Relayering the cost base to meet nascent demand

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With hotels having worked to restructure their cost base in light of the Covid-19 impact on all hotel revenue streams, it is time to think about recovery and how to take advantage of the knowledge hotels have garnered during this hardest impacting period of Covid-19 on the tourism industry.

 

Permissable activities will drive growth

As governments across Australia relax social distancing measures and open intrastate and interstate travel, we are seeing interest from domestic leisure travellers in making bookings for weekend getaways and school holidays as we exit this long period of imposed hibernation. 

Hotels located in the Sydney surrounds drive market (includes Blue Mountains, Hunter Valley, Newcastle and Wollongong) have experienced strong spikes in weekend demand with occupancies above those being recorded in the Sydney CBD. Similarly, Canberra saw a strong spike in demand over the Queen’s Birthday long weekend owing to its proximity to Sydney.  

In considering all the channels hotels source business from, these first signs of recovery through domestic leisure travel are most encouraging. This segment will underpin hotel revenue streams and over the course of 2020 be augmented by other segments such as domestic corporate, group and to a lesser degree MICE business.  For example, positive signs such as the reopening of stadiums in Queensland from 20th June, albeit to a limited number of attendees, as well as the reopening of theme parks will provide more reasons for Australians to travel. 

We note particularly the reference to business returning from domestic sources as international business is not anticipated to be a factor until the Australian Government reopens the international border, now anticipated to be in 2021. Notwithstanding, sentiment for the reactivation of domestic business among hotel operators remains very strong with more than 100 million domestic visitor nights spent in hotels nationally in 2019, which is considerably more than the 32 million international nights.

 
Cost mitigation will be key

As revenue grows through the reactivation of domestic travel channels, we need to consider the opportunity to maintain a strong reference to the detailed knowledge and subsequent cost position hotels now have following the efforts made to limit losses during the worst of the Covid-19 period.  

Underpinned by the Federal Government amendments to the Fair Work Act and Jobkeeper, hotels have a base of labour at this time which should be able to deliver product expectations to leisure travellers without adding material cost to their operating business.  

As hotel demand steadily increases with the return of domestic corporate and domestic MICE business, hotel operators will need to take extreme care in layering expenses on this newfound efficient cost base. By breaking down detailed hotel reporting, assessments can be made about layering in additional costs in such a manner that they correlate to the rise in revenue – in other words a “return on expense’ basis. In many cases, this approach will open new ways of operating hotels and allow hotels to reset their traditional cost base. 

As we spoke to in our first article in this series, successful cost planning going into the Covid-19 period was advocated by taking a ‘bottom up” approach to determining the cost needs of the hotel. In most cases where this approach was adopted, the above concept of carefully managing the layering of costs, is simply an extension of this approach. 

We also spoke in our previous article about collaboration between owners and operators. This collaboration underpinned the successful planning going into the Covid-19 hibernation phase. Similarly, it will underpin the success of hotel operations as we come out. This will be especially true as we await the Government’s plans around the term of JobKeeper and any potential extension, as well as the temporary amendments to the Fair Work Act to allow hotels the flexibility to redirect labour between departments, both of which assisted hotels to survive the Covid-19 period. 

 
Conclusion

Whilst uncertainty still prevails, there are signs that room night demand is starting to grow as states and territories relax restrictions in accordance with the Australian Government’s 3-step framework for a Covidsafe Australia. Weekends and school holiday periods provide an opportunity to grow revenue from a very low base but cost mitigation will be key if profits are to be realised. 

'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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