As stay-at-home orders went into effect and occupancy plummeted, hotel operators and owners had to make hard decisions. Thousands of hotels suspended typical day-to-day operations, or closed their doors entirely, and staff were laid off or furloughed, without time to plan for re-opening their hotels, or even knowing when they would. As of May 15, 2020, it is estimated that 4,609 hotels were fully closed since March 15, 2020 (15.4% of hotel rooms), not including the thousands that are partially operating with a skeleton crew. Between February 7 and April 24, occupancy in the U.S. declined a historic 74.6% across all rate categories. The group segment was hardest hit, with occupancy declining 94.1% during the same period.
When travel resumes, hotels are going to rely on the plans they are building now to guide success and overall future performance. No longer will we be able to rely on a playbook that worked in previous downturns. We are entering a new world, with travelers and corporations thinking more critically about what travel is essential and what can wait or be conducted virtually, coupled with elevated concern about health and the ability to be at a safe distance from other travelers, guests, and hotel associates.
Planning for the Best- and Worst-case
As the industry rounds the corner into recovery and occupancy ramps back up, understanding all possible options and outcomes is going to be crucial. Resilient players will need to consider all possible scenarios and build operating plans around them.
It will be important for hotel owners and operators to understand the varying degrees of impact COVID-19 has had and will continue to have on their hotels. In the absence of a crystal ball, an effective way to make these decisions is to use scenario planning.
With actualized data from more than 34,500+ U.S. hotels represented in their database, Kalibri Labs processes and closely monitors billions of bookings, including segmentation by rate category and customer acquisition costs. Algorithms have been run on over 5 years of historical data to study the effects on demand and pricing using multiple variables, including property location, week part, rate category, channel, property tier, impact and recovery scenarios from past downturns like the recession of 2008 and 9/11 to determine the most impactful variables and indicators of performance. This information is supplemented with projections from external and trusted sources, such as macro-economic factors and third-party data sources along with weekly updates on current patterns driven by the pandemic.
With the help of some analytical tools for understanding impact and recovery at the market- and property-levels, hotels are planning for the future.
The Big Picture
The Kalibri Labs Market Impact:Recovery Analysis was designed to provide context and assistance to stakeholders in the industry as recovery takes root. Three different scenarios represent approximate RevPAR recovery within 18-, 36-, and 48-months, compared to 2019 actuals. Although there are 3 discrete scenarios at a national level, recovery is most likely to vary by market and hotel; there won’t be a single model that will apply to the overall U.S. hotel industry.
In this example from Washington, D.C. examining all hotels, the three scenarios range from an expectation of a -40% to -68% decline in Guest Paid Revenue for full year 2020 (versus 2019).
In Washington, D.C., impact varies by hotel tier, ranging in this example from March 2020 from a decline in Guest Paid Revenue of -25% in lower tier hotels (midscale and economy) to a -64% decline in upper tier hotels (luxury and upper upscale).
Stakeholders need to consider their own analysis and historical segmentation data in conjunction with the scenarios offered at the market level to convey a realistic view critical for owners, operators, and lenders. Given the variation by market and hotel, these scenarios need to be applied based on local and regional realities in terms of government regulations and industry types that are dominant demand drivers. Markets with heavier local/regional demand or demand from healthcare, pharmaceutical or government entities may find a quicker bounceback than those dependent on hard hit industries like oil/gas, retail, entertainment, transportation or those with a heavy international or fly-in national business base. All of the models shown are updated every few weeks based on actual hotel production by rate category in each market.
Scenario Planning at the Unit Level
When a hotel team wants to determine an impact at the hotel level, the Property Impact:Recovery Model illustrates this well. A hotel can assign the anticipated degree of impact to the whole hotel, or a particular rate category, by month. The model allows the user to play out every scenario from worst-case to best-case for the property.
There are eight categories of potential impact, ranging from “Full Close” to “No Impact,” indicating flat performance versus 2019. In between are Categories 1-6, ranging from 15%-25% revenue decline to 85%-90% compared to prior year, with Category 6 being the most severe. Each category of impact is broken down with rate category assumptions, so it is not just a topline percentage reduction to historical performance. Depending on the property’s business mix, the percentage decline for each category will vary as each rate category has a different weighting assuming some will recover sooner than others.
Let’s consider a hotel in Washington, D.C., a market which historically has a very group-dominant mix of business. In 2019, Group comprised 28% of revenue in D.C., a segment which declined by -68% in March 2020, before the full impact of COVID-19 was realized.
In the Washington, D.C. 18-month recovery curve, 2020 Group revenue would be -47.5% versus 2019. Knowing that our example hotel had 24.1% Group contribution in 2019, one could apply this assumed -47.5% decline to the hotel’s Group contribution to assess the degree of impact.
However, it is more practical and accurate for the hotel team to model different scenarios as it relates to their full mix of business, and for Group specifically, based on what they know is currently on the books and the trends they are experiencing for their hotel by using the property-level model.
In this example, the most severe categories of impact have been assigned for April through July, with a rebound in group beginning in August to Category 4, which would represent 30% of the historical group performance for that month. The result of these assignments for this hotel’s group performance is a year-over-year decline of -67.5%, allowing the hotel to have an even more accurate understanding of their anticipated performance in group.
Given the challenges to the rebound of group business, the hotel team might decide instead to focus on re-building their loyalty member rate business and working with the brand to market to loyalty members in drive markets. They are able to model the anticipated impact this strategy will have on their performance using the Property Impact:Recovery Analysis.
The hotel team is now able to plan for a strategy where the year-over-year decline in Loyalty Member Rate is -25.1%. They will be able to set budgets for marketing and execution, as well as start thinking about staffing and service levels for the remainder of the year to maintain guest service scores for these highly valued guests.
By modeling worst- and best-case scenarios by month, day of week, and rate category, hotel teams will be able to quickly make important decisions around the most effective redeployment of sales efforts, operational staffing, purchasing, and business mix because they will have studied the potential results of possible scenarios.
A Post-COVID-19 World
The impact of this global pandemic will be felt for a long time, in nearly every industry and country. As hotels enter into a period of recovery, staying nimble is going to be critical to resilience.
Demand will certainly return, even if it is slowly in some markets. With hotels already paying 15 percent to 25 percent of guest-paid revenue to acquire their customers, it is critical for hotel commercial teams to be able to quickly react to business in the market, prepared with strategies from a pre-planned scenarios to assign and deploy resources (labor, marketing spend, etc.).
Given that some rate categories are likely to be slower to recover, forecasting impact and recovery timelines by rate category is the best approach. This will ensure hotels are focused on revenue in the short, medium and long term in order to closely match revenue generation resources to the opportunities as they come back into the market. Weekly monitoring of changes in the market and for a subject hotel will allow the team to adjust as they see upticks or declines by type of business. Planning and resource allocation will be critical disciplines to navigate the uncertainty of the recovery.
