Industry Update
Opinion Article 9 July 2020

Breaking Even and the 5 Stages of Grief

By David Eisen, Director of Hotel Intelligence and Customer Solutions for HotStats

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In 1969, Swiss-American psychiatrist Elisabeth Kübler-Ross published "On Death and Dying," which posited five stages of grief:

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  1. Denial
  2. Anger
  3. Bargaining
  4. Depression
  5. Acceptance

Hotel owners have been made to suffer through these phases at the cruel hands of COVID-19, which at its outset thoroughly destroyed the collective industry, bringing travel to a halt, wrecking revenue and drying up profit.

After the preceding years of relative operational success, 2020 was the wakeup call the hotel industry didn't want to hear, but was forced to.

When occupancy rates instantly fell 50 percentage points, hoteliers hit that first stage of grief: denial. How could this possibly be? There's no explanation for why some virus could derail my business like this. This doesn't make any sense!

No matter the region or locale, all hotels have been made to confront the pain head-on.

Phases 2-4 (anger, bargaining, depression) quickly followed denial. The pandemic was positively not their fault and had it been contained, I very likely would not be writing this blog. But here we are.

Many hoteliers I spoke to in the aftermath expressed a spectrum of emotions: anger and disbelief; resentment and melancholy; worry and anxiety.

One hotelier summed it up best: "I'm up to my eyeballs in no business."

As bad as it got, to a man, no one I spoke to ever discussed throwing in the towel. This was the situation we are in; here's how we will get out of it.

They entered phase 5 with aplomb; they accepted the circumstances and were hell-bent on forging ahead.

Acceptance is also reality. And the reality is that though things are improving month-over-month, it's still a long way back to pre-COVID revenue and profit.

Embracing the new normal is not easy. One way HotStats has tried to help is by running break-even analyses, which allow hoteliers to see what occupancy rate will result in break-even profit. You're not making money, but then again, you aren't losing any, either.

The first break-even analysis we ran focused on total revenue, taking into account not only revenue generated from rooms, but also ancillary revenue. It received a great deal of attention and also one glaring comment: What ancillary revenue?

The truth is, selling rooms during COVID-19 is hard enough; selling anything other than a room is next to impossible. Such was the case, so we decided to run our analysis again, only this time it focused solely on revenue obtained from rooms and nothing else for U.S. hotels.

The data shows that the occupancy break-even point is inverted when gross operating profit per available room (GOPPAR) is restricted to account only for rooms revenue and rooms variable costs. In that scenario, full-service and luxury hotels need the highest occupancy percentage to break even, while select-service properties require the lowest occupancy percentage.

On the heels of the U.S. rooms-only break-even analysis, HotStats has extended it to cover Europe, UK, Middle East and Asia-Pacific. The findings are below.

Middle East Break-Even Occupancy by Asset Class

The difference between break-even points within the same asset class is higher for luxury and full-service at 11.6 and 11.9 percentage points, respectively, but it is much lower for select-service at 2.3 percentage points.

The data reinforces our previous assertion of the heavy role ancillary revenue plays in profitability for luxury and full-service properties, and how it is less responsible for profitability within the select-service asset class, which relies almost exclusively on revenue generated from rooms. Therefore, they need a higher occupancy to break even under normal circumstances.

Europe Break-Even Occupancy by Asset Class

In the case of Europe, the delta between break-even points within the same asset class is narrower compared to that of the Middle East. For luxury and full-service, it's 3.0 and 5.5 percentage points, respectively, and much lower for select-service at 1.3 percentage points.

UK Break-Even Occupancy by Asset Class

The difference for the UK for luxury and full-service is 11.7 and 7.8 percentage points, respectively, but it is virtually nonexistent for select-service at -1.7 percentage points.

Asia-Pacific Break-Even Occupancy by Asset Class

For Asia-Pacific, the difference between break-even points within the same asset class is also higher for luxury and full-service at 11.2 and 8.1 percentage points, respectively, and is much lower for select-service at 3.1 percentage points. The results are similar to those of the preceding regions, reinforcing the claim that ancillary revenue plays a large role in profitability for luxury and full-service properties, while the select-service asset class depends almost exclusively on rooms for revenue, which is why the difference between break-even points within the asset class is small.

Breaking even is never the goal of a hotel. The objective is to make as much profit as possible. As July gives way to August and August gives way to September, the expectation is for hotel operational performance to continue to get better. Getting back to pre-COVID profitability will be a marathon and not a sprint, but as long as hoteliers accept this new reality of doing business, new cleaning measures and all, there is no reason hotels can't just stay afloat, but also succeed.

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