A whole new world - Hotel Management International

As 2019 drew to a close, Amsterdam, Paris and London topped the charts as the most desirable places for hotel investment, on a continent that enjoyed years of booming development. Few would have predicted that just a few months later, these once bustling cities would come to a standstill as the hospitality sector faced the crippling effects of the coronavirus epidemic.

With $550 billion in room revenues, the global hotel industry had enjoyed a financially successful year. Despite demand finally outpacing supply, the US managed to achieve its tenth consecutive year of RevPAR growth, while international arrivals to EU tourist accommodation continued to increase. Meanwhile in the UK, STR predicted a record year for the London hotel industry, with the highest number of hotels set to open in the capital.

“Investor confidence in the UK hotel market remains high,” observed director of Savills’ hotel team Rob Stapleton in January. “While political uncertainty in 2019 had an impact on overall deal volumes, yields remained low, highlighting that, for the right assets, the UK continues to be a key focus for emerging hotel brands and international capital.”

A severe impact

Risks came in many forms – Brexit, the US-China trade war, protests in Hong Kong – but the hotel industry proved its resilience and global occupancy levels were nearly 5% ahead of where they had been just prior to the 2008 financial crisis. While there was a general consensus that profitability was at its peak in a number of markets and growth would continue to slow, hoteliers were cautiously optimistic for the year ahead.

However, news coming out of South Asia began to cast its own shadow over the industry. By late January 2020, the 11 million residents of Wuhan had gone into lockdown and thousands of flights to China had been cancelled, devastating tourism throughout the region and stifling outbound international travellers. On 30 January 2020, WHO declared a global health emergency and countries across the world began introducing travel restrictions. Two weeks later, Europe recorded its first death.

An outbreak of Covid-19 in the Lombardy region of northern Italy led to several small towns being quarantined and, by 9 March 2020, Italy was placed under lockdown, severely impacting the Italian hospitality industry. Spain, France, the US and the UK followed. The next month, research from the World Tourism Organisation (UTWO) revealed that 100% of global destinations around the world had travel restrictions in place.

Hotel occupancy rates dropped dramatically as each country entered lockdown. In March 2020, Marriott International reported that occupancy was hovering at or below 10% in North America and Europe. By April 2020, the hotel giant revealed that its worldwide RevPAR was down by a staggering 90%.

Hoteliers have faced overwhelming challenges. “When you do not have the revenue, you have to cut costs; there is no other way,” explained Accor CEO Sebastian Bazin at the company’s first quarter earnings call. Between 22 March and 1 April, 210,000 Accor employees were furloughed. Elsewhere in the sector, unprecedented numbers have lost their jobs entirely.

Many hotels have been left without any liquidity to tap into. “They have pretty much zero cash flow,” head of hotel acquisitions and sales at Deka Immobilien Frank Hildwein said during a recent webinar hosted by the IDEEA Hotel Investment Forum. “Our leases protect us in that we can force the tenant to pay, but we are deferring payments as there is no cash. We do not want to terminate leases, so there is not much we can do.”

Plan for the future

While operations have been put on pause, hotels have taken extraordinary measures in cities around the world, providing emergency shelter for the homeless and free accommodation for front-line medical staff. In the UK, Premier Inn kept selected hotels open exclusively for NHS and key workers, while Best Western turned two of its properties into temporary hospitals. In April, Hilton announced that it was teaming up with American Express to donate one million hotel nights to medical professionals.

Going forward, new cleaning measures and rigorous health protocols will have to be put in place. In New York, the Four Seasons overhauled its operating procedures as it welcomed hospital staff. “We now have almost no touchpoints in the entire hotel,” the hotel’s owner, Rudy Tauscher, told NBC. “We used to be known for human touch – but now we’re about no touch at all.” Everyone who enters the building has their temperature taken, check-ins are performed virtually and deep cleans are carried out 24 hours after the guest has checked out.

In Japan, more than 10,000 hotel rooms were reserved for guests with mild symptoms of the virus to free up hospital space for patients with more severe symptoms. Robots have been helping to clean so that hotel staff do not have to go to parts of the building where people are sick.

Interestingly, housekeeping is now very much a boardroom-level issue. Marriott International is rolling out a multipronged platform to elevate its cleanliness standards, and hospitality norms and behaviours, to meet the new health and safety challenges presented by the current pandemic environment. “We are living in a new age, with Covid-19 front and centre for our guests and our associates,” said Arne Sorenson, group president and CEO, in a statement on Marriott’s website, 21 April 2020. “We want our guests to understand what we are doing today and planning for in the near future in the areas of cleanliness, hygiene and social distancing, so that when they walk through the doors of one of our hotels, they know our commitment to their health and safety is our priority. It’s equally important to us that our associates know the changes we are making to help safeguard their health as they serve our guests.”

A long road to recovery

Without a vaccine, however, planning for the future is difficult. “Since we do not know the shape, the time, and the nature of the recovery, everything we plan for is for the worst,” said Bazin. Capital expenditure projects have been postponed until the crisis starts to ease and many independent hotels are expected to close. Investors have been struggling to value real estate as property prices fluctuate. Industry figures are expecting to see fundamental changes to travel and tourism patterns, and it seems likely that hotel business models will alter in a post-Covid-19 world.

The uncertainty surrounding the lifting of travel restrictions and lockdown measures has left the hotel industry with understandable concerns. “Tourism has been the hardest hit of all the major sectors as countries lock down,” said UWTO secretary-general Zurab Pololikashvili in a statement in May 2020. “UWTO calls on governments to work together to coordinate easing and lifting of restrictions in a timely and responsible manner… opening the world up to tourism again will save jobs, protect livelihoods and enable our sector to resume its vital role in driving sustainable development.”

From 9/11 to the outbreak of SARS, the travel industry has encountered its fair share of crises and has always managed to bounce back. Following the 2008 financial crash, hoteliers were forced to cut spending and shed thousands of jobs. The industry made a gradual but full recovery, and new segments and models emerged. However, unlike 2008, it is not just reduced spending that poses a problem in the current crises, but also restrictions that mean people simply cannot travel like they used to. The hotel industry faces a long and difficult road to recovery.

A glimmer of hope

Despite this bleak outlook, the hope is that it has reached the bottom, rather than still being on the descent. “Looking at our occupancy and booking trends, it appears that lodging demand in most of the rest of the world has stabilised, albeit at very low levels,” Sorenson observed in May 2020.

“We think temporary hotel suspensions have plateaued and we are now seeing reopening requests,” agreed CEO of Hilton, Christopher Nassetta, speaking in April 2020. “In the last week alone, we booked tens of millions of dollars of group business in the Americas. In addition, we are starting to see double-digit increases in digital traffic and booking across all segments.”

Much like in the wake of the 2008 crisis, one opportunity being pursued by global hotel operators to encourage growth and recovery is brand conversion. “While we do expect new franchise agreements to be lower than last year, we do see development opportunities on the horizon,” explains Choice Hotels president and CEO Patrick Pacious. “We’re growing at a faster rate through increased conversions.”

There are even signs of the first green shoots of recovery, offering a glimmer of hope. In China, as quarantine and travel restrictions have eased, Accor has now reopened 100% of its hotels. Marriott International has also reported steadily increasing occupancy rates in the region. “China does appear to be recovering and holding,” Sorensen has observed. “By and large, what we hear there is reassuring.”

The early May Labour Day bank holiday in China saw a surge in occupancy rates, suggesting that domestic travel will fuel recovery. This focus on local business helped the hospitality industry in Asia to recover from the 2003 SARS epidemic. There has also been evidence of a growing market of driving due to international travel restrictions, which is likely to be seen across the world.

Even in Europe, there are reasons for cautious optimism. At the end of April 2020, the president of the Algarve hotelier association, Elidérico Viegas, revealed summer holiday bookings were picking up pace. “The pandemic has had a relatively low impact in Portugal and in the Algarve in particular,” he told Resident. “Portuguese and foreign holidaymakers are looking to us as a Covid-19 safe destination. Hotels are being contacted by an increasing number of people looking to book their summer holidays here.”

A wave of ‘revenge’ travel

After months of lockdown, people are keen to start travelling again, as soon as it is safe to do so. Younger generations, who are at less risk of the virus, are likely to be the first to start taking trips again. Research has shown that people will want to catch up on missed travel when the crisis is over. This has led to the hotel industry hoping for a wave of ‘revenge travelling’ where people go on a spending spree to make up for the opportunities they’ve missed.

Restrictions are starting to ease and people are emerging into a world quite different from the one they left behind. Residents of cities previously heaving with foreign visitors have seen their streets deserted and silent. Hotels have sat empty, gathering dust or been transformed into emergency safe spaces. Some of them will not reopen. For the ones that do, guest experiences may be dramatically altered. The hospitality industry has weathered many storms; Covid-19 is just the latest, but presents its own unique and potentially long-lasting challenges. The industry that emerges on the other side is likely to be markedly different to what stood before.