The Future of the Hotel Industry after Covid-19

by admin on April 15, 2020

Doubletree by Hilton Hotel in Paracas, Peru

Hotels will reduce its workforce

The current pandemic crisis, caused by Covid-19 will have lasting effects in the hotel industry worldwide. After this crisis, I don’t expect hotels to reincorporate all the people they had furloughed. There are a few reasons for this.

First of all, even after the crisis, occupancy will continue to suffer for the remainder of 2020 and probably well into 2021. The millions that had had been losing their jobs won’t have the disposable income necessary for traveling, lowering demand for an extended period of time. Weddings and family reunions would be postponed, as well as other social and corporate events. Urban hotels in areas where the outbreak has been significant, revenues per available room (RevPar) have dropped 81%, and nationally 69%,1 even when recovery is taking place, it is probably that some kind of travel restriction continues, which will diminish demand as well. If demand stays low, hotels won’t have the capacity to absorb the same size of labor force they had pre-crisis.

In addition, the longer the furloughs, the bigger the risk for hotel companies to lose qualified employees. Not many people in the United States can sustain three consecutive months without pay, and hospitality is not the exception. Many people in the industry may be forced to explore other job opportunities outside the field. Some may just voluntarily depart, even if they have the financial means to hold on, just because they may see the industry vulnerable and unpredictable.

Hotels will carefully evaluate any redundancy in their operations and will take this opportunity to make opportunistic changes. Operational departments would be consolidated, and many positions won’t be refilled. Large hotel groups and franchises would be able to operate with 20% or 30% less of its workforce in most cases.

Moving forward, hotel companies would be more aware of pandemic risks, and they may try to get a better handle on fixed costs. This means they will take a hard look at any position at the company and how they can optimize the resources at hand.

More hotel companies will jump into the “asset-light” wagon

Hotel companies had become more brands, not bricks. Both Marriott and Hilton, the two largest Hotel companies in the United States, are committed to an “asset-light” strategy; they both own very little real estate. According to Mark Wynne Smith, Global Head of JLL’s Valuation Advisory, many hotel brand companies have divested real estate to focus on operating hotels. 2

Even hotel brands that still have some real estate are divesting it quickly, but the current crisis will accelerate that process. Hotel companies that have more exposure to real estate are having more problems navigating this crisis because they have large outstanding mortgages and are responsible for far more people that maintain the regular operations at their properties. Although the government has offered some relief, hotels are facing many challenges accessing the resources that need, in the time they need them, and for the purpose they need them. 3

This extreme pain will cause brands to get rid as soon as possible of any real estate they still own. The latest major hotel brand to complete an asset-light roadmap was Accor, that completed the process in December last year with the disposal of Orbis, a 5.2% stake in Accorinvest, and a 5% stake in Huazhu.4Other major, medium, and small brands will follow suit.

The hotel industry will consolidate

On October 25th of 2019, Aimbridge Hospitality and Interstate Hotels & Resorts completed one of the biggest merges in the Hotel industry. The merge created a major hotel management company with 1,400 branded and independent properties in 49 states and 20 countries.5 It is not a secret that in Hospitality size matters, the same as companies such as Marriott or Hilton can negotiate better deals with online travel agencies, large management companies can negotiate better deals with hotel brands.

Better deals include many things, but the most important one is a significant reduction of associated fees. A management company with 1,400 properties have a different seat at the table that a management company that owns three or five branded hotels. Large management companies will also have better access to liquidity in times like the current one. Large companies can issue bonds, or leverage lobbyist to access government bailouts that would be difficult to access by small hotel operators. Large management companies can also leverage better deals with creditors because there won’t be any interest from anyone to let these companies go down.

This crisis will fuel this merging and acquisition trend, as many operators will look for opportunities to protect themselves against unforeseen events like this one, and will find better ways to leverage the economy of scale. Many small and medium operators won’t be able to sustain the crisis either, and they may become a target of large management companies with the cash and resources to navigate the crisis more successfully.

Automation adoption will increase in hotels

Like most crises, there’s always a silver lining. The current crisis is an opportunity for hotel brands to reinvent themselves and move forward with bold, untested ideas that had never been tested before. One of them is widely technology adoption.

Lately, major hotel brands had made important progress in technology adoption, such as digital room key and digital check-in. This technology allows people to check-in and check-out without even stopping by the lobby. In this crisis, this technology becomes highly relevant. As social distancing protocols are in place, the advantages of this technology is invaluable. Although Hilton and Marriott are pioneers of this technology, the crisis from Covid-19 may incentivize other hotel brands to do the same. This technology will not only protect hotel personnel from contagion but will also save money to hotels that may be able to operate with fewer people.

In the near future, the rollout of these technologies may take months, not years, as it has been the case so far. There are already some hotel brands that are ditching the front desk.6 Kiosks, check-in pedestals, tablets, or iPads are already replacing people at the front desk, and the current crisis will only speed up this process. Even properties that had been shy of trying robots may be willing to give it a second look. Hilton already piloted the use of a robot at the Hilton McLean in Virginia,7 and may continue experimenting after the crisis. Robots not only can be used in the lobby but to deliver room services to guests such as food and drinks. The coronavirus already increased the use of such robots in China exponentially, initially in hospitals, but we may see the same adoption levels in hotels moving forward.

Hotel brands will grow faster

In North America, 67% of hotels are branded, while 33% are not.8 Branded hotels are collectively organized, so they can easily reach out to the government for help, something that independent hotels will find very hard to do. Bridgewater estimates that the revenue drop in the travel and leisure industry in 2020 will top $199 billion for listed companies, and a whopping $920 billion for non-listed companies; this includes independent hotels, independent tour operators, independent travel agencies, etc.9 Large hotel brands, widely represented by the American Hotel & Lodging Association will find is relatively easy to tap into the bailout funds made available by the government through the Cares Act. But for small independent hoteliers, the story will be very different. Small operators don’t have the same representation, influence, or contacts to make their voice heard; in addition, small independent operators can run out of money a lot quicker. Banks can start tightening standards for new credit lines or recall revolving credits that were already issued due to market volatility. Additionally, small independent hotels will have a hard time negotiating more flexible terms with suppliers and vendors, something that big brands can do very easily by taking advantage of the economy of scale.

This painful experience from small independent hotels will cause a sudden interest to associate themselves with big brands. This will benefit extensively the biggest payers in the United States: Hilton and Marriott. Major brands will see a big interest spike from small independent hotels to become franchisees, so the numbers of conversions may skyrocket in 2021 and beyond. This couldn’t be happening at a better time when major brands already have multiple soft brands that can accommodate the integration of pretty much any kind of hotel in record time. After the covid-19 crisis, a significant growth for hotel brands will come from conversions of independent boutique hotels.

Business travel will face new challenges

Traditionally a big portion of the revenues in the hotel industry comes from the business travel segment, and that balance hasn’t changed in a long time. After the cover-19 crisis,10 this balance between business and leisure travelers may change.

Companies may start to push back on business travel because of the liability of employees getting sick. They may start encouraging virtual meetings and remote work, which may negatively impact the business travel segment moving forward. In addition, major corporate events, conferences, etc. may start to decline, which will negatively impact the meeting & events segment of the hotel industry. The corporate segment will see a decline, at least in the short term forcing major brands to rethink how they will attract more leisure travelers.

It is possible that both segments decline proportionally, maintaining the same balance that we have seen historically, but regardless of the distribution, corporate travel may have to be re-imagined. Business travel that has been the bread and butter of the hotel industry won’t be give it for granted after the crisis.

  1. https://www.hotelbusiness.com/report-recovery-depends-on-length-impact-of-covid-19/ ↩︎
  2. https://realassets.ipe.com/alternatives/hotels-brand-not-bricks/10015295.article ↩︎
  3. https://www.washingtonpost.com/business/2020/04/14/with-millions-unemployed-hotel-industry-lobbies-spend-stimulus-other-needs/ ↩︎
  4. https://press.accor.com/successful-completion-of-the-asset-light-roadmap/?lang=en ↩︎
  5. https://www.interstatehotels.com/2019/10/25/aimbridge-hospitality-and-interstate-hotels-resorts-complete-merger-today/ ↩︎
  6. http://www.nbcnews.com/id/39854018/ns/travel-business_travel/t/some-hotel-chains-ditching-front-desk/#.Xpc2Ay-z124 ↩︎
  7. https://newsroom.hilton.com/corporate/news/hilton-and-ibm-pilot-connie-the-worlds-first-watsonenabled-hotel-concierge ↩︎
  8. https://bit.ly/2RC3OJq ↩︎
  9. https://www.bridgewater.com/research-library/daily-observations/Greg-Jensen-the-coronavirus-4-trillion-hit-to-us-corporations/ ↩︎
  10. https://www.statista.com/statistics/207103/forecasted-number-of-domestic-trips-in-the-us/ ↩︎

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