Last week hotel occupancy dropped in the U.S.
U.S. hotel occupancy fell 1.7% to 64.1% during the week of 23-29 February, and despite a 1.6% ADR increase to $129.67, RevPAR dipped 0.2% to $83.16.
I expect that the effect will be greater when we get the numbers for this week. However there are a couple of interesting things already going on in the numbers.
- Occupancy is down most at airport hotels, affected by a decline in air travel especially international travel.
- However occupancy was down across the board and yet room rates went up not down.
There are two possibilities here underlying the rise in room rates alongside the decline in occupancy.
- People who stayed in hotels last week had booked their rooms in advance and didn’t reprice reservations as rates dropped. (Perhaps rates began dropping within their cancellation window.) That would suggest this is an anomaly, that average room rates lag changes in occupancy and we’ll start seeing lower rates going forward.
- That discounting doesn’t drive incremental room nights at this point. People are traveling who need to travel. The issue isn’t cost. People are avoiding travel even when prices fall.
Alaska Airlines is running fares as low as $20 each way (plus taxes) and $99 to Hawaii. It’ll be an interesting test to see whether low prices goose ticket purchases.
It’s easy to dismiss the value of discounting by saying that people aren’t traveling because it’s too expensive but out of fear, so what good does changing the price do?
Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn’t the small green pieces of paper that were unhappy.
Lower prices should drive demand at some point but the question is how low prices have to get to do so (do they have to become negative)? When people say ‘you couldn’t pay me enough to fly right now’ I don’t believe them, but it may be the case that you’d need to actually pay people to fly versus simply charging less.
I was surprised to see Alaska announce a fare sale, but I thought they did it tastefully alongside messaging around their coronavirus precautions. Currently the enemy is uncertainty as much as the virus itself. In a couple of weeks we’ll have more data about spreading and be in a better position to make plans or cancel plans.
Yesterday my college debate coach from a million years ago called me asking whether he should buy plane tickets for the team to attend Nationals. The event is scheduled to take place in about six weeks. I told him I wouldn’t.
- Does he know that the event will actually take place?
- Airlines are offering change fee waivers, but not refunds unless flights are cancelled. In this case he’d be buying tickets for others, and would have no way to get his money back – seniors on the team graduating would take the credits with them, rather than using the credits to travel to other debate tournaments.
- It’s a reasonable bet that waiting a week versus buying today won’t see higher fares.
This advice could be wrong but weighing the risks seemed right. I realized that the same conversation is playing out over and over across the country. It’s the unwillingness to pull the trigger on purchases in face of uncertainty as much as anything that’s holding back travel – it’s not just uncertainty about the progression of the virus, but uncertainty about how others will react in making their own plans (such as cancelling or not attending events).
You left out the 3rd possibility, something some hotels had been doing last time when demand dropped: accept lower occupancy rates but don’t discount like in the past since the buying power is still there for customers who stay anyway.
Marriott will be offering 500 bonus points for every 25 nights very soon 🙂
Hotels facing collapsing occupancy will probably choose to discount, otherwise what little business there is will go to competitors. Perhaps the smarter move for them would be to close entire wings for redecoration.
But, yes, it’s the uncertainty, as well as the fear of being trapped away from home while self-isolating, that will kill dead any non-essential travel in the near future. There will be a few bargain hunters who don’t have families but most people will simply wait out the next three months, hoping to re-schedule when the virus is on the wane.
What’s so surprising about the ADR numbers? The business travelers who pay high rates and need to travel are still doing so, and the leisure travelers booking cheapo rates are canceling out of fear. Simple.
Also, where is there evidence presented to support the position that discounting is occurring? My thoughts are in line with GUWonder – hotels will be super reluctant to drop rates; they’ll instead hold out for occupancy to come back. We see this all the time in new-construction residential and commercial real estate in hot markets – units or square footage will sit vacant for years because no one wants to bring down rates.
I have a lot of domestic travel planned over the next month that was booked months ago and I just checked hotel rates this morning for my reservations thinking prices might have come down. Instead I found that prices are now HIGHER than I reserved for all my reservations.
My guess was that hotels are assuming anybody booking travel now for the upcoming weeks really needs to travel and they are jacking up prices to take advantage of the inelastic demand.
SCO–same here, past 2 weeks I have been traveling and thought that with lower occupancy, the rates would come down. Wrong. I asked at 2 properties I stayed at and they said “thee are our normal rates, no reductions, we have corporate rooms booked long-term and therefore, no changes needed.”
So if occupancy drops from, say, 65% to 50%, just cut back on employee hours for awhile (they might even be out sick, anyway!) and eventually things will go back to normal.
Where I DO see some drastic reductions is in cruise fares over the next 3 months. Now I’m thinking of booking a late May/early June cruise because the fear factor has reduced fares across the board.
For those afraid to travel for fear of getting sick or getting stuck in quarantine, no, a 20% savings won’t make a difference. But there’s another group of customers who aren’t concerned about the coronavirus, who are driven by lower prices.
Further, even if the total traveling population won’t increase with lower prices, fewer travelers means more competition. Consider 4 airlines with equal capacity on a route. When planes are 95% full, there’s little incentive to discount; even the highest priced airline will have at least an 80% load. But if the planes are overall only 50% full, the highest priced airline may be flying nearly empty. So they’re not discounting to incent additional travel, they’re discounting to ensure a larger market share of those who are traveling anyway.
@sco-I’m seeing higher prices too on the domestic routes I usually fly-airlines (UA), hotels (Hyatt) and car rental (Avis & Hertz).
A few data points.
Firstly, next midweek you can stay in the Intercontinental Mark Hopkins, downtown San Francisco, for $114 ($140 with taxes) using Priceline (Express deal, but not hard to figure out). I haven’t seen that kind of rate for many years. I’m wondering if we’ll see a return of opaque hotel deals as a way of shifting excess inventory rather than openly discounting. There are at least 20K empty rooms because of GDC being cancelled at short notice. The (discounted) conference rate for the Parc55 when I booked it was $350 a night plus tax. Cheapest published rate then was over $400. Now it’s cancelled, the same nights are already down to $228
Secondly, my colleagues and I have already noticed a massive drop off on occupancy on flights. San Jose-Vegas is usually nearly or completely full on Southwest for every flight. Last week it was half full. Yesterday – 30 people on the flight.
Thirdly, if you’re interested in cruising, MSC cruises are offering 7 nights from Miami around the Caribbean for $249 per person (supposedly reduced from $2298), with free upgrade to a balcony. No idea how good they are but heck, food and board for $500 for a couple for a week if you live close to Miami is pretty tempting!
@Martin-Nothing from MSC is “tempting.”
I decided to cancel my planned, 17-day, mid-April trip from LAX to Thailand on XiamenAir because it transits through China and the current uncertainty (and despite cases going down in China and very few in Thailand). XiamenAir refunded my ticket in full. United also fully refunded the separately booked flights from DEN to LAX, which were Basic Economy non-refundable tickets.
In both cases, I received fast and very responsive service from United and XiamenAir by messaging them from their Facebook pages. I’ve dealt with XiamenAir by email previously and it was a bit slow and variable in terms of English responses. The XiamenAir Facebook team seems to be more consistently English fluent.
What will get people back on a plane? Changes in corporate travel policy. More and more firms are “grounding” their people “out of an abundance of caution.” Cheaper fares or hotel rates isn’t going to change that. Patience is.
The coronavirus is going to be with us until we find a cure, things are not getting better anytime soon.
I agree with GUWonder. The leisure demand side has collapsed and is no longer price elastic; no families will make vacation plans right now, just because hotels are starting sales. and no debate team is going to make advance bookings either. The business demand-side has reduced, but what is left is all travel that is deemed necessary and therefore completely price inelastic. I would expect prices to go up, not down, after revenue management recalibrates things.
Currently, legacy algos are automatically lowering prices and reopening opaque availability with crappy OTA (e.g. the Priceline “deal” cited above) as they see lower advance bookings, but only because they have not been updated yet.
And yet there is and is going to be some discounting with hotels. It just won’t be across the board with all hotels doing it or doing it the same way.
In part, it will depend on the nature of the employer/ workforce relationships. For forward looking properties, with good employment practices , it’s more likely they’ll discount to try to keep occupancy levels reasonable, just to keep the doors open/staff employed, even if that means a lower margin. They know that the good times will return, sooner rather than later.
For the others, particularly those with highly casualised labour, they would likely accept lower occupancy but maintain rates.
In Thailand , rates appear to be down about 25%, including everything from ‘cheap and cheerful’ right to the top end.
“Currently the enemy is uncertainty as much as the virus itself.” That sums up the entire situation in one sentence.
Anybody who books a non-refundable hotel rate is a fool (unless it is discounted 80% off the usual price)
Vegas is going to need to take a serious look at discounting similar to post-9/11 and post-2008 financial crisis. Nobody is going to take those kind of option trips (much less the conventions) and empty room cost money. But I am sure there would be plenty of takes at $25 nights (plus resort fees)