As we are in the throngs of COVID-19, forecasting a shape and timeline of the recovery is nearly impossible. We can, however, look back at similar past crises and see how the hotel industry behaved and responded to those. This report focuses on two particularly relevant past shocks: 9/11 and SARS.
Both crises resulted in a significant dip in arrivals, which had a considerable and lingering impact on the hotel industry. We investigate how Hong Kong was impacted by SARS, and how the U.S. hotel industry was impacted by 9/11. This allows us to provide a forecast for 2020 performance.
The report provides takeaways from our investigation of these case studies, and from interviews with hoteliers who lived through these two past crises. One main question asked is whether you can prepare for a crisis like this. Key lessons, as discussed by the hoteliers, are to pivot segmentation, change operations, market cleanliness, continue investing in the future, and don’t become complacent.
What You'll Learn From This Report
- 2020 performance estimates for U.S. tourism flows and hotel market.
- Impact of SARS on the Hong Kong hotel industry, and the shape of the recovery.
- Impact of 9/11 on the U.S. hotel industry, and the shape of the recovery.
- A discussion on the usability of past crises on the current situation.
- What hoteliers who went through 9/11 and SARS learned then, and how that can be applied today.
- Giovanni Angelini - Founder at Angelini Hospitality, and former CEO of Shangri-La Hotels
- Cathy A. Enz - Professor Emeritus of Strategy and Business Economics at School of Hotel Administration, Cornell University
- Arthur Kiong - CEO at Far East Hospitality
- Thomas Magnuson - CEO at Magnuson Hotels
- Douglas Martell - President and CEO at ONYX Hospitality Group
- Dean Schreiber - CEO at Oakwood Hospitality
As we are in the throngs of COVID-19, forecasting a shape and timeline of the recovery is nearly impossible. We can, however, look back at similar past crises and see how the hotel industry behaved and responded to those. This report focuses on two particularly relevant past shocks: 9/11 and SARS.
SARS impacted mostly Asian countries, and in this report we focus on one of the hardest hit destinations: Hong Kong. An investigation of Hong Kong Tourism Board data shows the impact on arrivals and hotel performance started in March 2003, after the first case of SARS was confirmed at the end of February. Arrivals rebounded rapidly after the last case was reported in June 2003, with especially mainland Chinese travelers returning swiftly. This benefitted the hotel industry, with revenue per available room (RevPAR) back to pre-March 2003 levels by March 2004. The health crisis, then, took about four months, with the recovery taking double that time, around eight months.
9/11 had a significant impact on the U.S. economy and hotel industry. Inbound arrivals declined significantly, and did not return to pre-9/11 levels until 2005. Hotels registered a significant decline in occupancy rates and average daily room rates (ADR), although the impact was less homogenous than we are seeing today. RevPAR levels did not return to pre-September 2001 levels until 2004, but we discuss academic research into extenuating factors which argues that the actual impact of the shock lasted only four months.
The investigation of these cases allows us to estimate 2020 performance, although we do not look further ahead than that, as the uncertainty is too large. Our estimates show that U.S. inbound arrivals, outbound departures, and domestic trips will almost half compared to 2019. RevPAR is likely to drop by 46% compared to last year.
The report provides takeaways from our investigation of these case studies, and interviews with hoteliers who lived through these two past crises. One main question asked is whether you can prepare for a crisis like this. Key lessons, as discussed by the hoteliers, are to pivot segmentation, change operations, market cleanliness, continue to invest in the future, and not to become complacent.
A Rationale for Looking Back
‘Unprecedented’ must surely be a contender for word of the year (probably pipped to the post by ‘social distancing’). These are indeed unprecedented times, as we will see when comparing the presently unfolding situation with past crises.
There has been some interesting work done to forecast or predict what the economic recovery will look like, and how the travel industry is impacted. There is a lot of talk about V-shaped, U-shaped, W-shaped, or L-shaped recoveries. McKinsey’s comprehensive take provides a total of nine different possible economic recovery scenarios, all with their own shape.
Rather than providing forward-looking scenarios, in this report we will look back. Granted, we provide some estimates for full-year 2020 performance but no further than that, simply because we feel the uncertainty is too large at present.
This is an epidemiological issue above all, that has no end in sight just yet. Social recovery will rely heavily on an effective vaccine and how it is distributed, with economic recovery further relying on the impact of economic stimuli, and many other factors that cannot be foreseen.
That is not to say that looking back doesn’t come with its own limitations, which we want to point out from the outset.
Importantly, crises do not happen in isolation. Not only is it hard to measure the exact impacts of a shock, it is near impossible to establish which effects should be attributed to the crisis. SARS, for example, was at its peak in 2003, particularly impacting tourism in Singapore, Hong Kong, Beijing, and the city of Toronto, Canada. This was only a year after a recession in Europe and the U.S. on the back of 9/11, and the same year as the start of the Iraq War. It is, then, hard to pin a decline in hotel demand to SARS alone.
The same might be true today. Would flight shaming have become a much bigger thing if planes hadn’t been grounded from one day to the next? And had U.S. hotels already reached the peak of the current business cycle, with RevPAR only registering 0.9% growth in 2019 according to STR, and CBRE forecasting only 0.1% growth for 2020 at the end of 2019. Obviously, no one could have expected the severe shocks that COVID-19 would bring, but that is not to say that growth would have gone on unabated in 2020 had the coronavirus not spread as it has.
The trade war between the U.S. and China hasn’t been fully put to bed yet, and uncertainty lingers around geopolitical relations with North Korea and Iran. The UK is still set to finish its transition phase to come out of the EU by the end of 2020, with all economic uncertainty that comes with that. Trump’s border wall is still on the agenda somewhere, and the Australian wildfires were still smouldering when the world was taken over by worries about COVID-19.
There have been some good attempts made to isolate the impacts of crises, and we will discuss these later on, but the fact remains that we live in a messy world. As said, it is hard to compare previous crises with the current situation. There has not been a situation where every country in the world was impacted like we are seeing today. The 2009 outbreak of Swine Flu might have come close, but most people had only mild flu symptoms, so travel warnings and border closures never happened.
So, although COVID-19 is unlike anything faced by the industry before, there is still a lot we can learn from past crises. This not only comes in the form of quantitative analysis, but also through qualitative insights. For that reason, this report will investigate the financial impact of past crises on the hotel industry, and compare that with the unfolding situation today, and we provide insights garnered from interviews with hotel execs who have lived and worked through some of the major crises in the past decades.
Two crises stand out as relevant to today’s situation, and warrant closer inspection: 9/11 and SARS. Both were (relatively) sudden shocks that had a profound impact on the hotel industry. We will discuss both cases in this report.
The Perfect Storm
While COVID-19 is a very different beast to past crises, the travel industry has always come out of previous crises stronger, with growth in international travelers continuing almost unchecked. Undoubtedly, 2020 will see declines in travelers, with the United Nations World Tourism Organization forecasting a decline in international arrivals between 20% and 30% in 2020 compared to last year, and even that might seem optimistic as social distancing, shelter-in-place policies, and border closures continue. This said, all previous crises indicate that long-term recovery is likely, as the demand for travel will eventually return, and the drive to travel was strong right up to the outbreak of the crisis.
The world, and the hotel industry, have had to deal with many crises over the past decades. In the exhibit below we show some of the main epidemics and pandemics, and how travel restrictions were implemented to curb the spread. COVID-19 is seeing by far the most far-reaching restrictions implemented in modern history.
At the time of writing, COVID-19 infections and deaths are still lower than during the Swine Flu outbreak, which saw a peak in 2009, or the Spanish Flu after World War I. However, rates of infection are still increasing rapidly, and many countries have not yet reached their peak.
The nature of the virus, and an ever more connected world, have resulted in a rapid spread of the coronavirus. Governments have taken steps to slow the spread by banning travel, closing retail and entertainment venues, offices, and country borders.
Border, or airspace, closures have happened before. The 9/11 terrorist attacks in New York and Washington D.C. led to the closure of U.S. airspace for three days, with a longer lasting negative sentiment and fear factor around flying. The longer-term impacts included much stricter regulations around flying and baggage, which are still in place today.
The 2010 Eyjafjallajökull volcanic eruption in Iceland, which resulted in an ash cloud hampering flights over much of Europe, closed European airspace from April 15 to 23, and then again locally on several days in early May. This, however, was a natural phenomenon — and a technical issue of plane engines being damaged by the ash clouds — and therefore demand picked up quickly after volcanic activity stopped. We have seen similar generally temporary impacts and quick bounce backs after hurricanes, typhoons, tornadoes, floods, wildfires, or earthquakes.
Financial crises have also had a dampening effect on travel in the past, most recently the 2008/09 global financial crisis. A major decline in disposable incomes and industrial output resulted in significant declines in business and leisure travel across the globe, with global trips declining by about 3.5% in 2009 compared to 2008.
It is fair to say that the travel industry is used to disruption, and is resilient in the face of it.
Coronavirus, however, has become the perfect storm. It is a combination of the fear factor as seen after 9/11 at a global scale, the financial impact of the 2009 recession amplified, and a widespread implementation of border closures never seen before.
Barry Diller, chairman of Expedia Group, bought Expedia in the aftermath of 9/11, but he said in an April 16 interview with CNBC: “This is not analogous. I don’t think it’s analogous to anything. Certainly not analogous to 9/11 and to the financial crisis in ’08.” Booking Holding CEO Glenn Fogel said on March 23 that the current crisis is worse than all previous “major” disruptions combined, while Marriott CEO Arne Sorenson said that “COVID-19 is having a more severe and sudden economical impact on our business than 9/11 and the 2009 financial crisis combined.”
Here we will focus on two past crises to determine how the hotel industry was impacted and responded to these shocks. We start with the SARS epidemic, as it particularly showed many of the same symptoms we are seeing at a much larger scale today.
The SARS Epidemic
There are many comparisons drawn between the current COVID-19 situation, and the 2003 SARS impact in Asia. The impact of SARS will sound very familiar to anyone following the news today.
The first official SARS case was reported in Guangdong province in China in November 2002. Outbound tourism from China dropped by 80%, while especially Beijing saw a high number of infections and saw major declines in tourism revenues as international and domestic travelers stayed away.
Olivier Dombey wrote in September 2003 about the situation in Beijing in previous months: “Day-to-day life was reduced to a strict minimum. Shops, restaurants, supermarkets, shopping malls, clubs, bars, parks and streets were empty compared to their previous bustle. Masks and disinfectant products were all out of stock. Companies and businesses were closing offices and sending staff home, others laid off personnel.” Sounds familiar?
Initially the virus remained largely contained to mainland China, until on February 22, 2003, Professor Liu Jianlun, a doctor at a Guangzhou hospital who treated SARS patients, checked in at the Hong Kong Metropole Hotel to attend his nephew’s wedding. Unbeknown to him he had contracted SARS, and after only one night was taken to a nearby hospital where he died on March 4.
Jianlun infected several guests in the hotel, including visitors from Vietnam, Singapore, and Toronto, Canada, which all saw subsequent outbreaks of the virus. Hong Kong itself became one of the hardest hit locations, with 1755 cases (22% of global total), and 299 deaths (39%).
We will use Hong Kong as our case study in this report, not only because it was hit hard by the SARS outbreak, but also because the city covers a small, contained area, has no domestic travel, and has been tracking monthly and quarterly tourism indicators for over two decades. All this makes it easier to isolate the impact of the SARS outbreak on the travel and hotel industry.
Visitors Stop Coming
The SARS epidemic had a severe impact on arrivals into Hong Kong. Total arrivals declined by 4.3% in March 2003, 65.7% in April, and a further 16.2% in May. In June, arrivals shot up again, growing by 66.3%, albeit from an extremely low baseline. The bottom of the trough did not reach as low as it seems to be at present, as indicated by preliminary data for March 2020.
Furthermore, the fall to the bottom was not as deep. While overseas arrivals have stayed relatively stable over the past two decades, mainland arrivals have grown steadily. While they accounted for 43% of total arrivals in 2002, this had increased to 68% in 2018.
The increase of mainland Chinese arrivals might also be obscuring the true impact of the SARS epidemic. Chinese arrivals rebounded quicker than overseas arrivals. It took overseas visitors until October 2003 to return to above January 2002 figures. In contrast, mainland China visitors never dipped as low as overseas visitors, and by October 2003 were almost twice as high as they were in January 2002.
Hotels Empty Out
Hotel occupancy rates dropped dramatically in Hong Kong as the outbreak spread. Some hotels were forced to close floors, and asked staff to take holidays or voluntary unpaid leave. April also saw five hotels being put up for sale. Data from the Hong Kong Tourism Board shows that occupancy rates in April 2003 declined by 57 percentage points to 22%, and further fell to 17% in May.
In comparison, data up to February 2020 shows that like arrivals, hotel performance indicators have fallen sharply, and while revenue per available room (RevPAR, calculated by multiplying occupancy with ADR, the average daily room rates) was as low in 2003 as it will likely be today, the actual drop is much bigger today as RevPAR has steadily increased since 2003.
Again, one extenuating circumstance is that before the coronavirus took hold of the market, the Hong Kong hotel industry was already in a weak position following widespread protests against new policies which would allow extradition of Hong Kong residents to mainland China. These protests started in June 2019, and resulted in weak results for the second half of 2019.
The Shape of Recovery
Recovery from SARS was relatively swift. The last reported case in Hong Kong was on June 11, and by the end of June the World Health Organization had declared Hong Kong SARS-free. A marketing campaign by 77 members of the Hong Kong Hotels Association was announced soon after, with many hotels offering discounts of up to 50% to entice visitors to come back. By July, average occupancy rates were back up to 71%, and to 88% in August, above the 82% registered in February 2003. ADR took longer to recover, as discounting contributed to prices dipping below pre-SARS levels until October. All in all, however, the impact seems relatively short.
Giovanni Angelini, who was CEO at Shangri-La Hotels during the SARS crisis said that the impact of “SARS was 3.5 months, and then business came back very fast. Even that year — we had about 50 hotels — the occupancy was in the single digits, but we still ended up the year with a small profit.”
Today, we are already starting to see collaborations between different hotel companies to safeguard jobs and finance marketing campaigns. It will be interesting to see how pricing will develop during the current pandemic. It is clear from the February data provided by the Hong Kong Tourism Board that prices are falling, with ADR dropping from HK$1012 in January to HK$963 in February, a 4.8% decline. OTA Insight, furthermore, started tracking future pricing changes for over 100 hotels in Hong Kong from March 16 onwards. It provides an interesting insight into the impact of coronavirus cases on how future prices are set by hoteliers. As cases started increasing, prices further into the future (i.e. 60 days ahead) started dropping first, but soon after, in early April, all prices were adjusted down. As cases have stabilized since mid-April, and while prices are already lowered, price drops are starting to become less severe as well.
After SARS, RevPAR took about one year to recover. Looking at historical data, we can see that real RevPAR started dipping below previous year prices in March 2003, and stayed below 2002 prices until March 2004. Considering that the first case of SARS was identified on February 21, and the last case on June 11, the epidemic lasted for about four months, with a further eight months to RevPAR recovery.
The hotel industry has adopted this as some sort of 1:2 rule — with recovery taking twice as long as the crisis itself. It has become a widely used rule of thumb to forecast future recovery, but as we do not know yet how long the current crisis and recovery will take, it is too early to start drawing any kind of forecast from that.
Furthermore, the 1:2 rule has many exceptions. While it seems to apply to Hong Kong, it did not for Toronto after the SARS epidemic. An investigation of the Toronto hotel market by HVS shows that in that market, demand had returned to 2002 levels by 2004, but ADR did not recover until 2006, mostly due to “draconian discounts implemented by hotels in the city in an immediate response to the sharp drop in demand”. This is not only a warning against oversimplifying and generalising recovery trajectories, but also a lesson in favor of pricing discipline for hoteliers today. Hong Kong hotels were seemingly able to bounce back quicker than Toronto from the SARS crisis, as they kept prices more stable.
Macro-economic and Tourism Performance Comparison
So can the economic performance during and after SARS tell us anything about how the current crisis will play out? It might give a possible indication, although it is still early.
An investigation of quarterly growth of GDP, visitors, and RevPAR shows that RevPAR follows a similar trajectory to GDP and visitor growth. The deepest trough is in Q2 2003, but this is followed by strong growth in Q3. In both quarters, decline and growth of RevPAR was larger than GDP by a factor of 10.
The expectation is that this time around, the impact on hotel performance will be stronger. The latest GDP forecast by the Hong Kong government is between 0.5% and -1.5% for 2020. Allianz, meanwhile, forecasts -0.6% growth. Using the ‘factor of 10’ rule, this would mean around a 6% to 15% decline in RevPAR for 2020, which seems too optimistic, looking at the data available so far. The Pacific Asia Travel Association (PATA) estimates arrivals in 2020 will fall by 32% in the APAC region. We estimate that Hong Kong will fare slightly better due to its proximity to mainland China, but not much. Our estimate is that RevPAR will be down 30% from 2019 figures, which shows what we believe will be a graver impact that this pandemic is having on Hong Kong than previous crises.
Above discussion shows how GDP is a strong indicator of RevPAR, although RevPAR is far more volatile. While there is still much time left in 2020 to improve hotel performance, 2020 is in many ways already a write off.
How can these findings be transferred to other markets? Let’s look at another past crisis and find similarities. We will focus on the U.S. hotel market.
9/11 Terrorist Attacks
The impact of SARS on the U.S. hotel market was minimal, and therefore it is more useful to look at another crisis to draw comparisons. 9/11 provides us with the opportunity to do this. After the tragic events of September 11, 2001, the U.S. came to a standstill. Airspace over U.S. territory was closed for three days. When the stock exchanges reopened on September 17 the Dow Jones saw a 7.1% decline in a single day. It is estimated that the city of New York registered a loss in GDP of $27.3 billion over the15 months following the attack, up to the end of 2002.
Fear Halts Travel
The impact on travel was severe and instant, and reached far beyond the cities hit, or even the U.S. The World Travel and Tourism Council (WTTC) found a 30% drop in global tourism related revenues immediately after the attacks.
We collected data from the National Travel and Tourism Office (NTTO), the Bureau of Economic Affairs (BEA), and the U.S. Travel Association to calculate the impact of the attack on tourism flows and expenditure in the U.S. The data shows that international arrivals declined by 12.3% in 2001 compared to 2000, 8.2% in 2002, and a further 4.2% in 2003. Arrivals did not recover to pre-2001 figures until 2005. Receipts saw a similar trajectory, with a total decline of 15.3% up to 2003 (in real value terms), and recovery to pre-2001 receipts by 2004.
As might be expected in a situation where the impact was heavily focused on a small number of cities and high-profile landmarks, travel in other parts of the country was less impacted, and domestic travel actually saw a slight uptick as travelers pivoted towards staycations. In 2001, domestic trips volume increased by 0.5%, and in deflated terms spending remained stable, alleviating some of the stress on hotels and other tourism businesses.
Comparing this data with the current situation, it is clear that the picture looks very different today. While official data is patchy, we get an indication by looking at the latest booking data from ADARA, a U.S. based travel data cooperative with over 200 members. Hotel bookings for both domestic and outbound trips by U.S. residents have been down considerably since the end of March.
Using Oxford Economics forecasts, combined with data from the U.S. Travel Association, NTTO and BEA, allows us to estimate the inbound, outbound, and domestic travel volume and value time series with a forecast for the full year 2020 performance. It does not look great. Inbound arrivals are forecast to be down 54% in 2020, with receipts down 46%. We expect outbound departures to be down 50%, with expenditure down 43%, and domestic trips and spending to be down by 43% and 41% respectively.
In volume terms, this means that inbound arrivals and outbound departures will fall below 2002/03 figures, while domestic trips will be the lowest in more than 20 years. But domestic travel is also most likely to bounce back quickest, and might outperform inbound and outbound in the immediate aftermath of the crisis. Inbound and outbound values are expected to drop below 2010 results, while total domestic travel spend has not been as low since 2011.
Hotel Performance Impacted
Hotels were impacted considerably after the September 2001 attacks. Below is a time series of the main hotel performance indicators, occupancy, ADR, and RevPAR for the U.S. When looking at aggregated, country-level, and annualized data, 2001/02 only saw a minor blip in performance.
In comparison, 2020 so far looks extremely bleak. The fact that this is happening in the first and second quarter of 2020 is potentially, and hopefully, distorting this image, as a decent third and fourth quarter would pull these figures up.
Annualized data also does not show the true impact of the 9/11 attacks on the hotel industry in 2001 and following years. Let’s dive a little deeper.
When looking at monthly key performance indicators for the hotel industry in the U.S. between 2000 and 2002, we see a clear decline in occupancy, ADR, and RevPAR. October actually saw a slight improvement, before further declines in November and December of 2001. The latter months, however, are always slower due to seasonality, and cannot necessarily be attributed to the crisis.
This monthly data shows the results for the entire country, but hotels were impacted differently based on location. City data shows that New York, hardest hit by the attacks, recovered faster than West Coast cities like San Francisco and San Jose. Orlando was hit hard initially, but was close to full recovery by the second quarter of 2002.
There is a broad consensus that this time around, the impact will be felt more broadly across the entire country. While many Americans would have watched in horror and would have been extremely saddened by the events of that day in September 2001, their lives went on largely without being impacted directly. In contrast, COVID-19 is impacting everyone, with every state having some form of stay-at-home regulations in place.
That said, in every crisis some businesses will always be impacted more severely than others. Thomas Magnuson, CEO of Magnuson Hotels told Skift Research that the aggregate results of hotels in his network only showed a $1 decline in RevPAR and 1% decline in occupancy for the first quarter of 2020. He explained this is largely down to Magnuson’s U.S. footprint. “A huge part of our hotel footprint is in secondary, tertiary rural markets, interstate locations, and we have a complete 100% focus on non-leisure. We focus on the kind of business that keeps the country moving, … like construction, medical, government, military, security.”
STR data shows the severe decline in all hotel performance metrics over the past weeks, starting at the beginning of March and picking up pace mid-March, when President Trump announced border closures to nationals from most European countries. It is therefore likely that the impact will be much more severe in the second quarter, rather than the first.
There is also a small sign of improvement though. In the week of April 12, aggregate U.S. hotel performance was up, with occupancy rates increasing by 2.4% compared to the week before, and RevPAR increasing by 11.7% to $17.43. This is still a long way off pre-crisis figures, and the road to recovery is likely to be much longer than the downhill tumble that got us here. Q1 might turn out to be the strongest quarter of 2020, depending on the shape this recovery will take.
Impact on Brand Performance
Looking at particular brands, below we highlight the real RevPAR values for three major brands in the U.S. Hilton Hotels and Marriott Hotels, both upper upscale brands, saw a significant slump in RevPAR, and took around four years to recover. Comfort Inn, sitting lower in the market in the midscale segment, saw no decline, but instead growth in RevPAR stalled until 2004.
In full-year 2001, the Marriott brand saw a decline of 11.8% in nominal RevPAR values. To put this into perspective, although we don’t have accurate brand-level data as of yet, and full-year data will not be available until 2021, Marriott has announced that it expects a drop in RevPAR of 23% globally, and 20% in North America specifically, across its entire portfolio for the first quarter of 2020. North American RevPAR stood at $119.61 at the end of 2019, which would mean a drop down to $95.69, or lost revenue of almost $24 per available room. In 2001, the drop was just under $14 per room.
RevPAR of the Hilton brand, meanwhile, dropped by 14.3% between 2001 and 2000 in nominal values. Today, Hilton estimated a decline of between 22% and 24% in RevPAR for the first quarter. The company said March was the worst month of the quarter, with an estimated 56% to 58% percent RevPAR drop at Hilton properties around the world.
The impact at the country-level and brand-level, then, seems to be more severe this time around, although the impact of 9/11 on specific destinations was much more severe than what averages allude to. We should also consider that other factors were already dragging down the hotel market in 2001 before the attacks.
Extenuating Factors for 2001 Declines
If we extrapolate RevPAR performance by month, we can see that hotel performance already started declining in March 2001, well before the attacks in September. The attacks further exacerbated the situation, resulting in RevPAR not recovering to pre-September 2001 levels until September 2002. The heights of 2000 were not reached again until 2004, similar to what the brand data shows.
It is clear, however, that other factors impacted the downturn in hotel performance in 2001,which is in contrast to the situation today, where hotel performance was at a all-time high at the end of 2019.
Cathy A. Enz, Professor Emeritus at Cornell University’s School of Hotel Administration has extensively researched the impact of 9/11, and highlighted the extenuating factors that impacted the downturn. According to her research, the hotel market had largely recovered from the shock after four months. The shock itself contributed to occupancy rate declines of 4.17%, ADR dropped by about 1.8% (-$1.01), and RevPAR by 11.9% (-$4.16).
Speaking with Skift Research, Enz said: “You could see what economists would call a V-shape recovery for September 11. An abrupt fall and a short-term rebound. [We] attribute a lot of things that are not about that shock, to the shock. But there are other things going on, like poorly performing hotels, unemployment, inflation. If you pull all that out it was a V. Very clear and really about a month.”
Beyond factors mentioned by Enz, like unemployment and inflation, government stimuli also have a considerable impact on recovery. After 9/11, on September 22, the federal government implemented the Air Transportation Safety and System Stabilization Act (ATSSSA), later extended with the Aviation and Transportation Security Act (ATSA), providing loans and compensation to airlines and airports, among other measures, totalling around $15 billion. Blake and Sinclair, in an investigation of the impact of these measures, found that without these measures, GDP would have seen a decline of $27.3 billion, but with the measure, this was instead minimized to $9.3 billion.
The same study found that jobs lost in the accommodation sector were reduced from a potential 174,000 to 141,000. Had the government taken further actions specifically focused on the accommodation sector — which it didn’t — the authors found that for every $1 million in subsidies to hotels, it would have saved 12.4 jobs and $2 million in GDP.
For the current situation, of course, the government has indeed gone much further to provide a stimulus package.
According to the American Hotel and Lodging Association, the industry is seeing $3.5 billion per day in lost revenue, and the association estimates that 3.9 million hotel jobs will be lost due to the crisis. Oxford Economics estimates that in April 2020 alone, over 1 million jobs will be lost in the U.S. lodging industry.
The government announced a total package of $2 trillion in stimuli, of which the Paycheck Protection Program worth $349 billion is earmarked as particularly relevant to small and independent hoteliers. A provision was added in the bill to enable many one-off hotel operators to qualify for small business benefits even if they operate under the flag of a larger brand like Marriott or Hilton. The scheme, however, ran out of money quickly, and a further $310 billion was added to the budget in late April.
Information from 8K’s, as published by publicly traded companies, shows that, for example, Red Lion Hotels received a $4.2 million loan, while Ashford Hospitality Trust and Braemar Hotels and Resorts, real estate investment trusts (REITs) owned by Monty Bennett, received $30.1 and $18.5 million, respectively. There has been growing unease about major public companies receiving these loans, which are intended for smaller operators.
Larger hoteliers weren’t actually ignored by Washington. The new law’s Coronavirus Economic Stabilization Act of 2020 subset offers $454 billion in liquidity to affected industries like the hospitality sector. To be eligible, a larger hotel company would have to use funds to support business operations and keep 90 percent of its workforce with full salaries and benefits through the end of September.
These measures will undoubtedly impact the recovery out of this crisis, and alleviate some of the negative effects we are seeing today. If the 9/11 crisis is anything to go by, and if the hotel industry would get only 10% of the current stimulus package set out above, this would mean a total stimulus of around $111 billion. A back of the envelope calculation using Blake and Sinclair’s findings after 9/11 would mean that this would save around 1.4 million hotel jobs, still a ways off the 3.9 million jobs that will be lost if we take AHLA’s estimates.
According to a scenario run by Oxford Economics, the mitigation of losses achieved by a staggered reopening of travel businesses from June onwards, as well as increased safety measures, and increased marketing campaigns, could also save 1.4 million travel-related jobs. A combination of financial stimulus, and a hopeful return to some semblance of normality in Q3 2020 might therefore be able to save many jobs, although the gap between jobs lost and retained will still be vast, and this will slow down economic recovery.
When Will Economic Recovery Come?
An investigation of annual growth rates of GDP, arrivals (inbound plus domestic), trip spending and RevPAR shows that trip spending and RevPAR were impacted in line with GDP declines during previous crises, albeit more severely. This is similar to the situation we already saw in Hong Kong after SARS. RevPAR was impacted most severely of all indicators during 2001, as well as during the 2008/09 financial crisis.
This provides one possible indication of RevPAR performance for 2020. GDP forecasts have been revised on a weekly basis lately, and not in the right direction. The Congressional Budget Office remarked on April 2 that GDP is set to contract by 28% in Q2 2020, but warned that “those declines could be much larger.” The International Monetary Fund forecasts U.S. GDP will fall by 5.9% in 2020, but increase 4.7% in 2021. Barclays Capital estimates GDP to decline by 6.4%, Morgan Stanley predicts a contraction of 5.5% in 2020.
The magnitude of RevPAR declines based on these GDP forecasts is unknown, but if we look at historic data, things look extremely worrying. Taking weekly averages, STR data shows that RevPAR has fallen by 79.5% between the start of February and the second week of April. CBRE forecasted on March 24, before the full impact of COVID-19 was known, and while still predicting that U.S. GDP would grow by 0.4% in 2020, that RevPAR would decline by 36.9% for full-year 2020. This was further revised down to -46%.
Combining this with our estimates of domestic and inbound arrivals and spending, this provides a dire outlook for 2020.
A silver lining is the fact that while the troughs are deep, the RevPAR peaks are also higher than any of the other indicators highlighted. This is true for all cases highlighted in this report. Therefore, at the first signs of an economic recovery, and of travel resuming, RevPAR is set to see a steep rise. This, however, will likely come too late for many businesses.
In a market where many have talked about growing oversupply, the current crisis might actually help some oversupplied urban markets in the long run, however cruel it may sound, but it will also hit places that have not struggled with oversupply over the past years. It is too early to estimate the full impact of this crisis, but early indications already show that today’s impact on the hotel industry in the U.S. is in a whole different category than the impact of 9/11, both in how widespread the impact will be, and how long the destructive impacts will last.
We’ve discussed two past crises with a focus on their impact on Hong Kong and the U.S. hotel market, but learnings from these case studies can be applied to any destination and hotel business. Here are the key takeaways.
COVID-19’s impact is more severe in every possible way
Our investigation and comparison of the current impact with past crises shows how today’s situation is more severe than anything that has come before.
We have focused predominantly on the U.S. hotel market, but trends are similar in other major regions like Europe and Asia Pacific.
That said, the travel industry was in a strong position when the shock happened, and while it might take a long time, recovery will come. Undoubtedly, however, this recovery will come with long lasting changes in regulations and consumer expectations. Preparing for these changes now is paramount.
Crises don’t happen in a vacuum
A crisis never happens in isolation, with many other developments and factors impacting both the severity of the crisis and the speed and shape of recovery. It is hard to separate the crisis from the crisis, which makes recovery highly unpredictable. We are not only dealing with a world that is in constant flux, the hotel industry also deals with seasonality and business cycles, which impact performance. These factors can distort performance, and can make a crisis look more impactful than it really is. Take 9/11 for example. RevPAR fell sharply in 2001, and did seemingly not recover to pre-2001 levels until 2004. RevPAR, however, already started falling in March 2001, and Cathy Enz and colleagues argue that the impact of the 9/11 shock was actually only about four months. Not everyone might agree with this analysis, but it is important to consider the messy world we live in.
Financial stimuli impact recovery
A major extenuating factor for recovery is the extent to which governments step in to offer stimulus packages. While this intervention will not save all lost revenue or erase job losses, research shows that they are indeed impacting the easing of the shock to the hotel industry, and the shape of the recovery.
The fact that almost all major markets are providing financial support to the hotel industry in today’s crisis is a positive sign. It will be far from able to alleviate the severe negative effects of the declining demand, but it should speed up recovery.
Crisis impact is not homogenous
The effects of any crisis are felt differently by travel players. As we have shown, 9/11 was felt more in major cities, and seemed to have a longer lasting impact on higher-end brands than the midscale and economy markets.
This time around we will see similar differences in the impact, between and within countries and regions. How this will play out we don’t know, but there will be ways for hoteliers to reduce the negative impact of the current situation. Beyond using the hotel as a place to stay for healthcare workers or as a quarantine centre, and short of actually changing the brand positioning, shifting segmentation strategies can be beneficial to recovery. More on this below.
Beware of rules of thumb
We briefly discussed the 1:2 rule of thumb which has seen increased use in the hotel industry. This rule proposes that the recovery from a crisis takes around twice as long as the crisis itself. There are many exceptions to this rule, and just because it applies to one case does not make it a universal truth.
Another popular response is to assign a letter to crises and subsequent recovery. Are you expecting a V-shape, W-shape, or extended L-shape recovery? While useful in many ways, let’s not get hung up about this now.
The recovery from the current crisis will be messy, and will have a different shape in every country and destination. We can only talk about recovery shapes after the fact. Beware of statements that forecast the recovery of the hotel market, as these are just speculations at the moment.
Pricing discipline is important
Our case studies have shown the importance of pricing discipline from the hotel industry. As Cathy Enz from Cornell University said: “The takeaway from the [9/11] study, which was profoundly gratifying, was that the industry was disciplined and resilient. It adjusted to the moment, it readjusted over time. … Pricing discipline is important, which everybody says, but nobody really means. You’re looking at your competitive set, and if they’re down I have to go down. Everybody’s advice is to watch your competitive set, but you’re held captive by your dumbest competitor, and you follow them down. The net effect is you lose money.”
The latest data from Hong Kong and the U.S. indicates that ADR has seen a decline, but it is predominantly occupancy that is down, driving down RevPAR. As recovery will start over the coming weeks or months, it is occupancy that will fluctuate, especially if the opening up of our society will be phased and might include periods of relaxing, and subsequent intensifying, of restrictions. It is down to hoteliers to keep their pricing stable, as ‘draconian discounts’ and price reductions will have a long lasting impact and hamper recovery.
There is a wealth of data available to help navigate this crisis
Beyond hotel-specific data from sources like STR, our case studies have shown that macro-economic and tourism flow data provides good indicators of hotel performance. This is no surprise, but it is good to reiterate this in times of crisis. Hoteliers have a host of sources available, including from business intelligence and hotel tech providers who are sharing data with their clients or the wider industry, and together this should provide hoteliers with more data and insights on how to navigate this crisis than ever before.
Can you prepare for a crisis?
The most important question might be whether hoteliers that have lived through a crisis before were better prepared this time around. COVID-19 surely is a black swan event, unpredictable but with severe consequences.
We could ask this question in a different way. Looking at our two case studies, the SARS outbreak had the closest resemblance to COVID-19 that we have ever had. Has Hong Kong performed better than the U.S.? This is obviously a naive question, knowing that we have just discussed the extenuating factors that impact each crisis, and so comparing the response and impact in two completely different countries is not possible. On first sight, cases are lower in Hong Kong, and the government response was quicker, but the hotel industry has struggled in both markets.
Having lived through a health crisis like SARS is likely to benefit hoteliers, but there are very few hoteliers that have not had to deal with some sort of crisis, be it the financial crisis, tornadoes, hurricanes, terrorism, natural disasters, or other health scares.
Enz noted that strategies implemented for 9/11 can still be very relevant to today’s situation. “You’ve got to create value add, you have to not discount, you have to think which business is going to come back, which customer segments are you most intrigued with. All of that is relevant. Some of those sales and marketing strategies are still viable.”
A health crisis, however, also provides its own, unique challenges. Dean Schreiber, CEO of Oakwood Hospitality said that SARS had taught his team to take measures early. “What we learned from SARS is that if a guest is infected with a disease and it has a knock-on effect and it becomes a hotspot, how quickly that has reputational issues that we have to consider. We started testing guests and staff early, we learned that from SARS. … We are protecting the guests and staff that are in the property, but also make sure that you are ring fenced from a reputational management point of view as well.”
So what are some of the key lessons that hoteliers learned from a crisis like SARS?
Pivot your segmentation: As already mentioned before, the crisis offers opportunities to re-establish the type of guests that the hotel can and wants to attract. Schreiber of Oakwood Hospitality said that his company quickly pivoted away from attracting transient guests as the impact of COVID-19 became clear. Instead, the company focused on attracting long stay guests, something it already does for its serviced apartments, but now also applied to the hotels it has in its portfolio.
Arthur Kiong, CEO at Far East Hospitality noted that the company had implemented a new ‘phased’ segmentation strategy. “We mapped out the crisis into phases, and listed key milestones to establish at each phase. For example, in phase one, when the World Health Organization declared a global emergency and countries are in lockdown, international travel demand is non-existent. So we turned to domestic tourism — staycations. … We have also mapped out plans for phase two, when travel bans may have been lifted, but a vaccine is still unavailable, and phase three, where a vaccine may be available for mass inoculation, and leisure travel is allowed.”
Changing a hotel’s guest segmentation might also mean changing distribution strategies. Thomas Magnuson of Magnuson Hotels said the company had seen a major compression of booking lead times in the U.S. as travelers were booking last minute trips, probably to get home before more severe lockdown measures were put in place. As a response, the company helped all its hotels to provide mobile rates on HotelTonight, a popular platform to book last minute hotel stays.
Change operations where needed: Interviewees spoke about ways to cut costs and alter operations to weather the storm. Observations included shutting down floors, implementing deep cleaning rotas, increasing hygiene checks, altering the check-in process and so forth. Oakwood Hospitality had already implemented a cocktail trolley service before COVID-19 hit, which brought cocktails to people’s rooms rather than guests having to come to the bar, and the company extended this service to now also include breakfast, which is taken to all rooms instead of being served in the restaurant.
Giovanni Angelini, the retired CEO of Shangri-La Hotels said that “one thing that we didn’t do [with SARS], but is done now in many cases, is to split the team into two, in order for the company to keep running if one person gets infected, so that you have another team that takes over.”
Market cleanliness: On February 16, 2020, the Singapore government launched the SG Clean campaign to raise cleanliness standards, and help slow the spread of the virus. Far East Hospitality has 15 properties in Singapore, and its Village Hotel Sentosa was one of the first to be SG Clean certified, and the other 14 properties are working towards the certification as well. CEO Arthur Kiong said the company established a crisis response team and a business transformation team as soon as the impact of COVID-19 became apparent. As part of this effort, “the marketing communications team encapsulates [our efforts towards cleanliness] into key messages that are delivered to the public via media and social media channels.”
Douglas Martell, president and CEO at ONYX Hospitality Group saw similar value in hygiene and cleanliness as a key message moving forward. “In the months and years to come, hotels are likely to come up with new ways of enhancing hygiene through perhaps a more considered choice of materials and surfaces, [and] revised procedures on how a room is cleaned and maintained.”
Continue investing in the future: According to Martell, the downturn also offered opportunities to invest in upgrading the company’s properties. He spoke of the Amari Watergate property in Bangkok, which had a renovation plan which was set to take place in stages. “However, with this COVID-19 situation, we have decided to intensify the scale of our refurbishments and the hotel will have its full operations temporarily suspended from the 1st of April to the 30th of November for works to take place.”
ONYX Hospitality Group also invested recently in a new enterprise software, which was still in the implementation phase when the crisis started. Martell and his team made the decision to continue its implementation, so that the company is better prepared to respond to changing demand as the situation improves.
Don’t become complacent: Probably the most important message provided by the hotel entrepreneurs that we spoke to was to remain vigilant. Dean Schreiber of Oakwood Hospitality said: “I think we felt we were really well prepared after SARS, we knew everything there was to know about handling this sort of crisis. Maybe with COVID we all didn’t react quick enough, because we thought it was just going to be another SARS. … I almost remember when we heard about the first COVID case, and I remember saying to my team: ‘this could be a big one,’ and then kind of ignored it for a month as well. We knew what we were going to do, we would take temperatures, we would sanitize our hands. Globally, we should have responded faster and quicker, and be ready for it.”
This is a pertinent lesson to remember for all, as the industry is undoubtedly going to start its road to recovery sooner rather than later. More crises will come along, but coming through the current shock will help to be better prepared in the future, as long as our memory doesn’t fail us.
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