Earnings Before Interest, Taxes, Depreciation, Amortization and Coronavirus …


Prospective analysis

The crisis produced by the COVID-19 pandemic is more than just a global health crisis that is triggering a worldwide economic crisis; for the hospitality industry it is an unprecedented crisis and a game changer. More than ever, managing is predicting!

Getting out of the health slump as a top priority

Planning a way out of the crisis will depend on the return of the confidence of customers and travellers. Confidence is essential for all types of travel—business or leisure—since it conditions the reopening of borders as well as the resumption of air traffic. However, the necessary restoration of confidence will depend mainly on health factors external to the hotel industry (effectiveness of barrier measures, availability of drugs for treatment, production of a vaccine). In this context, the prospect of disrupted activity seems to be on the horizon for up to 18 months. The time needed for recovery will depend on the depth of the economic slowdown, the extent of the actions taken to support the economy, and the consultation between governments in Europe as a matter of urgency and more broadly at G20 level.

The hotel paradigm after COVID-19: Health, Safety, Services.

In order to recover from this unprecedented episode, the battle for turnover will be fought over securing the customer experience, and it is today that all hospitality professionals must put in place this new sanitary living and protection environment.

Getting back on the market at the right time with an adapted offer

Each hotel must analyse, on a case-by-case basis, whether to reopen, under what conditions and at what pace, i.e. planning a surgical budgetary year that will reduce the risk of worsening the current financial situation.

The key levers to be considered are:

  1. Customer segmentation: each hotel must review its producing geographic markets and the profile/motivations of its target customers. Past behaviours have shown that international tourists are more sensitive to security and health crises, whilst local visitors being the first to return. It should be noted that the clientele of budget hotels has historically been the most resilient. Thus, a clientele that is more domestic or strongly associated with the needs of economic activity will lead to a faster recovery.
  1. The right opening date: since a hurried opening might generate significant operating losses, each owner must have plans for achieving economic equilibrium in place before deciding to reopen their establishment. This date will be different—even within the same destination—depending on the positioning and clientele of each establishment.
  1. Support measures from the State: in addition to the temporary governmental support that is already helping hotels to survive, the State will have to continue its support until hotels recover at breakeven. Loans guaranteed by the State should cover more or less the fixed costs of the establishments. Additionally, assumed flexibility of lending institutions should avoid forced sales in France. However, additional measures will probably be necessary if the recovery in activity is slow, in particular to support the cash position of weakened institutions.
  1. Anti-COVID-19 actions: to give confidence to customers and employees it will be necessary to implement appropriate hygiene measures. These measures will be relatively easy and inexpensive for the budget hotels to implement as they can easily limit interactions with and among guests. Ultra-Luxury and Palace hotels will have a double equation to work on “1001 points of contact” with a clientele that is highly demanding in terms of services and products offered. Their safety-related investments will be much heavier (filtering of ambient air, disinfection measures, reassuring communication).
  1. Mandatory reorganization of the production tool and teams: It is inconceivable that hotels and their production facilities will reopen immediately at full capacity. This means that partial openings of the accommodation stock will have to be planned, the catering offer will have to be reviewed, seminars/banquet activities will have to be suspended, pending an awaited “normal” return to activity.  A new organisation of work will be required to cope with the productivity challenge ahead.


Integrating the inevitable consequences to better fight for tomorrow

For budget hotels in the Ile-de-France region, assuming an average scenario corresponding to an upturn in activity at the end of June 2020, the impact on the occupancy rate in 2020 compared with 2019 would be at least around –20 points. This would probably correspond to a white year 2020 in terms of operating income. Mid-range and luxury hotels will face a much slower rise in  demand with a differentiated impact on occupancy depending on their location attributes. The likelihood of a large deficit in 2020 will be higher for most of these hotels.

Ultra-Luxury hotels will probably have to adapt their organization to meet the expected customer experience, as the growth in their business will be slowed by their significant exposure to the restaurant business and the geographic origin of their clientele, which is heavily exposed to the US and Asian markets.

By extrapolation with previous economic crises, the analyses by STR and HVS predict a gradual return to 2019 levels not before 2025. In our opinion, the hotel business in Paris should be able to recover faster because it is less dependent on long-haul arrivals if compared to New York, London or Dubai, and will benefit from major events such as the World Rugby Cup in 2023 and the Olympic Games in 2024. For Paris we expect post-COVID-19 recovery from 2023 onwards.

Predictable impact on hotel values

The impact of the decline in future cash flows will depend on each asset based on its customer mix (geographical and reason for stay) and its ability to quickly reposition itself to return to past performance.

Assuming an economic asset with low exposure to the international market, the impact on the valuation should be contained assuming an approach of discounted future cash flows. However, this effect will probably be amplified by the rising cost of lending. In view of the COVID-19 risk on tourist activity, the cost of loans to hotels has increased, and available LTV (Loan to Value) is lower. This increase will have a negative impact on the prices offered by debt investors, with an immediate impact of up to 10% of the pre-COVID-19 value.

For mid-range hotels, the loss in value will be greatest for the assets that are most exposed to the contraction of their cash flow. In addition to their exposure to the restaurant and MICE business, these are the least well-located assets, and those that are heavily dependent on non-European customers. Impact on value could reach 20% compared to 2019 values.

For Ultra-Luxury hotels, these investments are made with a long-term asset perspective, there is little correlation between the impact on values and short-term economic conditions.