Rethinking the staycation

ARTICLE | August 10, 2020

Authored by RSM US LLP

As cities slowly awaken from coronavirus-related lockdowns and reopen their economies, regions that rely on auto travel are leading the nascent recovery in the hospitality sector.

Low gas prices, concern over air travel and convenience for drivers are prompting a revival in parts of the hospitality industry. But for how long?

A combination of low gas prices, concern over air travel and convenience for drivers in many markets is prompting hotel operators – particularly on the more affordable end – to serve what they see as a pent-up demand for travel as stay-at-home orders are lifted.

“We expect Americans will choose to drive when their ability and appetite for travel return,” Patrick Pacious, chief executives of Choice Hotels International, told investors during an earnings call on June 15. Budget-minded hotel groups like his would benefit, he said, adding that “guests will replace lavish trips with lower-cost getaways.”

Now, hotel operators are gauging just how much demand is required to justify reopening their properties.

For a while, the results were encouraging for hotel operators. Occupancy for available rooms edged up to 45.6% overall for the week ended July 4, a marked improvement from the low of 22% from the week of April 11 — still a shadow of the pre-COVID market with a negative variance of 30.2% compared to the same week in 2019.

But not all the results for July 4 were positive. Total rooms sold of 16.08 million fell from 16.14 million the previous week – the first decline in rooms sold since the week ending April 11, according to STR, an industry research firm.

In addition, the reemergence of the virus seemed to stoke fears among potential travelers. Although the hospitality industry hoped the sun and sand of Florida beaches would vault results on the normally busy July 4 holiday weekend, 10 of 11 major Florida coastal markets showed declines of occupancy from the previous weekend.

Based on data aggregated by STR and the Transportation Security Administration, total TSA throughout – or the number of travelers passing through its checkpoints — was approximately 60% of total rooms sold the week of March 7. That relationship collapsed to approximately 8% on the week ending April 18 and has since climbed to 18% for the week ending June 6.

The smaller ratios suggest that guests are opting to drive to hotel destinations to manage risk. Drive-to demand is more prevalent in sprawling states (Texas), areas with beach access (Florida) and smaller markets that have limited air travel options with sufficient outdoor amenities (Gatlinburg, Tenn.).

Affordability matters

At the same time, travelers appear to be gravitating to the more affordable end of the market, even as the very top of the market has held up relatively well. Data on Google searches for Extended Stay America and Hilton Hospitality indicates travelers are looking less for the amenity-rich options as the economy option appears relatively unscathed by the pandemic.

Relevancy scores, which describe relative popularity for search results over a period of time, for Hilton peaked at 100 for the week ended July 14, 2019, dropped to a low of 22 the week of April 19 and have since rebounded to 40 for the week ended July 4.

During the same period, Extended Stay properties ranged from 10 to 18, suggesting a lesser share of the market, but indicative of the resilience of the economy tier as the industry tanked.  With the prospect of air travel appearing to be a health risk in the short run, drive-to destinations are appealing to road warriors with a flavor for adventure to distant locations.

According to mobility data for travelers in all 50 states, cars traveled greater than 250 miles on Memorial Day weekend at a clip comparable to the peak before the nation’s lockdown and at an approximately 22% greater rate in June compared to February and early March.

The thirst for travel to hotels will continue to be constrained by fears of contracting the coronavirus and its spread in publicly shared spaces, especially in states with renewed outbreaks like Arizona, Texas and Florida.

Until a vaccine or reliable therapeutic is developed and distributed, a share of the business and leisure travel population will avoid potential pitfalls.

Global hotel brands like Hyatt, Marriott, Four Seasons and Hilton have announced extensive safety measures to provide guests with consistent and comprehensive safety protocols. They come at a steep cost, though – about $9 billion per year or approximately $3 per occupied room night.

Costs from operating supplies, which include cleaning materials and personal protective equipment like masks and gloves, rose more than 15% per occupied room in May. Hotel operators are trying to satisfy the reluctant traveler at the expense of razor-thin margins and avoid the one bad review on a travel site, which can be significantly damaging.

Can this last?

Ultra luxury and economy tiers have been holding up the hospitality industry during the COVID-19 crisis, but for how much longer?

The high-margin business events and conferences that push the financial needle for the upper- and middle-tier hotels will most likely not make a meaningful reemergence until early 2021.

Middle-tier hotels will most likely not make a meaningful reemergence until early 2021.

Until then, most of these hotels will need to consider furloughs, reconfiguration of current spaces to more profitable ventures and capital investment in infrastructure to encourage travelers as the pandemic passes.

While employment data has been encouraging for the sector as hotels and restaurants reopen across the country, the recent reversal of re-openings and increased pace of infections will most likely cause the recall of workers to slow or even lead to an increase in sustained joblessness for the sector.

The latest employment report shows a significant increase from the 7,406,100 low employment figure recorded in April for the accommodation and food services jobs to 10,477,000 for June. While encouraging, these figures are still way off the pre-pandemic February figures totaling 14,394,400.

The takeaway

There is a light at the end of the tunnel, but the tunnel is very long.

Most industry leaders see 2023 as the full bounce-back, but based on the widespread health issue, catastrophic job losses and preference for at-home work, we expect closer to a decade-long recovery process.

Hoteliers will need to be creative and confident in measures designed to  protect their guests and staff – in this day and age, their livelihoods depend on it.

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This article was written by Ryan McAndrew and originally appeared on Aug 10, 2020.
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