The hotel industry is used to dealing with disruption, but never on this scale. While previously only localised events like hurricanes could result in long-term closures, 2020 saw a widespread drop-off in customers looking to stay in hotels. What continues to make this crisis so unique is how indiscriminate it is – every hotel business and every corner of the globe has been affected in some way.
In July 2020, occupancy rates dipped to 48% in the US and 32% in Italy. By the end of December 2020, the US hotel industry was still struggling with record-lows in occupancy and revenue per room. Normal is still a long way off for the hotel industry, as UK hotels aren’t expected to surpass occupancy rates of 59% for most of 2021[i].
So, what are the specific hurdles the hotel industry will need to get over in its post-Covid-19 recovery?
Hotels continue to generate a fraction of their previous revenue due to ongoing lockdowns and an ongoing commercial proclivity for virtual meetings. It’s predicted that business clients will be slower to return than those staying for leisure, as companies are likely to continue connecting virtually for the foreseeable future.
The situation remains uncertain and hotel operators still cannot say with confidence when travel restrictions will be lifted, and whether consumers will remain cautious for a period after. Social distancing is also likely to continue to keep occupancy low, and revenues will be further reduced by higher ongoing cleaning costs to encourage customers to return.
Many operators have been able to reduce their labour costs by reducing hours or using government support options. This has improved capital liquidity and helped many hoteliers stay afloat. But to put a sustainable recovery plan in place for 2021 and beyond, owners and operators will need to analyse their ROI. It will be up to them to work out whether current staffing levels are optimal for a profitable recovery period. It’s also vital that hotel businesses continue to make sure internal risk management and approval processes are effective as staff continue to work remotely.
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Debt and restructuring
It’s important that owners and operators identify areas where they are significantly lacking funds quickly. Even though many lenders are still willing to delay payments or negotiate payment terms, holding frank, early discussions about financial difficulties are the best course of action. Previously agreed restructuring or repayment terms may also no longer be viable considering uncertain, and certainly depressed, future revenue potential.
Many hotel operators are still looking to restructure their debts, which continues to present opportunities for private equity owners with large cash reserves. Being able to restructure requires being able to show that a hotel remains a viable business and will be able to operate with reduced customer levels for a long period of time.
Financial planning and reporting
2021’s financial planning and reporting strategies are going to be very different. Temporary tax reliefs and financial assistance measures are continuing to change, so companies need to make sure they’re taking advantage of the latest support. Owners and operators will also need to think about the true impact of asset impairment, and consider how to address growing worries about their future cash flow and earnings potential.
Contracts and agreements
The financial impact of changes to everything from customer loyalty schemes to management agreement fees to vendor contracts that rely on purchase volumes to keep costs down will be keenly felt by hoteliers. Virtually all business agreements will need to be reassessed to make sure they offer the best chance of a profitable 2021.
Hotels: where to from here?
The pandemic is likely to contribute to a shift in customer experience across the industry. What is clear though, is that it will be some time before the hotel industry returns to the way it was able to operate a year ago.
The hotel industry faces some stark choices in the coming months, as we all begin to navigate our way towards recovery. We are currently working with our clients to help protect and restore value so if you need support for the year ahead, get in touch with the authors of this article or your local Grant Thornton adviser.
i. Statista.com 2021