Hospitality Sector Should Prepare for an Extended Stay from COVID-19
By Deborah Friedland, Managing Director in EisnerAmper’s Financial Advisory Services and Real Estate Groups
"The impact to our industry is already more severe than anything we've seen before, including September 11th and the Great Recession of 2008 combined." A chilling statement from Chip Rogers, President of the American Hotel & Lodging Association (AHLA) on March 17—just as COVID-19 was starting to unleash its global fury.
Perhaps no other industry has been as bruised and battered by the coronavirus as has the hospitality sector. To understand the full scope, you need to look at the impact on the providers who support this $1.6 trillion industry. From farmers to engineers to cab drivers to bartenders, the list of professions impacted by the decline in travel goes on. Many hotel properties that were running at 70% occupancy are now below 5%, and the industry is in danger of losing four million jobs along with $3.5 billion per week. With numbers like these, there's no "silver lining" and with all of the pain and uncertainty that remain, how can we realistically talk about a "new normal?"
The Bottom of the Curve?
But to remain vital, the hospitality sector does have to plan for a tomorrow. In fact, industry CEOs are looking at a recovery period of 12-18 months, or potentially shorter if a vaccine is discovered. Industry analysts are closely watching the Asia Pacific and China recoveries as an indicator for how demand may rebound throughout the rest of world. Ninety percent of hotels in China are now open as compared with 50% in February. Occupancy levels at hotels in greater China have increased to approximately 20% on a month-to-date basis, which are up from the low-to-mid single digits in mid-February. So far, the China recovery has been slow. While it is difficult to find any glimmers of hope in the data and the news, we seem to be close to the bottom of the market and things can hopefully only go up from here.
The one thing that is certain right now is uncertainty. Nevertheless, here are a few things that could be in store for hospitality companies and their customers today, tomorrow and for the foreseeable future:
Hospitality Company Impact
- Liquidity - During times like these, cash is king. It's literally a lifeline. Public hotel companies are aggressively raising debt through note offerings to increase near-term liquidity. Hilton recently announced that it had pre-sold $1 billion in cash worth of loyalty points to American Express, a relatively inexpensive source of near-term liquidity for the company. Companies have slashed corporate staff anywhere from 15% to 50%. Coming up with bold, creative plans to get cash on the balance sheets are even more important given that government stimulus programs can only go so far.
- Technology - Properties and companies that were early adopters of technology will be better positioned to weather the COVID-19 storm. We're already seeing a preference toward mobile pay options versus cash. Imagine hotels staffed entirely by robots; this is already a common practice in Japan. From facial recognition check-ins to virtual reality to sell hotel space, anything that can be used to minimize guest exposure to staff and other travelers will be embraced.
- Higher Costs - There will increased expenditures on quality assurance and sanitation programs. And while hospitality companies will need to invest in masks, sanitizers, gloves and enhanced training, until demand returns to normal these costs probably can't be passed onto consumers.
- Spatial Changes - Have we witnessed the beginning of the end of the Las Vegas buffets? Communal has become a dirty word across all industries.
- Messaging - While it's hard to substitute the picture of a bustling Times Square or a bucolic Yosemite National Park, travel advertising will stress how sterile and safe travelers will be by choosing one airline, hotel, rental car and so forth over another. You might also see more cooperative advertising among hospitality companies with respect to a specific destination.
- Planning for the Next One - At some point, hospitality companies will need to create or update their disaster planning/recovery guides. They will also need to take a close look at obtaining adequate business interruption insurance if they don't already have it.
- Deep Discounts - A traveler's dollar will certainly go farther, specifically in cities that have had coronavirus clusters. It's a simple issue of supply and demand.
- Back to Basics - People have embraced disrupters such as Airbnb, We Work, and Uber that are, in part, experience-driven. We could see a return to more traditional vacation destinations and hotel chains in an increased effort toward security and predictability. Who knows? We may even see a resurgence of drive-in movie theaters.
- Government Involvement - Just like after 9/11, flyers had increased demands on identification. Similarly, we could see COVID-19 travel requirements such as antibody certificates; personal protective gear requirements; mandatory temperature taking upon entry of a restaurant, cruise ship, theme park, etc.
- Risk Aversion Isn't One Size Fits All - Let's face it, traveling in and around Boise isn't the same as traversing Boston. Some geographic areas will get up to speed faster than others. Furthermore, you might see Millennials look for discounts and adventures sooner than a family of four. Keep an eye on the corporate demand for meetings, trade shows and so on. Typically the last hospitality area for recovery, this will be the real engine to drive renewed growth.
A Way Forward
The knock on the big established chains was that they were slow to change and adapt to consumer preferences. This led disrupters such as Airbnb to become serious players in hospitality. For companies to survive this pandemic, they have no choice but to be nimble and customer-centric. Combine that with doing the right thing for employees and the community, and these companies will be best positioned for the recovery.
The hospitality industry will bounce back once travelers and companies regain trust—which probably will be later rather than sooner. However, thanks to the enormous amount of pent-up demand for both personal and business travel, the hospitality industry may reach even greater heights than before the pandemic.
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