The importance of financial relief for the hotel industry – Hotel-Online
Anne R. Lloyd-Jones | March 23, 2020
Through Anne R. Lloyd-Jones
The coronavirus pandemic (COVID-19) is having a profound impact on the hospitality industry, as travel restrictions, limits on large gatherings, restaurant and bar closures and, perhaps most influentially, fear of the viruses, have brought travel – and most other aspects of hospitality – to a virtual standstill. According to Chip Rogers, President and CEO of the American Hotel and Lodging Association (AHLA), “The impact on our industry is already more severe than anything we’ve seen before, including 9/11 and the great 2008 recession combined ”. With some hotels reporting occupancy rates below 20%, the industry is facing massive layoffs and the potential closure of many accommodation establishments.
On March 17, 2020, hospitality industry executives met with federal government officials to discuss the need for the federal government to provide relief and financial support to the industry. Executives cited the many layoffs that have already taken place, as well as the potential and likelihood of even greater layoffs as more hotels close their doors.
Financial support from the hospitality industry makes perfect sense given the importance of the sector to the US economy. According to the US Travel Association, the economic impact of the US travel industry was $ 2.6 trillion in 2019, and the industry supported a total of 15.8 million jobs. The hotel industry represents an important part of this impact. An economic impact analysis prepared by Oxford Economics for the AHLA concluded that the hospitality industry generated $ 1.2 trillion in sales and supported 8.3 million jobs (direct and indirect) in 2018, representing 395 billions of dollars in wages, salaries and other compensation. This equates to about 4.2% of total employment in the United States. Direct employment represents 4.7 million jobs and 97.2 billion dollars in payroll. The slowdown has a direct impact on all of these parameters and threatens hundreds of thousands of jobs and incomes, including tax revenues.
One of the main sources of relief under consideration is disaster loans through the Small Business Administration (SBA). As currently proposed, eligible hotel companies could borrow up to $ 2.0 million to cover payroll, debt service and other expenses. For the hospitality industry, SBA loans are available for businesses with an average turnover of $ 35 million in the previous three years. To better understand how this threshold aligns with typical hotels, we looked at the revenue metrics for the six hotel categories, as defined by STR. Our calculations are presented in the following table.
Source: HVS, STR
- Row 1 represents the 2019 revenue per available room (RevPAR) for each of the accommodation classes shown, as reported by STR.
- Multiplying this RevPAR by 365 gives the indicated annual turnover per room.
- In addition to revenue from rooms, hotels also derive revenue from food and beverage (F&B) activities and various other sources. STR’s HOST report provides aggregated operating states for hundreds of hotels in the United States. This report shows the proportion of revenue, by source, for hotels in each asset class. *
- Dividing the reported annual revenue per room by the room revenue ratio yields the total revenue per room for each classification.
- Dividing the $ 35 million revenue threshold by the average annual revenue per room for each category, we get the number of rooms a typical hotel in that category would need to have to exceed the $ 35 million threshold.
- Looking at the typical size within each class, it seems unlikely that economy, mid-range, upper-middle, and high-end hotels will exceed the threshold, while some upper or luxury class hotels might. do, especially those with significant F&B recipes (not taken into account in the calculations above). Hotels with food and beverage service activities are also likely to have a larger inventory of rooms.
* STR HOST data is categorized by full service and limited service hotels. We used limited-service data for economy, mid-range and upper-mid-range hotels, as this fits the profile of the majority of hotels in these categories. We used full service data for upscale and luxury properties, which is consistent with the profile of a large majority of these hotels. The upscale sector includes both limited and full service hotels; therefore, we used an average of the two.
Based on the above calculations, it appears that a majority of single-family hotels in the economy, mid-range and upper-mid-range sectors qualify for disaster loans under the SBA loan program. Most upscale and upscale individual hotels are also likely to qualify. Hotels in the luxury sector may approach this threshold and may not be eligible for the loans on offer.
Returning to the Oxford study, this study estimated the economic and employment impact of a typical single-family hotel, as follows:
“A representative hotel with 100 occupied rooms supports 241 jobs in total, including 137 direct jobs and 104 indirect and induced jobs. This impact includes 66 direct hotel jobs, with $ 2.8 million in wages, salaries and other labor income. This representative property supports $ 5.4 million in total tax revenue, including $ 1.9 million in direct taxes generated by the hotel.
With 100 rooms, this typical property would meet SBA criteria and qualify for a loan.
The above analysis looks at hotels on an individual and stand-alone basis. Many hotel owners own multiple properties, and depending on how the $ 35 million threshold is applied, their eligibility for these loans could be affected.
The need to support the industry through this crisis is obvious – to protect jobs and preserve the large capital investment in the more than 55,000 hotels in the United States. Less obvious, but just as important, is the role the industry will play in the recovery. Tourism is a vital component of the US economy and, as hard as it may be to imagine right now, people will travel again. Nationally, business travel will pick up as companies tackle postponed travel and meetings. Leisure travel will also pick up, perhaps faster than business travel, as people seize the opportunity to be anywhere but home. Meetings and events will return, although it may take a little longer for this segment to recover given the nature of these events. International travel will also return.
As travel resumes, it is vital that the hospitality industry is available to accompany these travelers. Availability means open and operational, with enough employees on hand to support customers and, therefore, revenue.