Hotel Owners ​Where should you be now?

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While the Covid-19 outbreak and subsequent lockdown has significantly impacted the short-term revenues of  the Australian hotel sector, an emerging positive has been the forensic focus on hotel expenses that has resulted.  In this article, we outline some of the steps that owners and operators should have already implemented in response to this demand shock.

 

Revenue Forecasting

Many hotels have grappled with the decision of whether to close or not.  Much of this decision rests on what, if any, revenue is likely to come.

By now each hotel owner, in collaboration with their operator, should have stepped through every market segment and contacted every account within each segment to determine what if any room night demand exists. If those accounts have indicated ongoing demand, you should have determined their stay patterns as well as their food and beverage requirements whilst at the hotel.

In terms of public demand channels like Expedia and Booking.com, most hotels that have remained open have adopted pricing policies similar to that of pre-Covid 19 levels, in other words they are not heavily discounting these channels, given the limited volume they are generating.

You should have also explored new revenue opportunities, particularly from government channels to determine if there is further demand that can be sourced. Some groups have opened new revenue lines such as take-away food and beverage, retail offerings, daily room rates for those who cannot work at home and pre-selling value-add gift voucher packages that encourage people to stay once the lockdown lifts.

Having honestly assessed the likely income expected over the past two months and the coming three months, the next step you should have undertaken is to restructure the cost base to match that revenue outlook.

Cost Assessment

Collaboration between owners and operators has never been more vital than now, and owners have for the first time been involved in the granular assessment of each expense line.

As the largest expense, payroll has drawn the greatest attention. This has been the over-riding focus in determining whether to remain open or not. The conclusion we have drawn is that the fixed labour cost required to remain open is not that different to the skeletal staffing needed even when the hotel is closed. It is also important to retain the key management team that will enable you to ramp back up once the lockdown lifts.

We advocate the “bottom up” approach to labour requirements. Rather than looking at manning guides with the view of removing roles, consider starting with a clean sheet of paper (even a roster) to look at what is required to man the hotel during the period. One way to think of this is to consider an opening of a hotel and build from the bottom up the labour resource that would be required to open a hotel. This bottom up approach gives you a manning baseline which can been layered up as demand improves. The government’s JobKeeper program enables the hotel to retain staff above this baseline, but it is critical to have established the baseline, should the crisis extend beyond the 6 month timeframe for JobKeeper.

Having assessed the requirement for each shift in each department, your attention should have shifted to each aspect of the departmental expense lines. Each third party service provider should have been contacted to renegotiate terms, particularly those contracts which are fixed in nature. Focus on information technology, marketing and property maintenance third party service providers in particular. Outreach to local council and State government should have also yielded savings or expense deferrals in statutory costs such as Council Rates and potentially Land Taxes.

Once completed, this combination of realistic revenue forecasting coupled with the granular expense review would have allowed you to understand your future cashflow outlook. You should therefore be able to understand if further equity injection is required and when. You would also have met with your lender to take them through this cashflow and identify when and how interest payments could be met and sought relief from the lender regarding any banking covenants (like Loan to Value and Interest Cover ratios). Finally, ensure you have been engaging and communicating with any and all stakeholders to keep them abreast of the current status and short-term outlook – e.g Directors, insurers (especially for Director and Officer insurance), ground lessors, tenants etc.

Collaboration is Key

The exercise of planning and implementation requires meaningful and regular collaboration between the owner and operator. It can be useful to engage a third party to assist in these reviews, as they can apply a higher degree of independence and robustly test assumptions being made in relation to revenue and cost plans.

The outcome of this planning and the implementation of saving measures should lead owners to weather the low / no occupancy storm for 2020.

In our next article, we will explore what owners should be doing over the next 3 to 6 months as recovery emerges. This will look at ways we can capitalise on sensibly rebuilding the hotel cost base without losing sight of the new knowledge of the minimal cost base needed to operate a hotel.

'Charting the Course' series

 

Colliers International Hotels team have put together a series of articles to help the hotel and tourism industry chart the course to recovery, as one of the sectors most acutely impacted by social distancing measures introduced in response to Covid-19.

For more insights and articles, please click the image below to be redirected to our home page.

 

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