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Virtual Coffee Chat — Key Takeaways from April 8

On April 8, Pegasus hosted its second Virtual Coffee Chat with hoteliers in Europe and the Americas to discuss a variety of issues ranging from corporate travel demand to rate strategy in a post-pandemic era. We want to thank special guests Elaine Kennedy, VP of Hotel Marketing Planning at Pegasus, and Cathy A. Enz, Professor Emeritus at Cornell University School of Hotel Administration, SC Johnson College of Business for joining the discussion and sharing their insights. Here are some of the key takeaways from the chats:

Corporate travel buyers will start making health and safety a key priority. As suppliers, hotels will need to adapt to these policies to win future business. 

After a few harried weeks focusing on repatriation and refunds, corporate travel managers are now shifting attention to reviewing their health and safety (“duty of care”) policies. This will become a big theme of 2020 and will influence how they select travel suppliers in the future. Hotels should use this down time to start thinking about their own health and safety policies, so that they can start shaping their own duty-of-care messaging. Some important points to consider include your cleaning processes, measures your hotel has taken to protect public health, and standard protocols if employees or guests are found to be sick.

Even if your hotel is currently closed, use the time now to stay in touch with your clients and with travel buyers. Communicate what you’re doing to protect your staff, and what you will be doing to protect travelers once your hotel is open again. Make sure these messages are everywhere your travelers are booking, including in the GDS, in email communications, and on your website.

Although some companies may use this crisis to pressure hotels to discount, in general travel buyers are not expecting to see broad discounting across the board. What they want to see is reliability, and they will pay for the assurance that the hotel is doing everything it can to increase safety and reduce risk.

Corporate domestic demand will be one of the first segments to return, while international business travel will be difficult to predict as it’s dependent on country-level restrictions. Either way, business travel will look quite different as companies seek to reduce risk. Hotels will need to be agile and flexible to get business back. 

Many businesses are eager to get their employees out into the field again, and we suspect that essential business travel will return quickly once travel restrictions are lifted. However, some companies are saying that their travel budgets have been hit, so we may see a reduction in non-essential travel.

One travel buyer in the pharma industry said that they planned on reducing one-day meetings and would seek to combine topics/content into two- to three-day meetings. This would reduce the time that employees are on the road and away from their families. One travel manager from the banking side said that their salespeople are eager to get back on the road again, so demand is still there. However, with country restrictions constantly changing—for example, if a country requires medical tests or self-quarantine upon entering—companies are going to want to avoid as much risk as possible. This may affect how quickly international travel can bounce back.

Hotels will need to be flexible in the first several months coming out of the crisis, as countries are experiencing the pandemic in different phases. Consider segments that you may not typically work with. For example, an Italian hotel that is dependent on the U.S. inbound market may need to consider building relationships with domestic travel agencies, consortia and corporate buyers now while they wait for the U.S. market to come back.

In the last two major crises that affected travel, 9/11 and the Great Recession, recovery took approximately four months, but the nature of the rebound greatly varied. How the pandemic will rebound remains to be seen.

A study by Cornell University’s School of Hotel Administration compared the rebound of hotel demand after 9/11 and the Great Recession. With 9/11, the recovery was “V-shaped” — a sharp sudden drop followed by a quick recovery. ADRs remained steady but occupancy dropped, and everything was back to normal by four months.

In contrast, the Great Recession, recovery was “U-shaped” — a much less dramatic drop followed by a slow and gradual recovery. However, there was a lag between price and occupancy. A drop in occupancy in the first month led to a drop in ADR in the second month, as hotels kept lowering their price in response to a lag in demand. For hotels that dropped their price, they lose more money and recovered more slowly.

For the pandemic, economists are predicting something completely different. The most pessimistic are predicting an “L-shape,” or a dramatic drop followed by a depression, but most economists are predicting something more like a “Nike Swoosh” (sharp drop followed by slow gradual return) or perhaps a “W-shape” or wave (a period of recovery is followed by another pandemic outbreak, which brings the demand back down again).

While it’s too early to make precise predictions, one thing still holds true—the players that build a strategy for recovery long in advance are more likely to succeed. Hotels will need to plan in three key stages: strategies for now, for the initial return when social distancing and other restrictions might still be in play, and one for post pandemic.

Travelers may avoid booking advance purchase, nonrefundable trips in the future. How will that affect rate strategy? 

It’s highly likely that travelers will have less appetite for risk coming out of the pandemic. Everyone wants more flexibility in their bookings, and we’re going to see that reflected in how hotels set their rate strategy. Advance-purchase, nonrefundable rate plans will likely “go out the window” or become much more flexible when it comes to rebooking—instead of cancellation, hotels are offering vouchers or credit toward future stays. Hotels are also considering adjusting cancellation windows to offer more flexibility.

The research shows that discounting in the short-term to capture demand can result in a downward spiral that can be extremely difficult to recover from; it will lengthen the recovery time. So how can hotels maintain ADR but still get their occupancy up when the demand starts to rise again?

Whenever possible, hotels should focus on trying to add value rather than reducing price. Work on differentiating your product and value proposition in a way that adds new services, technologies, and experiential areas. Highlighting risk mitigation (e.g. showing the ways you’re going above and beyond to protect travelers) will also be important to increasing your value proposition, especially for corporate travel.

On a higher level, there is an opportunity for hotels to create a strategic local response. Collaborate with other hotels in the area and with the local CVB to drive demand to the destination. When the destination gets more demand, everyone wins.

Lodging demand is much more inelastic than we think it is, and as a result, we can be our own worst enemies if we succumb to short-term tactical discounting. Cornell has produced many studies showing that this is the case. Hotels that drop rates and price below the market will end up with RevPARs that are unsustainable over a period of time. Hotels need to trust that demand will be back, and that it will ultimately be worth maintaining that high ADR. Many revenue managers are devotees of this point of view, but the more we can help other stakeholders understand that, the healthier the industry as a whole will be.

Join us on April 15 to talk marketing communications and social media strategies

Interested in participating in the discussion? Next week we will have guests Nate Lane, Senior Director of E-commerce at Pegasus; Jessica McDonald, Owner of Voyage Travel Marketing; and Bryan LoLordo, Client Advocate at Sprout Social on our virtual coffee chats. Click here to learn more.