At this point in the life cycle of the coronavirus pandemic, it’s difficult to identify one single aspect of society that hasn’t been impacted in some way, shape, or form since its onset back at the end of 2019 and into the early months of 2020. A year and a half later, and many supply chains, daily routines, and ways of doing business continue to be disrupted as the virus continues to infect millions globally and the new Delta variant begins to spread more rapidly than ever before.
One area in particular that took an especially hard hit by the coronavirus onset was the travel and lodging industry. There have been glimmers of hope here and there, but on the whole, hotels, cruises, tourism, travel agencies and everything else having to do with this industry continues to struggle greatly as a direct result of COVID-19.
To account for the significant losses they’ve faced, many of these businesses within the travel and lodging industry have taken it upon themselves to get creative in order to cut costs. Take hotels, for example, which have surprised retail traders and investors as of late with projected higher earnings. Why exactly is this happening, and will it last?
Been To A Hotel Recently? What Did You Notice?
If you or someone you know has stepped foot inside a hotel in the last several months, there’s one part of the traditional hotel experience that is immediately and obviously lacking today: the frequency at which the hotel is being cleaned. In the past, you could expect to see a housekeeping cart in the hallway every time you left your room and could depend on a knock on your door at some point in the morning. Today, many hotels have reduced their cleaning and servicing schedules down to every other day, every two days, or even every three days.
Those within the industry will claim that this is a direct result of decreased staff in the wake of COVID-19. Whether true, this reduction in cleaning and servicing is simply a cost-cutting measure. Only cleaning every few days as opposed to every day cuts down on all sorts of expenses, from paying salaried employees to restocking products in the room to the use of cleaning supplies. This will surely be reflected in the hotel’s financial reports, and the picture it will paint will not be the most accurate.
Operating Costs To Reduce
Because of these reduced housekeeping costs across the board in the lodging industry, many analysts are expecting to see increase in margins for hotels that exceed rational expectations for this moment in history. As a result, retail investors and traders can expect to see earnings for the biggest hotel chains to be higher than expected in the quarterly reports to come. This is going to be good for the hotels, like Marriott (MAR) and Hilton (HLT), and for retail investors and traders in the moment, but perhaps not in the long run.
It makes sense why earnings would appear to increase, seeing as lower spending means more income, but it’s a complex scenario equivalent to a child moving their food around on their plate and shoving it all to one side to make it look like they ate more than they actually did. There is less spending on housekeeping, to be sure, but that doesn’t mean that more people are coming to the hotels to spend their money there — it just means the business itself isn’t spending as much as it once was before cutting those costs.
Better Earnings Won’t Be Sustained
As a result of this optical illusion of sorts, it’s only a matter of time for this perceived increase in earnings to level itself out. There’s no denying earnings are probably going to look better than they should in the short-term, and it will be reflected in the price of shares for the biggest hotel chains on the stock market. This will not be sustained for very long at all in the long-term.
It won’t take very long at all for analysts to catch onto this phenomenon, at which point the cost-cutting measures will be factored into the equation and a much more reasonable analysis will be released for these chains, effectively knocking them back down to size.
Even if this didn’t happen and analysts never caught on, consider the fact that whenever the time comes for hotels to return to the kind of daily servicing duties they used to perform, those operating costs will shoot back up to normal once again. No matter which way you look at it, these increased earnings will not be sustained for long.
Short-Term Pop, Long-Term Drop?
In the coming months, hotels need to make a tough decision: Do they continue to spend on cleaning and servicing rooms daily as they once did before the coronavirus pandemic even though it will cost them more money, or do they continue to reduce service to two or three times a week and risk losing out on business to travel and lodging alternatives like Airbnb (ABNB) and Vrbo because guests are put off by the lack of cleanliness they expect from hotels?
It’s a lose-lose scenario, but it seems that the latter is much worse than the former: Spending more on housekeeping now is certainly a large financial burden in the moment, but losing out on countless hotel patrons to the competition is a much more permanent consequence. The choice is ultimately up to the hotels themselves, but either way, the aftermath will directly impact those retail investors and traders with financial stake in the industry — Be wary of this if hotel earnings pop in the months to come.
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