Event report: Managing hotels through ultra-high inflation

In the latest seminar in our series co-hosted on 14^th September with AlixPartners, EP Business in Hospitality and HVS, we were joined by industry experts to look at the challenges involved in managing hotels through ultra-high inflation.  

Thomas Emmanuel (STR) and Kathrin Cockhill (HotStats) presented data showing how the hotel sector is performing in 2022 against 2019. Highlights of their presentations are as follows:

• Average room occupancy rates in the US, Europe and the Middle East in 2022 are over 90% of 2019 levels. China and Asia Pacific still lag at around 80% due to slower removal of COVID-19 restrictions.  
• Worldwide leisure bookings have mostly recovered, but corporate and group demand is still only half of what it was pre-pandemic, likely due to the rise of home working.
• ADR (average daily room rate) is up over 25% in Europe and 20% in the US. Stripping out inflation, real ADR is still around 10% higher than it was at the same point in 2019.
• Most European recovery is due to demand in smaller cities and rural hotels. Occupancy in large cities was still only around 70-80% compared to 2019 in Q1 2022, although this has improved since July 2022.
• Of the major European cities, Warsaw and Paris have performed best. St Petersburg, Moscow and Kiev were worst, due to war and sanctions choking the tourism sectors in Russia and the Ukraine. Interestingly, Turkey’s performance in July was well above 2019 levels, possibly due to increased demand from Russian travellers.

• The UK showed a strong performance over the Summer, although room reservations in cities across the UK for September, October and November have already dropped slightly.
• 120,000 new rooms are in the UK development pipeline.
• UK housekeeping labour costs are up 30% vs their 2019 levels, with food and beverage prices also increasing.
• Hotels in the UK and Europe are paying 35% more for energy than they did in 2019, with out-of-contract costs in the UK being over 68% higher.
• Many luxury UK hotels have been able to pass costs onto their customers, increasing their overall profits compared with 2019 levels. Margins in the budget and middle end of the sector have already taken roughly a 2% hit.

Following the presentations by Thomas and Kathrin, a lively panel consisting of James Salford (Bird & Bird), Graeme Smith (AlixPartners), Jan Hazelton (Kerzner), Aiden McAuley (Accor) and David Nicholson (Jumeirah) was moderated by Russell Kett (Chairman of HVS), with his customary polish. The panel’s outlook was generally pessimistic but here are some highlights from the discussion:

• The panel felt that much of the UK’s strong performance was due to pent-up demand, further boosted by high-profile events over the summer.
• The panellists spoke of difficulties in budgeting for 2023. Many businesses are wary of overbudgeting, but Jan Hazelton stressed the need to look at the upside in the event energy prices reduce quickly. There was broad agreement that while forecasting is so difficult, hotels will need to look at costs carefully to ensure efficiency. Jan also mentioned the need for crisis management expertise to fix supply chain problems and predicted many rooms in development would be delayed.
• There was a concern that many hotels are unable to keep raising salaries while remaining profitable. Aiden McAuley calculated that rising energy prices will force a drive for efficiency to reduce waste. David Nicholson spoke of increasing staff benefits to aid retention.
• On the finance side, James Salford and Graeme Smith mentioned that, unlike in 2008, there was still plenty of debt available. However, businesses will need to ensure they generate enough profits to keep up with higher interest rates. They predicted that some will close if they cannot keep up with payments, leading to distressed assets coming to market next year.
• As lenders are behaving cautiously, hotels needing refinancing will have less senior debt available to them. Nevertheless, James Salford mentioned already seeing more inventive financing, using tools like mezzanine debt, structured finance and quasi-equity type deals to bridge the gap and keep businesses afloat in the short to medium term.

A recording of the seminar can be viewed here.