Five Reasons US Hotel Companies May Not Recover from COVID
Being unable to recapture lost revenues and a lack of guest confidence may be a death sentence for some hotel companies
By James Downey Professor, Program Coordinator MBA Hospitality & Event Management, Lynn University | June 21, 2020
Since the middle of March 2020, US hotel companies have suffered significantly in terms of lost revenue specifically as it applies to sales for rooms, food, beverage, telecommunication services and ancillary services all due to the COVID-19 virus. Some hotel companies have not been able to weather the storm over these last several months and have been forced to close some if not all of their properties with little or no hope for financial stability in the coming days and months ahead.
Until a vaccine is available to all Americans, the hotel industry may continue to suffer in spite of their best efforts to head off this medical anomaly.
In the information below, I will outline five observations/predictions as to the road the hotel industry will travel as the country begins to open up the economy on a partial basis at the time of this writing.
1. Product Perishability
The revenues hotels generate are at the mercy of their clientele because most lodging properties provide products and services for three distinct market segments. Those are: commercial business travelers; group, conference and convention attendees; and tourist and transient travelers. Each of these segments represents the lion share of business for the hotel industry in the US. A drop off of any or all of them could be a serious financial shortfall due to their relationship with the hotels they are frequenting.
Unlike most industries, hotels cannot afford to lose revenue from products and services offered to these three segments one day and expect to recapture it the next. This is because of the perishability nature of those products and services. For example, a 100-room hotel with zero occupancy cannot recapture the lost room revenue in the future. Conversely, a car dealer with 100 cars on the lot can recover lost revenue by simply selling those cars anytime in the future.
In addition, the revenue lost in conference and convention space that is not rented cannot be recovered anytime in the future.
2. Sanitation Expenses
Hotels have always made sanitizing their facilities a high priority when it comes to the care and protection of the guest. One area the hotel provides the most sanitary environment is the guest room. Housekeeping staff are trained to keep this area clean and disinfected since the guest spends more time here than any other part of the hotel. However, the way in which a guestroom will be cleaned in the wake of the COVID virus will take on a more stringent and comprehensive approach.
Supplies of items such as commercial sanitizing equipment, ultraviolet lights, temperature gauges, among others will add to the overall supply expense most hotels do not normally include in their operating budgets. Cleaning and sanitizing for high touch areas such as guest receiving, concierge, front desk, workout facilities, to name a few will generate more expenditures for such spaces in the hotel.
In addition, since a hotel attracts people from all over the globe, demands for these and other sanitizing safeguards will be requested for the safety conscious world traveler.
3. Guest Experience
Hotels have always prided themselves on offering the "human touch" when it comes to taking care of its guests and patrons. Now that no handshaking, physical spacing, extended hand washing, donning masks and other medically advised precautions are in place, the guest experience will be diminished at a level unlike any other time in history.
Guests may be afraid to use hotel facilities like restaurants, conference spaces, athletic facilities, pools and spas among others. This will lead to decreased facility use which might lead to downsizing or the elimination of these services altogether. Hotel development for the future may modify these services so as to offset their lack of use and diminished revenue.
4. Economic Impact
According to Business Insider magazine, the following data pertaining to the economic consequences of the COVID outbreak on hotels are as follows:
"Nearly 4 million US hotel jobs could be eliminated in the coming weeks, according to the American Hotel & Lodging Association (AHLA). That's close to 50% of all hotel jobs in the country.
"Due to the coronavirus concerns and regulations, hotels across the US are seeing unprecedented cancellations and closures. "In certain affected markets, including Seattle, San Francisco, Austin and Boston, hotel occupancy rates are already down below 20 percent," the AHLA said in a release provided to Business Insider."
"The loss of 4 million hotel jobs is based on a forecasted 30% decline in hotel occupancy rates and could result in a $300 billion hit to the GDP, a study by Oxford Economics produced in partnership with the AHLA concluded."
"On March 17, 2020 CEOs of leading hotels and tourism organizations met at the White House to ask the government for a $150 billion bailout."
It will be more than difficult to recover from these economic debilitations even with a $150 billion bailout. A serious reduction in variable and fixed expenses will be the norm if hotels are to have any chance of gaining lost ground to these hardships.
In addition, operating metrics such as the average daily rate (ADR) and revenue per available room (RevPar) will see pronounced declines at levels not seen in the hotel industry over the past fifty years due to this viral outbreak. Moreover, revenue managers will be challenged during this time to secure future bookings for their properties.
5. The Future for Hotels
Many articles written by lodging professionals and in depth interviews with hotel executives regarding the future of the hotel industry have been disseminated since March 2020. Even the best medical professionals such as Dr, Fauci of the NIAID, Dr. Redfield of the CDC and Dr. Hahn of the FDA leading the path of hope for a way out of this situation is at best not hopeful.
These medical 'experts' predict over 147,000 people will die of this virus by the month of August, 2020. While Americans have accepted the recommended methods by these medical experts to curtailing this pandemic, it is not going to go away anytime soon. This does not bode well for the hotel industry as lodging CEO's scramble to seek a way out of this morass.
According to an article regarding the future of the hotel industry, the following changes are predicted:
Those hotel companies that have furloughed employees as a result of this crisis will be hard pressed to rehire these workers at a 100 percent level. The reason for this is tied to occupancy. Less occupancy means less rooms to be cleaned which will impact housekeeping staffs. The same goes for staff in the foodservice and recreation outlets. Fewer patrons leads to a reduction in waiters, bussers, dishwashers, spa/wellness personnel and some management staff.
Hotel mergers and acquisitions will be on the upswing especially with smaller hotel companies that wish to join forces with larger hotel brands. This may have long lasting effects on the chain affiliated hotels the most since they have larger portfolios and more debt service.
Hotels may need to invest in more sophisticated technology for their guests who wish to stay connected virtually instead of physically. Since many guests have their own laptops when they check in, front desks and concierge services may be reduced or eliminated. However, teleconferencing may make a comeback from the 1990's since guests will acclimate to this way of communicating like they did in the past. This additional technological add-on will increase a hotels capital budget but the sacrifice may be worth it in the long run.
Since commercial and business travelers comprise a significant portion of a hotels revenue stream, more companies may limit the number of executives and employees from traveling so as to safe guard their health and conserve resources for their companies. Hotels will need to perhaps provide incentives like discounts on extended stays and credits on future reservations so as to secure "business on the books."
In summary, I believe some recovery is in the cards for the hotel industry but the level at which this occurs is going to change the way guests interact with these places of refuge and respite. Only the hotels that adapt and commit to COVID era changes giving the guest a safe and worry-free environment will be the ones to look forward to future if any financial success.
AHLA: COVID and Your Hotel
Seeking Alpha: The Future of the Hotel Industry After COVID-19
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