Here we are, to review the year just ended and marked by the biggest crisis in the history of hospitality, and to make a few projections for 2021 based on the booking data currently available to us, concentrating on four large clusters (seaside, mountain, lakeside, city) on which almost 80% of Italian accommodation facilities are distributed.
Let us start by stating one basic fact. This crisis linked to the COVID-19 pandemic has certainly affected tourism and the hospitality and hotel industry, but it did not affect everyone in the same way.
As we have mentioned in our previous articles, in 2020 we saw a performance far exceeding 2019 for certain destinations, a sign that some places have paradoxically benefited from the pandemic effect, which has shifted and directed flows of travelers to certain areas rather than others.
The data that we will present below is sourced from the revenue management software Revolution Plus on a sample of 300 properties currently utilizing the consultancy services of Franco Grasso Revenue Team.
Seaside, mountain, and lakeside locations
Let us begin with the analysis of mountain, seaside, and lakeside locations, which over the summer recorded performances surpassing 2019 (also in terms of average daily rate, as reflected in the summary chart at the beginning of the article) in those months when there were no travel restrictions in place and the health situation was relatively calm. It should be mentioned that these performances were largely determined by an extremely high domestic demand which offset the decline of foreigners related to international travel restrictions and was expressed to a greater extent through direct reservations (telephone, email, walk-in) with a very short booking window and using personal vehicles as preferred mode of transport.
As can be seen from the graph below, the performance of mountain locations followed a trend consistent with the developing epidemiological situation: excellent results in January and February 2020, followed by the collapse in connection to the first wave and the first lockdown of March-April-May (months of low-mid season for mountain locations), a slight recovery in June, followed in turn by the boom of July, August, September, and October before declining once again starting from November, with the emergence of the second wave across Europe and the first restrictions and closures that lasted until Christmas and New Year’s Eve. The final annual result, net of the difference between 2019 and 2020, worsened by the restrictions of Christmas and New Year, was nevertheless positive for mountain locations and generated significant profits for the hotels in this cluster.
Seaside and lakeside locations mirrored their respective performance. Analyzing the standard season of May-October, we can notice that the weakest months of all were the very first and the very last months, May and October, which generally represent the low/medium season for these locations. Clearly, the month of May was affected by the lockdown and the inter-regional and European closures, but after the slow reopening in June we did observe the subsequent boom in July, August, and September, which led to fantastic results for hoteliers in these locations. Then, there was a decline in October, owing to bad weather and the first signs of a second wave and restrictions in other neighboring European countries, which resulted in a reduction in the inflow of foreign tourists (October is generally a month in which Italian holiday resorts are able to deseasonalize their business thanks to foreigners, mainly German, Dutch, Swiss, Scandinavian, etc.).
So, the revenue decreases due to lockdown were offset by the excellent increases in the summer months and, overall, the final seasonal result for lakeside and seaside hotels, despite all the pandemic-related difficulties and the slight decrease compared to 2019 turnover, was quite positive and profitable for hoteliers in these locations.
As for art towns or business- and leisure-oriented cities (including Rome, Milan, Florence, Naples, Bologna, Bari, Palermo etc.), the situation is surely the most complex of all. These destinations largely depend on segments (international leisure, groups, MICE, etc.) that were almost wiped out by the pandemic.
The chart below highlights how cities were impacted by the first and second waves, with ensuing restrictions on international travel, cancellation of events and conventions, closure of restaurants, coffee shops, museums, and other entertainment venues. Yet, in the midst of these two waves, there was a time period from the second half of June to the first half of October 2020 during which cities experienced a robust recovery (thanks to the reopening of European borders and the resumption of most intra-EU flights, with a prevalence of German, English, French, Dutch, Swiss and Belgian customers), although at average daily rates inevitably lower than 2019 levels, in any case a fact which leads us to be quite optimistic about the future. This was a period in which a good mix of business and leisure domestic and European demand breathed some life into both large and small cities.
Clearly, from the second half of October to the end of December, with the reinstatement of lockdown, red zones, and various restrictions, including at the European level, city hotels had to withstand the impact, drawing fundamentally only on domestic business customers, smart workers, people requiring a place to self-isolate, or demand related to the health emergency. Simply put, customers who have always traveled during the pandemic, even in the most critical phases, and who have always generated demand for hotels.
There are city hotels which, by virtue of a location and certain services which are particularly attractive to the business segment (restaurant, room service/food delivery, parking, excellent Wi-Fi connection, etc.), were able to limit damages during both the first and second waves – with related lockdown and red/orange/yellow zones – achieving satisfactory levels of occupancy and revenue also during these periods.
It should also be noted that when it comes to cities there are differences in performance which depend not only on the geographical area but also on the class of hotel. There is no doubt that 5-star luxury hotels, historically linked to incoming foreign leisure travelers (American, Asian, Russian, Arab, etc.) have suffered more than 3- and 4-star hotels.
What we have found in the above-examined sample is that most city hotels (especially 3- and 4-stars with excellent online reputation), despite all the difficulties, have achieved year-end results which at the very least ensure the so-called break-even (simply the point at which expenses and revenue are equal), an essential factor for short-term financial sustainability. And in a crazy year like the one we have just experienced, reaching the break-even point (and in some virtuous cases even a profit) was definitely the main goal that city hotels were hoping to achieve.
Surely, the reduced supply in cities (based on Booking.com and STR cross-checked data, the number of temporarily closed hotels varied around 15% and 30% during the pandemic) was partially responsible for offsetting the reduction in demand, and in part favored those facilities that remained always (or almost always) open for business. We have argued from the start that, from a strictly commercial point of view, remaining open for business is always the best choice, and whereas demand levels might suggest that the costs incurred in keeping the hotel open are not justifiable, the damage of opting for closure in the medium/long-term could exceed the relative economic benefits in the short term.
Closing a hotel for a long period certainly leads to a considerable reduction in costs, but it does not eliminate them altogether (there will always be mortgages, rents, maintenance costs, taxes to be incurred etc.), while it most certainly eliminates revenues. It also negatively affects positioning, visibility, and online conversion rate. In times of crisis and low demand it is almost always preferable to try to remain open for business, optimizing operations as much as possible with few fixed costs and numerous variable costs, proportionate to occupancy or turnover (rent, technology providers, on-call personnel, etc.), and strive to keep the engine of online channels running through a constant feed of reservations and reviews, which, as few as they may be, will procure benefits in terms of visibility in the medium term and help to reach the above-described break-even goal.
On this respect, STR, the world’s largest benchmark company, has highlighted that those city hotels that remained always (or almost always) open during the pandemic fared better than those that opted for long shutdown periods and only reopened during the summer – once the lockdown was over, the restrictions lifted and the virus appeared to be under control – and later on closed again during the second wave and lockdown.
The data described so far also show how important it is for government aid, fairly meager as it is, to take into account this profound differentiation between destinations and types of hotels, as well as the fact that some properties certainly require a great deal more financial aid than others.
Now that we have examined what took place in 2020, let us take a look at what might happen in 2021.
First of all, it must be said that this virus has shown us how difficult it is to make reliable projections, since scientists themselves are often unable to provide answers and politicians dominate the scene with confusing, questionable or incomprehensible decisions.
However, after a year of pandemic, we certainly have a wealth of scientific and epidemiological data that allows us to make projections with a smaller margin of error and to hypothesize scenarios that will have to be interpreted dynamically and reactively from time to time and converted into effective strategies to achieve the best possible outcome for our hotels.
Today, we know that our professional and private life and the entire economy, including the tourism industry, largely hinge on a cold number, the Rt: the index which determines the number of people that can be infected by one person on average. As long as this parameter remains below 1, we can rest easy to some extent, since the epidemic is receding. As soon as it rises above 1, a cascade of events is set in motion with inevitable repercussion effects on hotels: significant increase in positive cases, upsurge in hospital/ICU admissions and deaths, various restrictions (lockdown, red/orange/yellow zones, closure of commercial activities, restrictions on circulation, etc.), significant damage to the economy, decline in demand for hotels.
The recent news concerning vaccine availability and first administrations certainly signaled a turning point for our projections on the future of tourism. It must be said that it is still early to understand what kind of impact the vaccine might have on the resumption of tourism and what sort of timeframe we might be looking at. There are still some unknown factors and we can basically posit two scenarios: a worst-case scenario and a best-case scenario.
In the worst-case scenario, the virus will undergo mutations over time which might affect the vaccine’s effectiveness and force science to re-engineer the vaccine to tackle emerging variants. Moreover, we do not know whether the vaccine only protects against symptoms or also against infection, and how long this protection might last. Even if the vaccine proves to be effective, there will not be enough doses available in the first 6 months to cover the entire population and, in any case, there might be a large number of people who, in the absence of compulsory vaccination, may resolve not to get vaccinated due to skepticism, fear or ideological stance, making it difficult to attain sufficient immunization coverage to achieve herd immunity in the population (at least 60/70%, according to scientists). In this scenario, unfortunately, 2021 will be identical to 2020, meaning we will have to continue to coexist with the virus and carry on doing what we would have done anyway had a vaccine not been available.
The weapons to coexist with the virus will continue to be individual and social prevention measures, enhanced diagnostic capabilities with rapid and at-home testing, tracing, technology, etc. and we will continue to see big waves and small waves, more or less geolocalized, as well as regional or provincial “stop and go” restrictive measures for longer or shorter periods decided by institutions, with businesses closing and reopening based on the local Rt trend, which will be something akin to a compass that hoteliers and revenue managers will have to consult frequently to plan operational, sales and pricing aspects to the best of their ability, in the short to medium term.
Such a scenario, however unpleasant it may be, must be taken into account. For a time, hotels will have to continue to run a flexible operational set-up, keeping a small amount of fixed staff and costs and everything else variable, so as to adapt to the various epidemiological stages and adopt a business and pricing strategy aimed at limiting damages during the most difficult periods and maximizing revenues in those times when the virus gives us some respite, the Rt remains below 1, and politicians allow us a bit of freedom. With the knowledge that during the summer, with offices and schools closed, less congested means of transport, and people more likely to spend their time in open and well-ventilated spaces, viral circulation should be slower and more manageable, all of which should positively affect tourism.
This fluctuating phase could last until the vaccine is made compulsory or the pandemic disappears on its own, as occurred in the past with other pandemics that left their mark on history. Meanwhile, the minimum target for hotels will continue to be, as was the case in 2020, to achieve break-even point or to maintain minimum profit margins. A goal that most hotels were able to achieve in 2020 by adopting an effective operational and commercial strategy to optimize costs on the one hand and maximize revenues on the other.
The best-case scenario is that in the first 6 months the vaccine will be administered to at least an adequate percentage of the population, first and foremost to at-risk categories such as health professionals and people over 60 and with preexisting medical conditions, thus expediting an immunization process of the population that is already ongoing and at an advanced stage due to the prior and current waves. In fact, today we know, according to several serological studies, that the number of people who have been exposed to the virus could likely be around 10 times higher than the official numbers, on account of the extremely high number of asymptomatic people (mostly aged 50 and under) that remain untraced. So, if 2 million Italians have officially tested positive for the virus to date, it is likely that the real infected may have been 20 million, basically over 30% of the Italian population. As we know from various scientific studies, those once infected with COVID-19 still maintain a protective immune memory one year on, and this applies to asymptomatic subjects as well (in the case of SARS in 2003, also a type of coronavirus, antibodies were detected in patients up to 17 years later). We also know that confirmed cases of reinfection are presently very rare (6 out of more than 80.000.000 in the world, therefore about 0,000007%).
We know from other scientific studies that Bergamo, the hardest-hit city in Italy in terms of cases and deaths during the first wave of March and April, escaped the second wave of October and November almost unscathed thanks to a near herd immunity acquired during the first wave (where more than 40% of the population was infected) and has slowed down viral circulation considerably, generating few positive cases and allowing hospitals to maintain the situation under control. In terms of virus circulation, much of the Italian territory experienced during the second wave what only Bergamo and few other cities in northern Italy had experienced during the first wave (before a national and total lockdown came into place).
Italy’s situation mirrors that of most of Europe and America, which are the continents with the highest number of COVID-19 infections.
In such a scenario, it is clearly desirable to hypothesize that the 60-70% threshold for herd immunity could be reached far sooner than expected, thanks to both the vaccine and the natural immunity of those who have already been exposed to COVID-19. If all goes well, this could happen in Europe and America between April and June, which might accelerate the recovery of tourism between these two continents. We will be able to gather this much from the Rt trend, which despite the relaxation of restrictions and the free movement of persons, at that point will no longer increase above 1. Clearly, scientists and health institutions will confirm this based on serological research.
Clearly none of us has the crystal ball and can foretell which epidemiological scenario will prevail and, above all, what other crazy decisions politicians might have in store for us.
However, we are 100% certain of one thing: the market is more than ready for the best-case scenario. This is not merely an optimistic hypothesis, but a mathematical certainty and an awareness derived from the analysis of what transpired in 2020 and what is apparent from the above-described data. In the summer of 2020, when the virus and politicians seemed to have given us some respite, the market literally exploded. To be sure, with varying intensities and average daily rate, depending on the destination. Nevertheless, it exploded anyway and everywhere, both in urban locations and in the more holiday-oriented destinations. The above-described data speaks loud and clear. And those who argued that virus-related fears or economic difficulties associated with the crisis would curb the desire to travel were contradicted by the very facts, because the only real factors that actually managed to exert a profound effect on demand were only political decisions and travel restrictions.
Those who own a seaside, mountain or lakeside hotel with excellent online visibility and reputation surely know what we are talking about and will certainly have experienced that paradoxical feeling by which at some point, from June onwards, the phone wouldn’t stop ringing and one struggled to keep up with the number of e-mails and booking requests. At that time, there was a transition from the dark and utter despair of March and April, with no incoming reservations at all, to the regret of not having enough rooms and staff to meet the overwhelming increase in demand from July to September. Some hotels in certain locations, with the help of favorable weather, came to realize at the end of the season, with a mixture of surprise and embarrassment, that 2020 was paradoxically their best year ever.
At the time the vaccine was not available and the proportion of population that was immune having been exposed to the virus was still quite small. Yet, the market literally exploded. What could happen now that the vaccine is available and herd immunity might hopefully be achieved by summer?
Under the latter epidemiological scenario, and with favorable weather, this could turn out to be a PHENOMENAL year for mountain, seaside, and lakeside destinations, far exceeding 2019. Indeed, mountain destinations are already sending out strong signals in this regard, as shown in the chart below.
For seaside and lakeside destinations the available data is not yet relevant, but as we have seen in 2020, it is only a matter of time before the tsunami of reservations for these places begins, as well.
Surely this 2021 could see, in the epidemiological scenario described above, a gradual recovery of art towns and major cities between April and June (owing to the resumption of flights and the relaxation of restrictions at the intra-EU level). Some city hotels – namely the ones that have always remained open during the pandemic, that have an excellent online reputation and an appropriate pricing and sales strategy – could start seeing results surpassing those of 2019 already in the second half of 2021, on account of the so-called compensatory effects by which a large part of the demand will pile up during that period of the year, as competition and supply continues to hover at levels equal if not lower than 2019 (taking into account all the properties permanently closed for COVID-related reasons). In fact, in addition to all the international leisure clients who have had to postpone the trip of a lifetime to Italy for over a year due to the restrictions in place and will be eager to make up for lost time, the impact of events must also be factored in. Many of the events that would have been spread out over time in 2020 and were later canceled due to COVID-19, will be concentrated in the second half of the year. One only has to look at the first signals coming from Milan, where we can observe a strong pressure (also in terms of average daily rates) in the third quarter of the year due to certain international events. This is a sign that certain segments such as MICE, groups, international leisure and business could make a strong comeback in the second half of the year, contributing to a sharp rebound of cities.
Further encouraging signals are also coming from the Americans, who according to Expedia data (cross-linked with Booking.com data) are the most active on-the-books market for destinations such as Rome, Florence or the Amalfi Coast. As illustrated in the chart below, Americans occupy the first place in terms of the percentage of bookings for the second half of the year. It should be clearly stated that absolute volumes are still lower than those of a normal pre-COVID year. But this data, provided by the two main OTAs in the market, is likely to underscore a trend that will strengthen over time as trust in vaccines and herd immunity increases, and it is important to highlight that a key segment for many Italian art towns (namely, Americans, understood primarily as United States citizens but also Canadians, Brazilians, etc.) is already exhibiting a certain degree of confidence and optimism on the recovery of international and long-haul tourism. As far as Asian tourists are concerned, we may have to wait until 2022 to welcome them again. Many Asian governments have had a significantly less tolerant approach to the virus (mindful of the SARS experience in 2003) compared to European or American governments, and it is likely that for a long time, until mass vaccination takes place, there may still be a number of restrictions that continue to limit the flow of tourists to and from those countries.
As has become clear from our considerations, it will be crucial for hotels to adopt the right strategy this year, which envisages a cost-flexible operating framework to cope with pandemic-related demand fluctuations on the one hand and, on the other hand, a dynamic and responsive sales and pricing approach to maximize revenues in those times when the health situation permits it, and limit damage in those times when restrictions of various kinds come into place that directly or indirectly affect demand. In this context, 2020 has shown us that revenue management is all-important to achieve the best possible result, both in favorable market conditions and (especially) in periods of crisis and low demand. However absurd and inconceivable it may seem, 2020 has shown us that revenue management is effective and applicable even during a pandemic.
If all goes well and the high number of vaccinations (in conjunction with the immense number of people already immune after getting infected with Covid) truly help us to end this nightmare, we will have to do a good job at managing the effects of the recovery, which could be overwhelmingly positive for those properties with excellent reputation and online visibility that will understand how to read and interpret market developments reactively and dynamically.
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