variables accounted for include the extent to which the virus is contained, how willing people are to travel, and the degree to which public places and group events can resume.
“One of the key assumptions is to what extent is group travel going to be permitted,” Ryan said. “The moderate overhang scenario is saying group travel would be permitted, but you’ll have this overhang.” Under the most serious of Oxford’s models, Ryan said prolonged restrictions and a risk-averse mood among consumers would be a significant drag on the travel industry. “In the greater overhang scenario, you would have restrictions on groups. Very limited group activity, many public places closed, restaurants more limited, travelers cautious about non-essential travel,” he said.
Hospitality data analytics firm Kalibri Labs made projections for the potential impact of COVID-19 on the U.S. hotel industry as a whole, using 2019 figures as a baseline for comparison. Each forecast presumed a percentage decline in business as its starting point, ranging from a dip of 15 percent up to a 65-percent collapse. The projections concluded that even a 15-percent decline would leave the industry in a negative cash flow position.
“I’m anticipating that we may end up somewhere between 40 and 60 percent reduction in revenue, and I think that’s probably closer to 50 or 55 overall,” Kalibri Labs CEO and Co-founder Cindy Estis Green said.
Whatever the prospect for recovery, the likelihood is hoteliers across the United States will need to remain vigilant against new outbreaks of the virus. In the short-to-medium-term, hotels will need to reinvent hospitality, at least temporarily to meet the demands of a world enduring a pandemic. “Luxury hotels are gonna have to literally rethink everything,” David Eisen of hotel market analysts HotStats said. “Customer service is very up close and personal, checking in on you, making sure that you’re taken care, of whether it’s your bag, drinks at the bar.”
The trick is to deliver the best, most personalized service possible while being uncompromisingly vigilant on safety, sanitation, and social distancing. “They’re talking about cleanliness in a way that I’ve never seen cleanliness talked about before,” Eisen said. “Some of these protocol enhancements they’re putting in, you’ll see disinfectant wipes in every part of the hotel. You’ll see cleaning just amped up in general.”
Eisen said breaking even by Q4 would represent a “stellar” performance. “The first step is regaining demand and occupancy, but once you do, how can you generate revenue off of that?” Eisen cautions against dropping rates to drive bookings. “It’s not a rate issue, it’s because people are worried about their health. You don’t want to have to be in that position when you do come out of this to have to deflate your rates to such a point where you can’t get them back up.”
An effective vaccine would remove the threat entirely, but vaccines typically take 12 to 18 months to develop. Of course, there is hope that the resources invested in the hunt for a vaccine could shorten that timeline, but there are no guarantees.
In the absence of that silver bullet, hotels will have to walk before they can run. Just as the federal, state, and local governments have outlined phased plans for the economy reopening, hotels will resume normal operations step by step. At each phase, falling case numbers and growing public confidence will allow hoteliers to scale back on some of the cautionary measures, moving toward a sense of “normality.”
Of course, the possibility of a second wave of COVID-19 will cast a shadow over the industry until a vaccine is available or evidence appears to suggest the virus has run its course. It’s almost certain there will be localized outbreaks at least, perhaps even in places that were not affected in the first wave. A resurgence of the virus would lengthen the road to recovery, depending on the severity and geographical spread of a second wave.
However, at least hoteliers won’t be caught off guard. “If there’s another outbreak, the good news is that each local market has had some experience in what to do, whereas we didn’t have that the first time around,” Estis Green said.
If emergency plans are not already in place, that needs to be a priority. “What to do if they need to shut down in a hurry. What to do with the staff. How to notify anyone who has reservations for the upcoming three months,” she said.
DIFFERENT PACES OF A REBOUND
Another factor limiting a rebound could be the extent to which leisure travel is dampened, and not only by risk aversion. “I don’t think there’s a lot of discretionary income available right now,” Eisen said. “We’re seeing a lot of people who have been furloughed, or have lost their jobs outright.”
Any economic recovery will be uneven in pace and intensity, not just geographically but potentially from one hotel to another. Regions and localities that experienced few cases of COVID-19 are placed to rebound faster. Confidence will return more quickly in those places, and group business will resume sooner, even if only tentatively. The areas worst affected, and especially New York City, will face a slower path back. “I think the economic drag is going to be holding everyone back,” Ryan said. “But the virus- related drag will probably feel very specific to different regions.”
Some categories of property will also fare better than others. Changes in travel preferences and patterns will help some properties and hinder others. Airport hotels will be affected if traveler confidence in air travel remains depressed. On the other hand, hotels near highways could benefit from an uptick in road trips and people driving for business.
Fortunes also may vary depending on size and scope of service, Estis Green said. “I think some of the limited-service or select-service hotels will fare better, and their business will bounce back more quickly than some of the bigger hotels with a lot of meeting space who do a lot in corporate accounts,” she said, adding that she believes the profile of AAHOA Member properties will tend to fare better, leaning toward more select service, secondary and tertiary markets and with more emphasis on local and regional business. “The big ones with a lot of meeting space are going to have a much a deeper reduction for 2020 and a longer recovery cycle,” she said.
A related factor is the distinction between the recovery of corporate accounts and revenue from more local firms. Estis Green expects many global or national companies will be cautious about getting their business travelers back out on the road. “They don’t want their travelers going out and getting sick, and they’ve taken a big economic hit in many industries, so they’re trying to cut costs,” she said. Having adjusted to working remotely for several months, some people may also be reluctant about resuming a hectic travel schedule.
Limitations on meetings will be a particular pain point for larger properties, depending on what proportion of their revenue comes from events. “There will be restrictions on gatherings of more than 30 people or more than 50 people or more than 100 or whatever,” Estis Green said. In contrast, smaller and medium-sized companies with more streamlined organizational structures may be nimble enough to spring back with booking rooms and meetings.
Uncertainty is probably the only thing that hotel owners can count on for the remainder of 2020, and the industry needs to prepare for every eventuality. “Some people are approaching it where as a team, we need to plan for a situation where we’re closed, a situation where we have 25 percent of the business we had last year, and a situation where we had 50 percent of the business we had last year,” Ryan said. “And then, maybe one with 75 percent of the business of last year. I think that’s a reasonable way of trying to think ahead.”