It’s been more than a decade since the 2008 financial meltdown, but it’s never comforting to hear the word “recession.” Last week, the Dow Jones Industrial Average dropped 800 points, triggered by the inversion of the yield curve, an indicator of investment in the U.S. economy.
Economists looking for signs of a slowing economy might point to President Trump’s ongoing trade war with China, sluggish foreign markets or even the state of the trucking business, which is currently seeing “recession-high levels.”
Business cycles are, by definition, cyclical and after the longest period of economic growth in U.S. history, a slowdown is inevitable. What we don’t know is when it will hit.
The hospitality and travel industry is often the canary in the coal mine of financial indicators. Travel is a discretionary expense—a want, not a need. Nobody’s life ever depended on a night in the St. Regis. Even if consumers aren’t willing to give up their vacations, they might start making substitutions as they stay in cheaper places, cut their vacations short or turn to startups like Airbnb, which grew in a postrecession economy after its founding in 2008.
“You can see revenue flow almost in real-time with the economy,” said Kevin Jacobs, CFO at Hilton Worldwide. “History has shown that people love to travel in good times and bad, but it can be a leading indicator because at the end of the day, it is a consumer discretionary product.”
When consumers’ wallets tighten and their vacation budgets shrink, hotels need to get creative to fill their rooms and keep the lights on, if only to outlast the downturn.
Keeping the lights on
Chuck Kelley, a hospitality consultant who spent 32 years rising through the ranks at Marriott International, was overseeing the brand’s operations in the Caribbean and Latin America in 2008. When the recession hit, he went hotel to hotel, asking each manager what their plans were and what was needed.
“If you’re going to lose U.S. leisure travel, what other markets can you go to? What businesses have you turned down because of rates?” Kelley asked them. When the U.S. markets began to dry up and rates fell, a traditionally more rate-sensitive international market appeared. A special discounted rate was created for the island locals.
“The way we discussed it was a hotel room for a night is a perishable good,” Kelley said. “If you don’t sell it, you can’t sell it again tomorrow.”
In all, the hotels in Kelley’s region were able to mitigate the downturn, seeing revenue per available room decline only half as much as the competition in the Caribbean.
Another option is to promote staycations and getaway weekends for people closer to home. Hotels can partner with local theaters or restaurants to offer discounted weekend packages without consumers having to worry about travel expenses.
“[It’s] almost an oxymoron … but a staycation [says] you don’t have to go too far to experience something new—we offer a weekend of indulgences,” said Srikanth Beldona, a professor of hospitality business management at the University of Delaware. “Sell to your immediate environment and local markets; sell getaway packages. Those are more reasonable than traveling far away and spending a lot.”
Hotels can also negotiate corporate partnerships. By keeping rates flat for traveling clientele and throwing in an amenity like a free breakfast or room service, a hotel can cover operational costs and keep the lights on.
Kelley was overseeing Marriott’s regional sales and marketing for Asia and the Pacific and responsible for filling a new 600-room JW Marriott in Hong Kong during the 1989 Tiananmen Square protests in Beijing. “Travel to Hong Kong virtually stopped,” he said.
So Kelley turned to the airlines, negotiating a contract with American Airlines, United, and Cathay Pacific at a “deeply discounted rate” to fill the rooms with pilots and flight crews.
“By doing that, you’ve covered the fixed cost, you keep people employed and you keep the lights on,” Kelley said. “If you approach a recession strategically, you can mitigate the downturn on an individual property.”
At the corporate level, fears of a recession persist.
In a survey released by the consulting firm PwC, only 27% of CEOs in the hospitality and leisure industry said they were “very confident” about revenue growth, compared with 35% of CEOs globally. In North America, CEOs this year saw their optimism fall from 63% to 37% and their pessimism jump from just 3% to 28%.
When asked about political uncertainty in Hilton’s quarterly report, CEO Christopher J. Nassetta said people have “put a caution flag out.”
“It doesn’t mean they’re not doing things, they’re not spending, they’re not hiring, they’re not traveling,” Nassetta said. “[They’re] incrementally more cautious because of what’s going on in the broader environment.”
The Hiltons and Marriotts of the world are set to weather a potential downturn or even a recession on the strength and size of their brands. Hilton alone claims 94 million members in its loyalty program.
“Size matters when you’re working with distributors, intermediaries, stakeholders, simply because you have more leverage in the marketplace and the amount of inventory you hold,” Beldona said.
Pointing to Hilton’s own 2019 projections, Jacobs said he isn’t expecting a recession. But, in the event the economy turns, he believes Hilton would survive.
“We try to be really disciplined with how we allocate our resources in all times such that the muscle memory is there in the organization so that when we go into a downturn, people don’t have to behave all that differently,” Jacobs said. “Strategically, we wouldn’t have to do anything all that different.”