Industry Update
External Article11 March 2020

Data insights into effectiveness of downturn strategies

Analysis of hotel strategies during the 2008-2009 downturn give some insight into what might work best for hoteliers during the next one.

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Downturns in the lodging cycle can be difficult for hotel owners and operators alike. The inability to drive rate, reductions to demand and expense levels that do not decline proportionately with revenue foster a considerably challenging operational environment.

Hotel owners have the responsibility to make debt service payments and fulfill specifically defined debt service covenants, all of which become more burdensome to maintain in an uncertain economic climate and stage in the lodging cycle. For hotel operators, their management fee revenue streams are generally linked to both a hotel's revenues and net operating income.

The struggle in sustaining upward rate growth, coupled with the difficulty in maintaining appropriate expense ratios and implementing profitable revenue management strategies, can be crippling for a hotel operation and management companies overall. Understanding a hotel's cash-flow vulnerabilities is the single most important thing an owner or operator can do at this point in the cycle.

One of the more telling examples of the challenges brought on by a downturn is illustrated by examining the impact of a reduction in revenue per available room against on rooms expense. Utilizing STR HOST P&L data from 2008 and 2009, the graph below shows that U.S. RevPAR in the midscale, upscale and luxury segments dropped by 17% to 22.3% over that time period. However, over that same span, rooms expense per available room dropped only 8.7% to 11.7% across all three segments.

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