Report Overview

The current COVID-19 outbreak has put the world of travel on pause and given us all cause to reevaluate how we want to run our businesses. Skift Research is using the moment to look back on past crises and draw upon the lessons they can offer our industry. We recently published a report on what can be learned from the 9/11 and SARS crises, and this report will focus on the impact of the 2008/2009 financial crisis on travel. We will primarily focus on the U.S. market, where we have the most data. But we believe the lessons we draw from the analysis apply to the much broader travel industry today.

We divide this report into three sections, starting with a review of how major travel sectors in the U.S. fared during the 2008/2009 crisis, and how long they took to recover. Next, we present a success case study of how Marriott was able to first survive the crisis, and ultimately embrace the opportunity to reinvent, allowing the company to come out the other side stronger. Lastly, we look at the unsuccessful case study of Extended Stay America that went into the crisis with an overoptimistic outlook and a poor cost structure, which led to its bankruptcy.

We draw lessons learned in each section and come up with 13 principles that we believe are still applicable today.

What You'll Learn From This Report

  • 13 in-depth lessons for the travel industry learned during the 2008 financial crisis that still apply to companies dealing with COVID-19 today.
  • How U.S. consumers shifted behaviors during the great recession of 2008.
  • How different parts of the travel industry performed during the crisis including the hotel, airline, and travel agent sectors.
  • Winner Case Study: What Marriott did well to emerge from the last travel recession a stronger company.
  • Loser Case Study: Why the crisis forced Extended Stay America to declare bankruptcy and restructure its business.

Executive Summary

The current COVID-19 outbreak has put the world of travel on pause and given us all cause to reevaluate how we want to run our businesses. Skift Research is using the moment to look back on past crises and draw upon the lessons they can offer our industry. We recently published a report on what can be learned from the 9/11 and SARS crises, and this report will focus on the impact of the 2008/2009 financial crisis on travel in the U.S.

The 2008 global financial crisis was a systemic banking failure caused by the over-use of debt and risky investments while this current crisis is caused by a viral pandemic. But we still believe there are lessons from 2008/2009 that are useful today.

The commonality is of course, the massive economic harm suffered by business and consumers, regardless of source. In fact, unemployment claims today are greater than during the global financial crisis and tell a story of economic hardship on par with the Great Depression of 1929. While these claims may prove to be temporary once businesses re-open, there is no doubt the financial damage will be severe.

We divide this report into three sections, starting with a review of how most major travel sectors in the U.S. fared during the 2008/2009 crisis, and how long they took to recover. Next, we present a success case study of how Marriott was able to first survive the crisis, and ultimately embrace the opportunity to reinvent, allowing the company to come out the other side stronger. Lastly, we look at the unsuccessful case study of Extended Stay America that went into the crisis with an overoptimistic outlook and a poor cost structure, which led to its bankruptcy.

We draw lessons from each section that we believe are still applicable today. The lessons are:

  • Who’s up for a road trip?: Road trip popularity grew after the financial crisis as a cheap travel alternative. Add to that extra safety this time around and we expect a road trip revival.
  • The recovery is long and slow if the pain is deep: It took seven years for U.S. consumer spending on travel to regain highs from before the crisis. We can begin to anticipate some sort of anti-viral treatments and the early signs of recovery in the near-term. But a key question will be how much of the economic damage done is permanent. This will vary by country, but if U.S. jobs do not return rapidly, we should not expect our industry to fully heal for many years to come
  • It’s not just top-line that matters; profit is just as, if not more, important: Managers must maintain a dual focus on guiding top-line to a recovery while not taking their eye off the ball regarding profit. A full recovery in demand with a poor and unsustainable cost structure is meaningless.
  • Low tide reveals who is swimming naked: Often, companies are running on momentum alone, even as the entire market around them has changed. It is only when a crisis hits and forces a reevaluation that these businesses wake up to the trouble they are in, often too late.
  • The recovery starts in leisure: Leisure was an early segment to recover after the global financial crisis. This is likely to recur during COVID-19 recovery.
  • luxury was the first to go and the first to come back: Among Marriott’s brands, Ritz-Carlton saw among the worst performance in 2009 and among the best in 2010. This trend seems likely to repeat, given the luxury consumer can better afford to travel during an economic downturn and the segment is likely to be faster to offer higher levels of service and housekeeping.
  • Pricing power, once lost, is difficult to regain: Pricing discipline quickly disappears in a crisis and once the floodgates are opened, there is a race-to-the-bottom for room rates simply to maintain pre-existing market share. Once pricing power is lost, it is extremely difficult and time-consuming to regain. As a result, the recovery in RevPAR (Revenue per Available Room) will likely take much longer than the recovery in demand or occupancy.
  • The Big Get Bigger: Large businesses have many advantages in a crisis. In addition to cash and scale, they often benefit from a flight to quality among customers and suppliers. It may not be fair, but it’s true and seems almost certain to happen again in 2020.
  • Embrace the opportunity to reinvent: A crisis offers you a clean slate to build from. You no longer have to be tied to old ways of doing business. This is a chance to aggressively pursue new business development and leadership talent.
  • Debt needs to be handled with care: Debt will feature heavily in the recovery from our current coronavirus crisis. While debt can be lifesaving in a scenario like today with no cash flow, it means that small missteps, rather than being recoverable, become fatal.
  • The recovery is not real until business travel comes back: During the financial crisis, the travel market was made up of transient, price-sensitive, leisure travelers. This bodes poorly for many large travel corporations, from hotel chains and airlines to global distribution systems and travel management companies, that are built for business travel.
  • Asset light is preferable, where possible: Asset-light business models were resilient during the financial crisis. And while not every business can be asset light, it is important to look for opportunities to try and integrate principles of recurring revenue into your business model as best as possible.
  • The importance of modern properties and property management: Those with the strongest product and the ability to merchandise it the best are positioned to win. This current crisis is not the time to be doing revenue management based on gut decisions.

U.S. Travel Economics During the 2008 Financial Crisis

Consumer Spending

The global financial crisis of 2008 and 2009 hit consumers hard. Leisure travel, as a discretionary purchase, could easily be cut back during these times of belt-tightening. For this reason, Arne Sorenson says that, “[the travel] industry typically lags heading into a downturn and to recover.”

Digging deeper into trends, Skift Research built a unique time series of estimated American household spending on travel over the last 21 years. These estimates represent direct spending by U.S. consumers on travel goods and services on both domestic and international trips based on data from the Bureau of Labor Statistics’ consumer expenditure survey. Importantly these figures exclude spending by businesses, governments, and non-residents.

This long-dated time series is able to reveal unique travel trends from the financial crisis. Adjusted for inflation, U.S. consumers spent, in aggregate, $407 billion on out-of-town travel in 2007, at the height of that economic cycle. Spending fell by $60 billion, or 15% over the next two years to bottom at an aggregate spend of $344 billion.

The recovery in travel spending from the global financial crisis was a long, slow slog, returning to parity with the 2007 highs seven years later in 2014.

In contrast, after the travel peak in 2000 that marked the popping of the tech bubble and was followed up shortly thereafter by 9/11, it only took four years, until 2004 for travel spending to recover.


Exhibit 1:It took U.S. consumers seven years to return to pre-crisis travel spend


The reduction in travel spend was a two-fold process. First, households cut their level of spending altogether, travel included. Secondly, households cut what portion of annual budgets they wanted to dedicate towards travel. Comparing U.S. consumer spending on travel as a share of overall household expenses isolates these two trends. By 2012, travel as a share of overall expenses had nearly recovered – up to 5.6% of total expenses compared to 5.8% in 2007. But in real dollar terms, travel spending was still only about 2/3rds recovered. That missing third of the recovery in dollar terms is due to the lower overall level of consumer spending in 2012 relative to 2007.


Exhibit 2: Travel consumers cut their travel budget notably during the financial crisis


Finally, as a yardstick for this current crisis, it is interesting to mark that in recent recessions, both after the tech bubble and the global financial crisis, consumer consumption of travel fell to just about 5% of overall household budgets from a pre-crisis peak of typically near 6%. It may be reasonable to benchmark travel spend in the current environment to a similar share of household expenditures at 5% or less.

The Great America Road Trip

There is a growing consensus that driving will be one of the first ways that Americans return to travel after coronavirus. We agree. Not only does this make sense in the context of travelers wanting control over their immediate environment in the wake of a global pandemic, but a look back on the global financial crisis backs this up.

Using the same consumer time series data from the Bureau of Labor Statistics as above, we were able to isolate line-item expenses and build a measurement of consumer spending on self-driving road trips. We did this by aggregating spending for oil and gas while out-of-town (e.g. cost to fill up your own car), spending on rental cars, and on recreational vehicles.

We then benchmarked these “road trip” expenses to overall consumer spending on travel. We found that from a pre-crisis baseline in 2007, when Americans overall spent 9.2% of their travel budgets on driving, the popularity of the road trip shot up to account for 11.6% of all travel expenses in 2008. This trend continued for the entire time when travel was still in recovery. The road trip peaked in 2013 at a 12.3% share of American travel budgets.


Exhibit 3: Spending on self-driving travel grew as a share of the travel industry from 2008–2014


Driving expenses as a share of travel expenses sharply declined starting in 2014, perhaps uncoincidentally the same year that overall U.S. consumer travel expenditures regained their pre-financial crisis peaks. It settled back in at 8.5% of overall trip spending by 2017, about the same level it started at in 2007.

We can corroborate this by looking at the shipment figures of recreational vehicles (RVs) in the U.S. Though the overall volume of RVs shipped would continue to grow throughout the last cycle, the two strongest years of percentage growth over the two decades came in 2010 and 2014 as part of the post-crisis recovery in travel.


Exhibit 4: RV sales growth peaked coming out of the recession.


Airline Sector

U.S. airlines are an interesting study in contrasts coming out of the financial crisis. Top-line revenues recovered rather quickly but passenger volumes did not and neither did profitability.

As we can infer from the above, with an uptick in travel by driving, the loser is primarily travel by air, in particular domestic air travel. Domestic air traffic, hit from the leisure and business side of the market, lost 61 million passengers from 2017 to 2019, going from 679 million at the high to 618 million at the low. The damage was so bad that it took 88 months, just over seven years, for domestic passenger traffic to regain 2008 highs. For comparison’s sake, that’s twice as long as the recovery in international passenger enplanements took, at just 42 months.


Exhibit 5: International passenger traffic recovered much faster than domestic


Yet despite this weaker demand environment, revenue recovered faster than one might expect. While not speedy by any means, industry revenues were back to their 3Q 2008 peak within four years, by 3Q 2011.


Exhibit 6: U.S. airline revenues recovered quickly, back to the highs by 2011


Part of the reason for this was that U.S. airlines acted aggressively to reduce capacity. By cutting scheduled flights, the airlines saw only a brief dip in load factors, the share of seat miles flown occupied by paying revenue customers (equivalent to occupancy in the hotel world).

Less capacity also helped support passenger yields (equivalent to room rate in the hotel world), which after falling a dramatic -12% in 4Q 2009, stabilized and grew from 2010 – 2012. Part of this price increase can also be attributed to a greater mix shift towards more expensive international passenger demand and the pass-through effect of nearly $100 oil in 2011 – 2013.


Exhibit 7: Capacity cuts helped support load factors; yields struggled for several years


Top-line figures though are only one part of the story, and the U.S. airline industry would not emerge from the financial crisis unscathed. While revenue would return by 2011, airlines are notoriously unprofitable, they lost money before the financial crisis and would continue to do so for years thereafter.

On a profit basis, the U.S. Airline industry would lose a collective $24 billion, a margin of -13% . Carriers stemmed their losses in 2010, but still struggled to make money as they were faced with near-record high oil prices, low-cost carrier competition, legacy labor contracts, and a tepid consumer recovery. Ultimately, profits would not come back to the industry until 2013. This slow recovery in profits would ultimately lead to a wave of bankruptcies, restructurings, and consolidation in 2010-2013.


Exhibit 8: Despite the rapid recovery of revenue, profits would remain elusive for the airline industry after the crisis


Hotel Industry

U.S. hotel occupancy hit its peak of 63.2% in 2006, but held strong through 2007. It wasn’t until 2008 when demand for 28 million room nights disappeared that occupancy really took a hit, dipping to 59.8%. Occupancy would bottom in 2009 at 54.6% and take 8 years to fully regain its prior peaks with an occupancy of 64.4% in 2014.

While occupancy was falling in 2008, hotel pricing power continued its upward trend reaching a peak average daily rate of $107.4. Discounting in the recession would push room rates to a low of $98 in 2010. By 2013, ADRs of $110 would finally surpass the pre-crisis levels.


Exhibit 9: It was a long, slow, recovery for the U.S. hotel industry


Combining both metrics, we can see the pace of recovery in U.S. hotel revenue per available room (RevPAR). In 2007, RevPAR would reach its pre-crisis high of $66, but then quickly fall in the crisis. At its worst in 2009, RevPAR fell a whopping 17%. Growth rebounded in 2010 and after four years of mid-single digit RevPAR growth, by 2013, the industry would be earning per-room profits above where it was during the crisis. A total recovery time of six years.


Exhibit 10: It took six years for U.S. hotel RevPAR to fully recover



Exhibit 11: RevPAR growth bounced back fairly quickly but off of a low base


Travel Agents

The impact of the financial crisis on travel agents was split along digital lines. Online travel agencies like Expedia Group and Booking Holdings (then doing business as Priceline) were still in the early stage of their growth journey and the financial crisis would help them develop into the travel behemoths they are today.

Hotels, which might have previously been reluctant to sign up for an OTA, were suddenly eager to add any new distribution capability, regardless of the high commission rates. Unlike today, when there is effectively no travel happening, even in the depths of the financial crisis there were small pockets of travel demand out there. And hoteliers of all sizes and stripes were willing to bid for it

This shifted the balance of power between travel agencies and their suppliers, especially since the online booking sites could serve as global aggregators of demand whereas a hotel could typically only market itself in its own region.

Overall the worldwide effective take rates at the two largest global OTAs, Booking Holdings and Expedia Group, declined during the 2008/2009 financial crisis. But this is as much a function of evolving business models and the two players emerging from sub-scale. But digging deeper into the data, marginal take rates, the commission earned on incremental new bookings earned in a given year (i.e. new revenue divided by new bookings in a given year), tell a different story.


Exhibit 12: Overall OTA take rates did not benefit during the Global Financial Crisis but…


Our work shows that Booking Holdings generated a 24% commission globally on new incremental bookings that came onto the platform in 2009, above and beyond those that would have been otherwise earned in 2008 and other past years.

This potentially indicates a mix shift, where new independent hotels desperate for additional distribution flooded onto the platform in 2009 in the depths of the global recession, and these small hotels paid the highest tier of Bookings’ commission.


Exhibit 13: …Marginal take rates on new reservations at Booking Holdings suggest the company saw great strength in 2009


However, we should note this trend was a lot less clear at Booking’s biggest rival Expedia Group, which had a negative marginal take rate in 2009, making comparisons difficult. However, it does appear to follow a similar trend, with marginal take rate rising from 10% in 2005 to 17% in 2008 as the crisis began to take hold.

Further benefiting the online travel agencies is that consumers too, were primed to shop on the booking sites. The web was just hitting mainstream adoption and the online travel agencies had a strong reputation as discounters, especially since rate parity was not the buzzword it is today.

Crises are inflection points where consumers reshape their behaviors, and sites like Expedia, Orbitz, and Priceline fit perfectly into the new market demand for price-sensitive leisure travelers shopping online.

Online booking sites were one of the few businesses anywhere, let alone in the travel sector, to grow throughout the global financial crisis. Combined, Expedia Group and Booking Holdings would increase their worldwide gross bookings from $25 billion pre-crisis to $31 billion by 2009, in the depths of the recession. The only real sign of the times can be found in the deceleration of their growth rates, going from a 21% pace in 2007, to a still solid 9% gain in 2009.

The online travel agencies would be one of the only travel sectors to experience a true “V-shaped” recovery, rather than the more drown out “U-shape” of the hotels or double-dip “W-shape” of the airlines. By 2010, gross bookings were back growing at a 27% rate and would continue to increase at a 20%+ clip for the next four years until 2015.


Exhibit 14: Online travel agencies one of the few to see bookings growth even in the depths of the recession


It was a tale of two cities within the travel agency business, however. While the online booking sites quickly recovered, the same cannot be said of offline travel agents who were on the wrong side of the switch to digital. This is evident in the employment figures out of the crisis.

Hotel sector employment followed the same path as the broader labor market. And although a slow recovery, hotels, motels, and casinos had recovered the collective 144,000 jobs lost during the recession by 2014. Airlines took a longer path, as the industry bankruptcies, consolidation, and cuts in capacity all took a toll on the labor market for air transportation workers. Nonetheless, employment in the sector had returned to pre-crisis levels by 2018.

Travel agent employment, however, tells a different story. Job losses in this sector were three to four times worse than in any other travel sector. Employment in the industry has never fully recovered from the global financial crisis.

This is part of a structural decline in the offline travel agency business playing out since the mid-90s, but the global financial crisis acted as an accelerant to bring forward years of layoffs among travel agents into one short timeframe.


Exhibit 15: Offline travel agent employment would never recover from the crisis


Crises are a time of reevaluation and self-reflection for all businesses. Business models that were barely holding on pre-crisis are forced out of business and even at surviving organizations, managers have a freer hand in cutting non-essential staff. The results are what we see above, and while travel agents will not go away, clearly many brick-and-mortar leisure travel agencies had outlived their moment and missed the shift to digital.

We believe that many more weak hands will be forced to fold in this current crisis as well.

Lessons from U.S. Travel Economics During the Global Financial Crisis

Who’s up for a road trip?
In the last crisis the use of self-driving, whether in an owned vehicle, a rental car, or an RV soared. Americans allocated 11-12% of their travel budgets to driving after the recession compared with 8-9% before. At the time this was a cost-saving measure as driving tends to be cheaper than flying or taking the train long-distance.

This time around, the rationales for road tripping are even stronger. Not only will economic hardship bring back driving as a cost-effective means of transport. But in the wake of coronavirus, cars will offer travelers a sense of control and security over their personal space. These dual motivations are likely to make road trips a leading trip option in the immediate aftermath of COVID-19 travel restrictions.

The recovery is long and slow if the pain is deep
Following the global financial crisis, it took seven years for U.S. consumer spending on travel to fully recover. Seven years for domestic passenger volumes to make new highs. Six years for hotel RevPARs to return to pre-crisis levels.

The severe economic hardship of the global financial crisis left its mark on the psyche of many Americans which showed itself in how they traveled for both business and leisure. Regardless of your role in the travel industry, in most cases it took more than half a decade to fully recover.

The current COVID-19 crisis has different roots, it is rapidly transforming from being purely an epidemiological disaster to an economic one as well. Unemployment claims are already higher than they were during the great recession. If those jobs don’t come back soon the financial hit to consumers and businesses will be extreme.

Perhaps we can begin to anticipate some sort of anti-viral treatments and early signs of recovery in the near-term (e.g. 6-18 months). But if the economic damage done is permanent, we should not expect our industry to fully heal for many years to come.

It’s not just top-line that matters; profit is just as, if not more, important
The recovery in U.S. airline revenues was among the fastest of any travel industry, back to pre-crisis levels within four years. But that hides deep-cutting wounds exacerbated by the crisis. Airlines had hardly been profitable before the crisis and would not return to a profit for many years even after their revenues had returned. This led to a wave of bankruptcies and restructurings which help explain why air transport employment took a full decade to recover.

Our second case study of Extended Stay America, below, also demonstrates this point. Even though room revenues ultimately returned relatively quickly, a poorly run cost-structure sent that company into one of the largest hospitality bankruptcies of the crisis.

The same principle will hold for this current coronavirus outbreak. Managers must maintain a dual focus on guiding top-line to a place where it can recover while not taking their eye off the ball regarding profit. A full recovery in demand with a poor and unsustainable cost structure is meaningless. This crisis actually presents an opportunity for travel leaders to think about how they have structured their business, what their greatest costs are, and how to restructure those to be more efficient.

Low tide reveals who is swimming naked
If a rising tide floats all boats, then the opposite is true as well. It is only during a falling tide, as Warren Buffet likes to say, when you realize who has been swimming naked.

Many business models and in some cases whole industries are running on momentum alone, even though the market has changed around them. Like boiling a frog, the changes build slowly without industry incumbents realizing it. It’s only when a crisis hits and forces a reevaluation do these businesses wake up to the trouble they are in, often too late.

Most notable during the financial crisis was the shakeout that happened in traditional, brick-and-mortar based travel agents. For years, the shift to digital booking of travel had been growing in prominence, but for the most part the two were able to co-exist. However, the financial crisis truly cemented the shift to digital as both the online booking sites and sites became the go-to method for booking leisure travel. 13,000 travel agent jobs were permanently lost during the crisis. These jobs never came back, unlike other sub-sectors that saw a slow, but steady recovery in headcount.

The same will happen again with COVID-19. Brands that operate through intermediates and that don’t have the trust of the consumer or the ability to communicate directly with them will suffer.

Many other seismic shifts could potentially take place as well. Take the example of Airbnb, which was founded in 2008, during the depths of the crisis. Though it began by solving for how to travel affordably and generate extra income in a time of austerity, the company would prove the spark that revolutionized the short-term rental industry and, even more broadly, how we travel today.

What could be the major shift with this crisis? A shift towards more local tourism? A move away from crowded cruises and all-inclusive? A greater emphasis on virtual rather than physical experiences? All of these options and more are on the table today.

Winner Case Study: Marriott

Marriott’s Setup into the Crisis

Marriott is today the world’s largest hotel company with more than 30 brands and nearly 1.4 million rooms, of which a third are overseas. We will be primarily focused on its North American operations for this case study.

Looking back to 2008, while the global financial crisis surprised the world in its severity, there were still warning signs of an economic slowdown building before the crisis reached its peak with the failures of Lehman Brothers on September 15th 2008.

When Marriott reported its 3rd quarter earnings on October 4th 2007, it saw few clouds on the horizon and gave an outlook for strong growth in 2008. Five days later on October 9th, 2007 the S&P 500 would hit its highest pre-crisis closing, a level it would not return to until 2013.

By February 14th, 2008 when Marriott reported full year 2007 earnings, J.W. “Bill” Marriott, Jr., Marriott’s chairman and chief executive officer sounded a modest warning that the company was well-positioned to, “tackle short-term economic challenges.” He still expected growth in the full year of 2008. Revenue per available room (RevPAR) was still increasing moderately in absolute dollar terms but year-on-year RevPAR growth had been decelerated since the second half of 2006.

Finally, the first real alarm bells from Marriott came at the NYU Hospitality conference in June 2008, when Bill Marriott told investors the company was seeing “weak weekend leisure demand and softer mid-week demand… indicating that he would be surprised if North American RevPAR strengthened in the second half of the year.” He would be right about this with 2Q 2008 representing the company’s peak RevPAR that cycle in North America. North American RevPAR growth would cross into negative territory in 3Q 2008 and International RevPAR would follow one quarter later.

Marriott Responds

Marriott responded with three major prongs: 1) conserving cash, 2) stemming revenue declines at the property level, and 3) expanding market share.

Cash Management
On the cash conservation side Marriott secured a $1bn+ line of credit to secure liquidity, but also worked aggressively to cut costs. Marriott laid off over 1,000 staff while many more saw cuts in hours worked or salary and bonuses were forgone.

Marriott also cut costs on the supply-side, switching up its supplier of breakfast bacon and replacing Häagen-Dazs ice cream with the cheaper Edy’s brand. Hotel operations were trimmed back with shorter hours for some restaurants and spas. The company even stopped giving out newspapers to all guest rooms, saving the company an estimated 18 million papers a year.

Revenue Strategy
In order to stem revenue declines, the company turned to new distribution channels, its loyalty program, and promotional discounts.

On the distribution channel front, this included “add[ing] business from the federal government, travelers using AAA, and senior citizen discounts,” according to Carl Berquist, Marriott’s CFO from 2009–2015. Marriott also announced enhancements to its loyalty program that included the elimination of blackout dates for redemptions, a 5th night stay free on 4-night redemptions, and increased bonus points per stay for elite members.

These first two moves were to add incremental new business. Finally, though, the company also resorted to discounting its room rates. This move did not bring in any new business, but was part of a tit-for-tat response to the competition cutting its rates. Berquist explained on April 23, 2009 that, “we are already seeing significant competitor discounting of room rates… Marriott will not lead the market down on rate, but we also do not intend to lose share by failing to respond.”

Here, it is worth breaking RevPAR down into its two drivers: occupancy and room rate (measured as average daily rate, or ADR).

Occupancy rates were the first sign of a problem, showing weakness as far back as December 2007, when the U.S. officially entered recession, though room rates would continue to rise until 3Q 2008. By September 2008, the global financial crisis was in full swing and at that point ADR and Occupancy rate quickly collapsed and bottomed within a quarter of each other late-2009 / early-2010.

But the path to recovery looked quite different for each key metric. Occupancy rates recovered much quicker than expected while room rates took a full 15 months longer to return to September 2008 levels.


Exhibit 16: It took an extra 15 months for Marriott’s room rates to recover relative to occupancy


With both U.S. consumers and businesses so hurt by the financial crisis, all travelers were bargain hunters. Business travel was slower to recover than tourists. Marriott saw a mix-shift towards “price sensitive leisure travelers.” In the second quarter of 2009, Marriott reported a 12% increase in leisure room nights and on the group side a 7% increase driven by “weddings, sports teams, family reunions and the like,” but not by the standard MICE (meetings, incentives, conferencing, exhibitions) bulk business. In fact, in 2Q 2009 Marriott saw higher weekend occupancy, than weekday occupancy, which the company called a “very surprising statistic,” given the spring peak in business travel.

Plus, of course, hoteliers simply wanted to fill rooms at any price to maintain occupancy and cover their fixed operational and finance costs.

This race-to-the-bottom industry dynamic around pricing goes a long way to explaining why it took so long for RevPAR to fully recover. It would be a long slog, until June of 2014, a full six years, until Marriott’s RevPAR in absolute dollar terms returned to its pre-crisis high.


Exhibit 17: It took six years for Marriott’s RevPAR to fully recover


Development Strategy
Let’s look back at what CEO Bill Marriott’s said in January 2009. He laid out the company’s crisis response priorities as, “first, we are focusing on driving higher market share at the property level and through new room additions. Second, we are enhancing our cash flow by reducing investments in new projects. And third, we are reducing costs in all areas of our business to reflect the realities of the marketplace.”

The company went into the global financial crisis with a record 130,000 new rooms in its development pipeline as of September 2008. With that context it’s interesting that Bill Marriott’s very top priority, even in the depths of the crisis, included “new room additions.”


Exhibit 18: Marriott continued development throughout the crisis, maintaining a healthy pipeline of new rooms, even in 2009


Marriott would use this period of market weakness to its advantage to add to its portfolio of hotels both by partnering with developers on new projects and by converting existing hoteliers to one of its many flags. This would allow the company to exit the crisis bigger and stronger than when it started.

Arne Sorenson, then Marriott’s President and Chief Operating Officer, said in October 2009 that during crises, there is often a “flight to quality,” to be affiliated with leading brands.

Existing hoteliers looked to convert their properties to a Marriott flag to tap into the company’s distribution network, loyalty program, and expertise. In 2009, 19 hotels converted into five different Marriott brands, bringing nearly 4,000 rooms with them. But conversions in the peak of the financial crisis were slow because, as Sorenson explained in 2010, “lenders have been hesitant to recognize losses and owners are hanging on for tomorrow.” However, with $40 billion in hotel mortgage-backed securities coming due in 2011 and 2012, losses had to finally be recognized and more hotel properties came under new ownership. The Marriott development team targeted these properties for conversions and drove 26,000 rooms onto the company’s platform from competing brands in 2011 – 2014.

Underlining this effort, Marriott launched its first soft brand, the Autograph Collection in 2010, which specifically targeted existing independent hoteliers. The soft brand charges lower fees than a typical franchise deal and allows hoteliers more independence to manage their properties while still tying the hotels into Marriott’s loyalty program. Autograph group President Robert McCarthy, in the brand’s launch press coverage added that, “he believes financial difficulties faced by many independent properties will make the properties ripe for conversion to the new brand.”

Autograph would sign up 13 new properties with 3,828 rooms in 2010 and double to 27 properties with 6,105 rooms by the end of 2011


Exhibit 19: After hitting the bottom, Marriott converted growing number of rooms over to its brand from existing properties as a part of its recovery strategy


In addition to conversions, new developers, and perhaps more importantly their lenders, favored the high credit quality of Marriott for hotel projects over an independent operation or a smaller brand. In addition to new construction of existing brands, Marriott also launched two new brands for greenfield construction, Edition Hotels, first announced in 2008 and opened in 2010, and AC Hotels in 2011.

The bottom line is that Sorenson found the depths of the financial crisis to be “great for us in the environment of competing for new management and franchise agreements.” His statement is borne out by the below chart showing 2009 as Marriott’s best year for net new room additions since 2001 and until 2014.


Exhibit 20: Between new developments and conversions, Marriott saw some of its best new room growth in 2009 at the peak of the crisis


Lessons From Marriott During the Global Financial Crisis

The recovery started in leisure
Leisure was the very first segment to recover after the global financial crisis with weekend outpacing weekday occupancies at Marriott. Business travel was slow to return, especially in the MICE segment. The root causes of this current crisis are different, so it is unclear if we will take the same path. Certainly though, group travel will be slow to recover in this crisis, handicapping business travel for conferences and exhibitions, though some unmanaged travel may be early to re-appear. Last time around, Marriott saw some personal groups such as weddings recover early. But that is unlikely to come back as quick today.

Luxury was the first to go and the first to come back
Sorenson called out Marriott’s luxury Ritz-Carlton brand as having the worst performance in Q2 2009, during the depths of the crisis. But flash-forward to Q1 2010, when the recovery first started to kick in, and Marriott’s “worldwide luxury business showed outstanding results,” according to Sorenson. The Ritz-Carlton saw an abrupt flip in 2010 with January RevPAR down -2.4%, February 2010 up 7.6%, and March up 15.7%. That last figure is twice as fast a recovery as the overall Marriott portfolio which saw RevPAR grow 7.1% in March 2010. This trend seems likely to repeat to us, given the luxury consumer can better afford to travel during an economic downturn and the level of service and housekeeping is likely to be upgraded quickly for this segment

Pricing power, once lost, is difficult to regain
Occupancy is often the first sign of declining demand as, at the margin, hotel general managers would rather let a few rooms go empty than lose pricing power. But this pricing discipline quickly disappears in a crisis and once the floodgates are opened, there is a race-to-the-bottom for room rates simply to maintain pre-existing market share. Once pricing power is lost, it is extremely difficult and time consuming to regain. It took until 2014 for Marriott to regain its 2008 room rates. This is likely to replay in this crisis with rates already slashed to low levels. As a result, though in some markets, such as China, while occupancies seem to be stabilizing or recovering moderately, we warn that the true recovery, measured in RevPAR, will take longer.

The Big Get Bigger
Large businesses have many advantages in a crisis. They typically start out with larger cash balances and have greater access to capital markets to bolster those reserves. Their scale in distribution, customer loyalty, marketing, suppliers, and more mean they feel the pain less than a mom-and-pop business would. Finally, you have a flight to quality phenomenon where new business development skews towards being affiliated with a well-established brand and existing hoteliers want to switch sides. It may not be fair, but it’s true. The big get bigger in a crisis and that seems almost certain to happen again in 2020 and beyond.

Embrace the opportunity to reinvent
A crisis offers you a clean slate to build from. You no longer have to be tied to old ways of doing business. Marriott used the opportunity to aggressively pursue new business development and came out of the crisis with three new brands and 72,000 new rooms in 2011 compared to 2008. It restructured its cost basis and supplier contracts.

Perhaps most importantly, Marriott named Arne Sorenson President and Chief Operating Officer of the company in 2009. Conventional wisdom would have been to not change your horse midstream. 2009 was a daring time to bring new blood into the leadership of the company. But ultimately it proved to be prescient long-range leadership planning and set the stage for Sorenson to become the first non-Marriott family member to be CEO of the company in 2012.

Loser Case Study: Extended Stay America

Extended Stay America’s Setup into the Crisis

Extended Stay America was founded in 1995 as a developer, owner, and operator of extended stay hotels.

The extended stay segment blends the limited service hotel category with apartment-like offerings, and rooms typically include a kitchen. Typical use cases include working on an ongoing offsite project, housing for the extent of a multi-day corporate training, or as a temporary relocation during a household move. As a result, Extended Stay America’s typical length of stay is 18 – 20 days compared to an industry average of 2.5, and business travelers account for 60% of its room nights compared to a 40% industry average.

In good times, this results in higher than industry average occupancy and the resulting lower turnover, paired with the limited service model, boosts operating margins. In 2007 the extended stay hotel industry operated with an occupancy rate of 73.8% compared to an overall industry average of 63.1%

Extended Stay America began with new hotel developments, but over time shifted to become a consolidator, acquiring other extended stay hotels. This trend accelerated after its buyout by private equity giant Blackstone in 2004 for $2 billion. Unlike peers, such as Marriott and Accor, Extended Stay America did not pursue an asset-light strategy and instead chose to both own and operate the vast majority of its properties.

By 2007, Extended Stay America was the largest owner and operator of mid-range, extended stay hotels in the U.S., with 683 properties totaling 76,000 keys across 44 states and 10,000+ employees. That year, Blackstone sold the company to Lightstone Group in an $8 billion+ levered buyout, of which $7.4 billion in debt financing was used, representing a ~13x debt to EBITDA ratio. Of that debt financing portion, $4.1 billion was in the form of a commercial mortgage backed security securitized by Wachovia.

This left an asset-heavy Extended Stay America laden with debt at the top of the market cycle with heavy exposure towards business travel, which would be most affected in the coming recession.

Extended Stay America’s Bankruptcy

Extended Stay America was hit hard by the financial crisis, as were many other business travel exposed hospitality businesses.

By 2008, Extended Stay’s occupancy rate had decreased to 64.5%. We don’t have company-specific data for 2007, but the industry average occupancy for mid-range extended stay that year was 69.8%, making it reasonable to suggest that the company experienced a 5 percentage point fall in occupancies.

Room rates fell a peak to trough 26% from $57 in 2008 to $42 in 2010. As was the case with Marriott, Occupancy rates were both the early canary in the coal mine and the first to recover post crisis. While occupancies regained highs by 2010, ADRs took far longer to recover, not returning to peak levels until 2014.


Exhibit 21: Extended Stay America’s occupancy recovered quickly but pricing power took a long time to return


Revenue per available room took a big hit, down an estimated -7% in 2008, followed by a dramatic -19% decline in 2009. RevPAR returned to growth fairly quickly thereafter, though it took until 2013, six years, to return to pre-crisis levels.


Exhibit 22: RevPAR returned to growth quickly but it took six years to regain pre-crisis levels in dollar terms


It is worth pointing out here that, while bad, this was not that much worse than the rest of the hotel industry. Take Extended Stay’s trough decline of -19.4% RevPAR in 2009. By comparison in 2009, the broad hotel industry saw RevPAR decline of -16.6%, while Marriott saw RevPAR decline -17.2% for the full year. In its single worst quarter, 2Q 2009, Marriott’s RevPAR fell -21.2%

So yes, Extended Stay America marginally underperformed its industry peers, but the difference between success and failure of the business was not those two percentage points of RevPAR performance. It was Extended Stay’s debt load.

In fact in 2008, hotel operating expenses were $462 million while interest expense on the company’s $7.4 billion of debt was $485 million. It cost more to service the debt, than to run the hotels! Even though Extended Stay was turning a property level profit, this level of debt was unsustainable during the recession and would lead to the company filing Chapter 11 bankruptcy in June of 2009.


Exhibit 23: In 2008 it was more expensive for Extended Stay America to service its debt, than to run its hotels


Extended Stay America entered bankruptcy with $7.6 billion of liabilities due on a base of only $7.1 billion in assets. It would be one of the largest and most complex hospitality defaults of the financial crisis.

The bankruptcy became one of the most prominent commercial mortgage backed security defaults of the crisis and became a test case for the enforceability of certain technical provisions embedded in those complex securities. The intricate financing structure meant that many lenders were involved, including Wachovia and Bear Stearns, both of which went under during the financial crisis. And since the Federal Reserve picked up many of their assets, this left the U.S. government as a creditor in the bankruptcy.

Extended Stay America would restructure and exit bankruptcy in October 2010 by being sold to a consortium of private equity investors for $3.9 billion after writing off $5 billion in defaulted debt. The PE shops included Centerbridge Partners, Paulson & Co., and, ironically, original pre-crisis owner Blackstone. These private equity firms would bring Extended Stay America public in 2013.

Lessons from Extended Stay During the Global Financial Crisis

Debt needs to be handled with care
In 2009, Extended Stay America generated $833 million of hotel room and ancillary revenue while its properties cost $440 million to operate. That means that at the absolute darkest point of the crisis, the company still generated a 47% property level margin. The biggest issue for Extended Stay America was an irresponsible use of debt based around over-optimistic planning scenarios.

Debt will feature heavily in the recovery from our current coronavirus crisis. Many large corporations have tapped new debt issuances and drawn down lines of credit. Small companies have taken out Small Business Administration loans, most of which will not be forgiven.

Debt is not in-and-of itself a bad thing. It can be great for bridging cash flow in times of crisis like today. But what it does is it limits companies’ flexibility. Business models become more brittle and it is essential that managers take off their rose-tinted glass when planning for the future. While debt can be lifesaving in a scenario like today, with no cash-flow it means that small missteps tomorrow, rather than being recoverable, become fatal.

The recovery is not real until business travel comes back
Extended Stay America was, and still is, heavily skewed towards business travel. And to use our previous example, Marriott told us the same thing. Sorenson said in October 2009 that though, “leisure business is very important to us [Marriott], overwhelmingly [the recovery is] going to be a question of corporate business.” To add insult to injury, Marriott reported that transient travelers made up 60% of its business during the crisis.

In sum, during the crisis the travel market was made up of transient, price-sensitive, leisure travelers. The exact opposite business that extended stay hotels in the mid- to upper-range market are built to attract.

This is the case for so many other major travel businesses. From hotel chains and airlines to global distribution systems and travel management companies, many large travel corporations are built for business travel. And until business travel comes back, the industry cannot truly recover.

This, sadly, bodes poorly for our industry during this current crisis. Most businesses have found the switch to remote work rather seamless and we suspect that duty of care obligations and liability concerns will prevent many major corporations from sending their staff on travel for the short- to medium-term.

Asset light is preferable, where possible
One of the big lessons from the financial crisis is the resiliency of asset-light models. Even in the depths of the recessions, franchisors like Marriott, Hilton, and Accor, were able to collect franchise fees. These recurring cash flows are much more stable and predictable than the room revenues that asset heavy models like Extended Stay America count on. This left Extended Stay more vulnerable during the downturn, further exacerbating its debt issues.

Yes, not every business can be asset light. At some point, somebody somewhere must be willing to plunk down the cash to buy heavy assets like hotel real estate or airplanes. But the lesson is to look for opportunities to be asset light and to try and integrate the principles of recurring revenue into your business model if possible.

In recent years, Extended Stay has begun to diversify its revenue streams by refranchising many of its properties.

Importance of modern properties and property management
Though we did not discuss it much above, as over-leverage was the key reason for the bankruptcy, Extended Stay also didn’t run the tightest management ship heading into the financial crisis.

For instance, in 2011, immediately after exiting bankruptcy, Extended Stay employed just 13 associates in its revenue management department. These staff employed no forward-looking tools and made highly reactive, “gut driven,” pricing decisions. The company has since integrated modern, automated revenue management tools with daily forecasting capabilities and 40+ associates. The Revenue management implementation boosted RevPAR by 130 basis points leading to gains of $14 million of EBITDA annually.

Extended Stays properties too were getting old by the time of the financial crisis and a major pillar of the post-bankruptcy recovery plan was to invest significant capital expenditures on renovations. By 2016, it had renovated 495 of its nearly 630 properties and saw a four-point boost in RevPAR at newly redone locations.

In order to recover and grow out of a crisis it is crucial to continue to invest in the business both at the physical property level and on the technology and operations front.


History doesn’t repeat but it often rhymes. COVID-19 has a different root cause than the financial crisis of 2008, but there are still lessons from that last crisis that apply today.

Let us be clear that the case studies singled out in this report say nothing about how those companies will fare this time around. In fact, Extended Stays America reported Q1 2020 earnings on May 6 that showed some of the strongest results in the hotel industry. It’s combination of long length-of-stay and limited service product are well-suited for this current epidemic, leading to an outstanding 61% occupancy rate in April 2020. It’s a shocking statistic, but Extended Stay America today operates more hotels with an 80% or higher occupancy than it does hotels with a 50% or below occupancy.

At Marriott, while a quarter of its properties are closed, the company believes we may be passing through the bottom of the cycle. Arne Sorenson, now CEO, reports that, “lodging demand in most of the rest of the world has stabilized, albeit at very low levels.” His limited service brands are seeing the first green shoots with Sorenson describing 20% occupancy in North America and properties “benefitting from leisure and drive-to demand.” This is in line with lessons distilled above that road trips and leisure will lead the recovery.

In another example of history rhyming, take executives Marriott, Wyndham, Hyatt, and Choice Hotels all of whom have all already highlighted their plans to expand by converting properties over to their flags. This follows the tactics that Marriott pursued in 2009, capitalizing on a flight to quality among hotel owners and their lenders.

COVID-19 is likely the greatest crisis that the travel industry has likely ever in its history. We will need to rely upon all the many hard-earned lessons gleaned from years of experience to emerge from it stronger.