What is the state of hotels in the face of coronavirus? What does the future hold? Here are 7 strategic ways hotels are surviving the pandemic.
The coronavirus outbreak has impacted the hospitality industry disproportionally more than other industries. For most of these companies, revenues have fallen off and business processes are greatly affected. Also, the uncertainty and likely overhang of disruption caused by pandemic in the hospitality industry according to experts will continue for the foreseeable future.
According to industry reports, jobs in the hospitality sector could also either be lost or severely impacted by the outbreak.
In late March 2022, it is believed that over 45% of all hotel jobs had been or would be eliminated before the end of the year. Current forecasts of a 30% drop in hotel occupancy over a full year are expected to result in the loss of nearly 4 million hotel jobs, ranging from general managers to housekeepers.
The State of Hotels During a Pandemic and What the Future Holds
Many US hotels are closed, especially luxury hotels. Looking ahead, economy hotels are expected to have the fastest return to pre – pandemic levels, and luxury and upper upscale hotels to have the slowest. This is because economy hotels are more or less able to tap segments of demand that remain relatively healthy despite travel restrictions, including truck drivers and extended – stay guests.
Also, economy hotels can stay open at lower occupancy rates than other chain scales. In hotels in the United States, revenue is a function of average daily rate, number of rooms, and occupancy—plus food and beverage where available.
Costs are threefold: variable (with revenue); semi – fixed (may be eliminated if hotel suspends operations); and fixed. For owners considering suspending operations, variable and semi – fixed costs are factors, since fixed costs don’t change, irrespective of what may be.
Have it in mind that to cover variable and semi – fixed costs, luxury hotels at the barest minimum need occupancy rates 1.5 times greater than economy hotels. A lot of economy hotels can even reduce their variable and semi – fixed costs, especially if they use family labour. While most luxury hotels, on the other hand, require more than 100 employees to operate.
However, travel will return, but the recovery will more or less take longer than in other industries, and will vary across segments.
Business and leisure travel will also return at different paces, as will domestic and international travel. What’s imperative is that the next normal will be marked by structural shifts, especially around customer expectations for hygiene and flexibility.
Note that for business travellers, demand will also come back unevenly. Essential travel will differ by industry. Reports have it that most companies in the United States are using technology as a substitute for nonessential travel. It is believed that certain types of travel—like internal meetings—will never fully return to pre – COVID – 19 levels.
In the United States, hotels face the prospect of a long recovery. Over the coming months and years, properties’ circumstances will differ widely based on a number of factors, including chain scale, location, and demand profile. There is no one right response for everyone, but some guidelines apply universally.
Hotels are expected to care for their employees, staying engaged with them through the pandemic and keeping them safe when they return. These companies must manage customer expectations, recognize that these will continue to evolve, and prepare to act agilely to address health and safety concerns.
Hotels will have to revise their commercial strategy for the restart, with an eye toward the next normal. In the long run, travel will return because of an important shift in consumption—an accelerated pivot from buying things to buying experiences. To survive the coronavirus storm, companies in the hospitality industry should consider the following.
7 Strategic Ways Hotels and Hospitality Industry Can Adapt and Make Profit During a Pandemic
1. Evaluate Insurance
It is advisable that hotel companies review insurance policies to determine possible coverage and comply with all applicable notice requirements.
Even though the most obvious source, which is business interruption and extra expense insurance more or less requires some sort of physical injury or damage to other business property as a trigger to coverage, such coverage normally should be designed to apply where a physical event (e.g., a building fire) shuts down operations for a period of time.
However, it is unclear whether a claim premised on the physical illness of people necessary for business operations and government – ordered closures would be accepted. This issue should be examined on a policy by policy basis. While somewhat uncommon, so – called “civil authority” coverage can be found in certain business insurance policies.
These clauses were designed to insure against losses arising out of loss of income and extra expenses incurred in the event civil authorities prevent access to the business due to civil unrest or other emergencies. Coverage varies wildly depending on specific language used, but insured businesses should examine their coverage carefully to see if such protection is included.
2. Conserve Cash
Since Coronavirus have seriously reduced revenues, hotel companies need to find ways to conserve cash. Note that this includes analyzing essential spending; idling operations; working with vendors, landlords, and suppliers regarding credit terms; and applying other methods.
Note that to maximize their liquidity position; these companies must prioritize their use of cash. Hotel companies should also consider the relative costs and revenues of idling operations—i.e., temporarily closing locations—until business is permitted or activity normalizes.
Hospitality companies will continue to have some cash burn to idle operations, but the net cash burn at idle may be less than that incurred in maintaining skeletal staffs to provide takeout service.
3. Meet Reporting Requirements
Note that most hotel companies in the United States are publicly traded and should review and make accurate required disclosures, in the event that business operations are impacted such that a reporting requirement is triggered under the Securities and Exchange Commission’s “’34 Act.”
In addition, Hotel companies that are parties to credit agreements and other financing arrangements should review existing material adverse change (MAC) clauses and potential impacts on the borrower’s financial covenant compliance.
4. Review Labour Issues
Have it in mind that Labour makes up a significant operating expense for most hotel companies. These companies need to focus on whether to furlough or terminate employees, recognizing the costs and benefits of each option. Although most companies have already assessed these costs and benefits and made decisions; however, companies may need to reassess their decisions from time to time.
5. Dialogue with Stakeholders
It’s imperative for hotel companies to open communications with vendors, landlords, bondholders, equity holders, and other interested parties to assure them that they recognize the challenges presented by the coronavirus and have plans to address them.
Note that in times of crises, communication with stakeholders remains very important. The stakeholders have their own doubts concerning the ultimate impact of coronavirus on their businesses and investments. Note that clear and open discussions regarding the issues and challenges presented by this crisis shows goodwill and demonstrate a company’s intention to work with its stakeholders.
Have it in mind that these discussions do not need to express definitive solutions to the challenges, but are intended to reassure stakeholders that the company recognizes the scope and severity of the issues and is contemplating various responses, depending how facts and circumstances firm up.
6. Communicate with Lenders
Also Hotel companies are adviced to open a dialogue with their lenders. If there is availability on lines of credit, a reasonable agreement should include draw – downs to bolster liquidity. Additionally, discussions may include forbearances, interest payment deferrals, amendments, extensions, restructurings, standstills, and borrowing availability increases or additional loans.
However, if the lender shows willingness to support the continuation of the business in these uncertain times, the hotel company will have to be transparent and candid, and provide information and analyses of the various possible scenarios to establish credibility with the lender.
Note that the going concern value of a Hotel business usually exceeds liquidation value, especially under current circumstances.
Hotels, timeshares, casinos, movie theatres, and restaurants are considered unique operating businesses within special purpose real estate. The operating business comprises the largest component of the asset’s value. The growing levels of stress and distress may make lenders more receptive to alternative options to maintain going concern value until the businesses normalize.
7. Update Cash Flow Forecasts
In these trying times, every forecast need to reflect the current economic environment, expected to account for reasonable upside, as well as downside, scenarios regarding the impact of the pandemic on operations—even including a potential second outbreak of COVID – 19. Also note that these forecasts may be shared with lenders and other stakeholders, depending on circumstances.
Agreeably, the current economic landscape may make forecasting challenging and nearly impossible, as the severity and duration of disruption in the hospitality industry remains uncertain. In addition, depending on the business and its location(s), normalization of business operations may take additional time.
However, for many businesses in the hospitality industry, ramp – up may extend over a period of time, and they may face further disruption from changing consumer preferences or a second virus outbreak. Cash flow forecasts, however, must account for these uncertainties.
Hotel companies are advice to review their fixed and variable costs carefully and determine what costs are needed to run the business at current levels or at idle.
In summary, the hospitality industry must take steps now to mitigate and address the impact of the coronavirus on businesses in the sector. Ultimately, the secret to getting through this crisis is for hotels to leverage the same sort of customer – centric and technology – leveraged approach adopted by other small brands in other sectors.
Although this may force a sharp learning curve, but it’s one that will, in the long – term, improve how hotels are marketed and operated long after 2022 and coronavirus is behind us.