Staying Ahead of Increased Economic Uncertainty

Let’s make one thing clear upfront: This is the golden age of the travel industry. Powered by a rising middle class, which is expected to increase from 3 billion to 5.4 billion people by 2030, airline passenger numbers will almost double by 2037 and worldwide foreign visitor arrivals are expected to grow from 1.48 billion in 2019 to 2.2 billion by 2029.

However, while overall worldwide trends are extremely positive, there is no shortage of data regarding economic uncertainty in the United States hotel industry. Depending on what you read and who you talk to, the outlook for the “slowing down” of our economy is akin to looking into a crystal ball—cloudy, with a potential chance of clarity, but maybe not all that clear.

Tourism Economics President Adam Sacks said at the 2019 Hotel Data Conference that the trade war with China leads many concerns as it drives higher prices on imports and exports. Exports to China have fallen 26 percent, while imports have fallen 30 percent, hitting profit margins and raising prices for consumers. A recent report from the consultancy Tourism Economics estimates the ongoing dispute could cost the country 1.9 million inbound visitors and 11 billion in tourism-related spending

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From a groups booking perspective, Jeffrey Emenecker, senior director of analytics at Cvent, stated that supply continues to increase, but booking pace is not keeping up, which means a drop in group occupancy across the board.

CBRE is forecasting a RevPAR growth rate of 1.2 percent for 2020, which is also a downward adjustment from 90 days ago. “Downward pressure on room rates also will come from a rise in new hotel openings,” said Mark Woodworth, senior managing director at CBRE. “Our 2020 supply growth forecast now is 2.1 percent, which is greater than the long-run average of 1.8 percent. This will drive a 0.8 percent national occupancy rate decline for the year.”

Finally, from a broader perspective, there is a question if the United States is not already in recessionary territory. The New York Times reported early in September that U.S. industries such as car and technology hardware manufacturers are feeling the pinch, so much so that some stocks fell on Wall Street following the release of a report from the Institute for Supply Management. However, this is an ongoing saga that seems to change daily. Definitely more will be revealed on this front.

Ultimately—we don’t really know. At the recent SKIFT Global Forum in New York City, both the CFO of Marriott and the CEO of Hilton continued to paint a positive future for their companies, citing the resiliency of their operating models and the strong pipeline in supply. And as per STR: “A review of recessions between 1992 and 2014 across 63 countries shows that economists accurately predicted only five out of 153 in April of the year preceding the recession.”

Making Sense of the Data

In a world of uncertainty, it is important to remember that regardless of economic conditions the key to ongoing success is to understand how to effectively manage revenue at your hotel during uncertain times. How do we go about doing that?

Machine learning and artificial intelligence may seem like overused buzzwords today, but revenue managers must learn to trust technology in order to price correctly and then to focus on the strategic aspects of their jobs. With hundreds of thousands of decisions required on a daily basis, revenue leaders must be ready to let their systems do the grunt work of pricing decisions autonomously and be ready to step in when exceptional circumstances require it.

Once established, it is important to let the software do its job. With systems ready to take over the daily pricing decisions, the revenue strategists of tomorrow continue to look toward the trifecta for hoteliers: loyalty, distribution and revenue.

Informed, strategic decisions about what product to make available to whom (loyalty or non-loyalty guests), and through which channel (direct or indirect), are increasingly the essence of revenue management.

Regardless of economic conditions—in fact, especially so if conditions deteriorate—it is critical to understand how to effectively manage revenue at hotel properties. Here are some ways to think about managing the revenue process in uncertain times:

It’s time to have a plan, even if it will never be implemented. As you are dealing with increased uncertainty, it is critical to start to map out and stress test best-to-worst case scenarios and the activities to deal/counter each. Activities should be multi-functional and cover varying “what if” scenarios. (e.g., What if corporate demand drops by 5/10/20 percent? What if group bookings fail to materialize? What if weekend demand declines by 25 percent?). You might never need your plan, but better to be prepared then to panic.

Be ready with creative alternative revenues. Include in your plan activities to protect existing revenue sources, find alternative revenue sources and create new ones. If weekday demand declines significantly, what alternative revenues can make up some of the lost demand (e.g., locally sourced business, crew business, etc.)? How much revenue can you protect by locking in contracts for longer periods of time? Are your post booking pre/at arrival upsell activities optimized? Be sure to take a long-term view. Discounting takes a long time to rectify once demand rebounds, as does giving too much business to potentially more expensive third-party channels.

Fine-tune and closely monitor your revenue system. A modern and automated system will alert you to changes in your demand forecast well before you would be able to spot them manually. Once that happens, carefully evaluate if these changes indicate a long-term trend or are just a one-off event and not an indicator of an overall slowdown. Use data from multiple sources (including conversations with your key corporate customers) to validate changes in demand.

Don’t panic! Slowdowns happen frequently and business always comes back. Hopefully and most likely it will only be a short bump in the road, and not a protracted full-blown recession like we had in 2008-2010. Do not implement anything you might regret later. Rather take a long-term view of what is best for your business not just for the next 12 months, but for the next 24-36 months. Remember the overall trend is and will remain positive for the industry, even if at times it might not feel that way.

Learning From the Past

At the end of the day, keeping an eye on industry trends is key, but what is really needed during times like these is a rational and thoughtful approach to your pricing and revenue management strategies when uncertainty increases.

While the circumstances are different than 10 years ago, the Cornell University School of Hotel Administration conducted research after the “last great recession” to provide us with an in-depth look at what worked and didn’t work during these times. The authors said it best, “While we all would like to think that a recession won’t happen again, we know that it will. So let’s prepare to respond to a market downturn in an intelligent and strategic fashion.”

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