The hotel industry is planning for its recovery from the COVID-19 pandemic. Industry leaders are flooded with forecasts and opinions about when and how the recovery will happen. Nearly every one of these predictions is wrong.
The problem is not with the timeline or the projections, it is with the area of focus. The hotel industry is dominated by large franchisors whose profit depends upon topline performance. The health of the industry is measured in gross revenues and RevPAR (revenues per available room). Hotel owners, asset managers and operators know that revenue performance is just an ingredient in success. Actual recovery and industry health is measured in bottom line performance and cash flows, not RevPAR. Preparing and pursuing recovery requires a relentless focus on gross operating profits (GOP) and net operating income (NOI). These are the statistics that drive the viability of a hotel investment and the business of hotel management.

Forecasting GOP and NOI recovery is a lot more complicated but is essential to the health of every hotel. While occupancy has fallen and room rates have dropped, fundamental changes to hotel operations during the pandemic may position some hoteliers to dominate in the post-COVID world. Others will be forced to exit the business.

Labor is a critical focus area. With less than half of all pre-pandemic hotel jobs recovered, aggregate labor costs are at an all-time low. The elimination of time-consuming operations, including most food & beverage functions and stayover cleans, has led to short-term reductions in labor hours per occupied room (HPOR). The combination of these factors results in a lower cost per occupied room (CPOR) which is not sustainable. However, some investors are relying on these savings in the future. In its recent earnings call, Chatham Lodging Trust (NYSE:CLDT) said, “Our labor costs per occupied room are down about 15% in the quarter. And when you look at our rooms department, our labor costs per occupied room were down approximately 30% to $13 a room compared to $18 per room last year.” The company’s spokesperson went on to say that it was, “critical for us to scrutinize our labor models and keep them under control when occupancy and rates start to jump.”

Missing from this analysis is nearly all of the per-room labor cost savings were derived from food & beverage jobs lost because of the pause in all meetings, catering and restaurant functions combined with an 80% reduction in stayover cleans. According to data from Hotel Effectiveness, these two functions contribute an average of 36 minutes of labor per occupied room. Nearly all of this labor will return as COVID restrictions are relaxed and mainstream travel resumes.

The COVID-19 recession created the biggest opportunity for hotels to re-invent operational processes in the history of the industry. Smart hoteliers are re-examining time-honored processes and programs. Re-inventing them will reduce labor intensity and produce more aggressive productivity standards.

Ignoring these opportunities for sustained improvement creates significant risk. It will take years for revenues to recover, and the cost of revenue generation will reach record highs over the next 18 to 24 months as competition for guests and room nights will be fierce. As a result, net RevPAR after acquisition costs will be severely depressed. Hotels which do not implement fundamental changes to their operating models may not survive even after travel volume approaches pre-COVID levels.

Third party management companies are already experiencing the impact of these recovery factors. Big companies, such as Aimbridge Hospitality, have implemented system-wide programs and technologies to enable these critical operational efficiencies. “We were early adopters of labor management technology,” cites Bruce Barishman, vice president of operational excellence at Aimbridge. “All of our staffing models and labor plans are based on robust labor standards that prevent waste and incentivize productivity. As our operational needs have changed, we have modified standards so that under any conditions we know that our GOPPAR and bottom-line results are optimized.”

There are technology solutions available, built by hoteliers for hoteliers, that address these pain points. By embracing and investing in technology, perfect labor markets can be achieved saving hotel operators time and money.

Susan Black is the former chairperson of the influential Eye for Travel conference series. “Whether hotels embrace software or develop their own approach, it is clear that dynamic staffing and standards-based labor management is critical for near-term survival and long-term prosperity in the post-COVID-19 world.”