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Scenic Trips and Cost-Cutting Driving Hotels Toward Profitability; First Steps Taken on a Long Road to Recovery

Hospitality sector recovering as economy reopens. Hotels, along with other commercial properties, began to see rising foot traffic in late Spring as initial economic lockdowns started to end. After falling to 21 percent during the week ended April 11, hotel occupancy recovered to 50 percent in mid-August before edging slightly lower. While that measure is still down about 25 percentage points from a year ago, filling half of available hotel rooms is still a remarkable achievement given the substantial disruptions caused by COVID-19. Most professional and entertainment events have been canceled through at least early 2021, eliminating some popular travel motivators, while inbound visitation to the U.S. has also been curtailed. Many vacation destinations remain temporarily closed as well. The net impact as of early August has been to cut U.S. travel spending by about half what it was a year prior. Even with these challenges, hotels are charting a path toward stronger performance and financial health.

Hotels chart path toward profitability despite health crisis. More hotels are reporting financial improvements after adapting to current travel trends and substantially reducing expenses. Both full- and limited-service hotels, at an aggregate level, reported positive gross operating profits per available room in July. Rising room demand from domestic leisure travelers and essential workers on the go as well as active cost management have been key to driving these financial gains. Hoteliers have reduced staff sizes and scaled back other services to bring expenses closer in line with revenues. In some cases, businesses are limiting room sanitation until the guest has left, minimizing contact between employees.

Hotels near outdoor attractions draw spontaneous visitors. Domestic leisure travelers are driving demand at many hospitality properties, with numerous guests booking rooms on short notice. Months spent confined at home have encouraged individuals and families to still take vacations this year, modifying their destinations and modes of transport because of health concerns. Hotels in less-populated scenic destinations reachable by car have been outperforming properties in more urban environments. Idaho, South Dakota and Montana led the country in occupancy in July; these are all states that historically trail major business and tourism hubs. The greater appeal of natural attractions this summer can be seen in a July increase in visitation to Yellowstone year over year as well as elevated hotel occupancy at Virginia Beach. Weekly occupancy levels at the popular regional vacation spot are exceeding the 2019 annual average. These trends show that people want to get away and get outdoors.

Lower cost hotels demonstrating durability. Elevated unemployment and the loss of income are also affecting room demand. Limited-service hotels with lower ADRs have demonstrated more resilience compared with higher-end establishments so far during the health crisis. To manage costs, many full-service hotels have suspended amenities that normally support a premium room rate. Current travelers are instead focusing on sanitized accommodations and features that support physical distancing such as kitchens, all at a competitive price point. Occupancy at lower-end extended stay hotels surpassed 72 percent in early August, outperforming all other segments of the lodging industry. Amid fewer differentiating services and greater financial disruptions, guests are zeroing in on the safest, most affordable accommodations.

Hoteliers cut costs, including labor. Beyond improving room demand, hotel profitability was also achieved by cost management. Hoteliers have drastically reduced staff since February. The total number of accommodation workers fell by 1 million, or 49 percent, between then and May. The sector has since restored more than 220,000 jobs, but a substantial number of hotel workers remain unemployed. Future rehiring is likely to be modest. After an initial disruption, the ratio of employees to room sales has returned to a pre-pandemic level, suggesting additional job growth must be driven by gains in occupancy.

End of summer, redirection of international travel may sway hotel recovery. The transition from summer to autumn may temper hotel performance gains, but not as substantially as with past seasonal changes. While some schools and universities are opening to a portion of their student bodies, the risk of COVID-19 infection could force them to close again. Many other students are continuing to study remotely, which when paired with professional work-from-home practices, allows opportunities for family trips. Any substantial jump in travel, however, will be predicated on the return of corporate and group trips. Some lost demand could be offset by a shift to more domestic travel, though. Restrictions imposed by other nations will make it more difficult for American residents to partake in international travel for the near future. If a large share of U.S. residents who had planned international vacations in the latter part of 2020 shift to domestic destinations, it could help lift hotel performance.

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