Potential Scenarios to Exit COVID-19
Humans have evolved over thousands of years to become social beings; however, the COVID-19 pandemic appears to have another agenda. From a world of hugs and handshakes, ours has become one of gloves and masks. People are afraid of other people; human contact is being avoided and social distancing is the new norm.
The travel and hotel industries are primarily based on human interaction between not just the ‘host’ and the ‘hosted’ but also amongst the patrons themselves and fear of people is not good for business. Travel itself is slated to become a time-consuming and inconvenient process post the crisis when elaborate health and travel history checks as well as distancing measures are put into place. These measures, however, will need to be emulated by hotels in order to reassure travellers of their safety. Therefore, in the coming 12-18 months, the extent of recovery from the ongoing lockdown does not look swift.
What makes the situation more complex is the lifting of travel bans in different places across the globe at different times. Hotels will have to deploy brainpower and manpower across geographies to respond to lifting travel bans and reopen their inventories in a phased manner along with putting adequate safety measures in place.
We are of the opinion that a V-shaped or U-shaped recovery, as seen after the financial crisis a decade ago, will not be the case this time around. Post the lockdown, when domestic and possibly some international travel is feasible again, movements will occur causing a small uptick for the industries. However, in the absence of a vaccine for the disease, this is likely to cause a resurgence in COVID-19 cases which will eventually lead to a second decline. Many entities are feverishly working to be able to successfully develop the vaccine and only when it is widely available to masses both globally and in India, will a sustainable recovery be possible. Hence, we anticipate a W-shaped recovery curve for the Hospitality and Aviation industries.
Recovery for the Indian Hospitality industry is dependent on factors such as spread of COVID-19 in the country, extent of the ongoing lockdown and subsequent zoning exercise, lifting of travel bans in India as well as internationally, availability of the vaccine and possible relapse of the virus in typical feeder markets. The advent of recovery, in some form, in the coming 3-4 months is the best-case scenario for the industry at the moment. In the worst-case scenario, this recovery may take close to 2-3 years.
Hotelivate forecasts the road to recovery and erosion of overall profitability for 2020 in each of the scenarios for the branded and unbranded hotel sectors. Typically, occupancies and ADRs witnessed by the branded and unbranded segments are:
Figure 1: Average Nationwide Occupancy and ADR | Branded and Unbranded Supply
- Best-Case Scenario – Assuming that the ongoing lockdown ends in the beginning of May, and occupancies begin improving post June 2020, the branded hotel segment is looking at a ~21% decline in occupancy and ~14% decline in annual ADR. This means an erosion of revenue by ~32% which amounts to ~US$1.59 billion. For the unbranded sector, a similar dip in occupancy by ~20% is expected with a smaller decline of ~11% in ADR. However, given the sheer size of the sector, erosion in revenue of ~25% amounts to ~US$4.69 billion. In all, the hotel industry, both sectors combined, stands to lose ~US$6.28 billion in the best-case scenario.
- Mid-Case Scenario – In case of a slower recovery by September 2020, annual occupancy is expected to erode by ~38% with a ~33% erosion in ADR for the branded sector. This implies a decline of ~53% in revenue (~US$2.64 billion). Following similar timelines, the unbranded sector is slated to witness a larger dip of ~42% in average occupancy with a ~25% decline in ADR leading to a ~44% erosion of revenue (~US$8.18 billion). Total loss of revenue for the industry in this scenario amounts to ~US$10.82 billion.
- Worse-Case Scenario – In the event that market recovery takes longer than the calendar year, branded supply may face an erosion of ~58% occupancy and ~82% ADR leading to a massive decline of ~US$3.57 billion in revenue (~72%). On the other hand, the unbranded sector faces a ~73% decline in occupancy and ~43% decline in ADR, adding another ~US$11.19 billion to revenue losses, bringing the total revenue loss to ~US$14.76 billion.
While China now grapples with a second surge in asymptomatic cases of COVID-19, STR data tracked during their initial recovery period in late February and March showed that occupancies trending in single digits and early teens recovered to between 30% and 35% in the span of a month after hotels in various provinces reopened. As expected, economy to mid-market hotels performed better than upscale to luxury hotels and initial demand was seen from domestic corporate and leisure travellers as well as arbitrary demand from international travellers stuck during the quarantine period and looking to head back to their home countries.
Although recovery of the industry’s performance to 2019 projected levels globally will only occur over an extended period of time, and will depend largely on when this process begins for each country, India may well expect to see similar trends to those seen in China in terms of occupancy and demand segments. Once the lockdown ends and hotels are able to reopen, Indian hotels should consider targeting the domestic leisure segment in the medium term.
*All estimations are for the calendar year 2020
*All financial data is expressed in US$ and the exchange rate used is US$1 = `74