Hotels Cut Staff, Delay CapEx Spending

NEW YORK CITY-With fewer guests filling their rooms, hotel managers have turned to a slew of cost-slashing schemes that include staff reductions and postponing capital expenditures. However, they are also making sure those cuts leave the customer experience unaffected.

Those trends were uncovered by Ernst & Young in a survey it conducted between December 2008 and February. About 40 hospitality-management firms, with revenues ranging from below $150 million to more than $600 million, were canvassed for their strategies on how to survive the current economic downturn.

“We went out to the marketplace to figure out what hotel management companies were doing to weather the storm,” says Michael Magrans, locally based senior manager in the hospitality advisory services group at E&Y.

Specifically, the firm wanted to know how the companies are operating their hotels; managing finances and risk; undertaking transactions and alliances; recruiting and retaining customers as well as staff.

What they found was an industry focused more than ever on being prudent with its dollars. “When things were going very well over the past few years in the hospitality market, it tends to mask organizational inefficiencies, both at the asset and entity level,” says Magrans. “Now smart companies are asking how can they eliminate the duplications and inefficiencies inherited when growth was so strong. They are looking for ways to enhance revenue and cut costs. So as things turn around, they can be in a position to hit the ground running.”

There is also a renewed vigor about truly understanding how the company as well as its portfolio is being operated. “When business was good and the bottom line was positive,” Magrans says, “there was probably a lot less attention paid to internal controls. Now companies are putting an emphasis on transparency, because the more you can do to restore confidence in your operations, the better off your position will be.”

All responded that their primary cost management tool was some type of labor management tactic, such as hiring freezes, layoffs and reductions in paid working hours. “This is going to have a major impact on employment in the hospitality industry,” Magrans states.

Yet this doesn’t mean that hoteliers are losing sight of the importance of how they treat their customers. “Guest services are the absolute last thing you would want to cut,” Magrans states. “If anything, they are increasing guest services at this point and reaching out to loyalty networks. Operators are trying to drive demand as much as possible through guest services, whether that’s a more personal touch or providing complimentary gifts/services. Now is the time to try to hold onto your customer base as best as possible.”

Other cost-saving measures include holding off on capital expenditures. “Instead of refurbishing the rooms or the amenities, they are pushing it off a year,” Magrans says. Thirty-percent of the respondents said they undertaking working capital cutbacks.

Undertaking property tax appeals is another way to preserve precious cash reserves, with 22% saying they are utilizing that option. “In the past few years, property values have skyrocketed,” Magrans says. “Therefore, now they are paying those taxes on those inflated values. So they are going back to their municipalities and trying to get a more accurate take on what the true value of those assets are, which in turn would reduce the real estate taxes.”

And in an ironic move for those in the hospitality industry, 11% of management companies are clamping down on business excursions. “They have pretty much grounded all unnecessary corporate travel to keep costs down,” Magrans relates.

And while marketing programs are being trimmed, hoteliers are beefing up their online presence. “They are looking for creative ways to market their properties,” Magrans finds. “A lot of that is being driven through the online channels, whether it’s Google, so that their hotel shows up as the number one search result, or they are really investing in travel blogs and trying to build a brand presence. They are putting money into developing or redeveloping their websites to capture market share.”

Though the majority of respondents expect that RevPAR will decline in 2009, they may be somewhat optimistic about how steep the descent could be. Magrans reports that the year-over-year plunge in RevPAR reached 17% in March. Yet only 10% thought there would be a drop greater than -8% in ’09, while 50% said the decline for the year would be between -5% and -8%. “To be honest, the optimism of the respondents surprised me a bit,” Magrans says. “Perhaps it had to do with when the survey took place. They are a bit conservative in their revenue per available room decline over the year.”

When asked to characterize their company’s financial status, 74% of the respondents answered “performing,” while 11% said “stressed” and 7% checked “underperforming.” As fundamentals in the lodging industry continue to weaken, E&Y anticipates that more companies will be pressured by slumping revenues.

As for capital strategies, a third plan to raise fresh capital in 2009, with 38% intending to do so between 2010 and 2012. With the financing markets tight, more than two-thirds say they will seek joint ventures or alliances with other hospitality enterprises and capital sources to bolster their business.

The most challenging factor facing the industry is declining demand, which was cited by 82% of the respondents. Shrinking average daily rates came in second, with 56% of the vote.

The E&Y survey further indicates that the hoteliers have embraced the green movement in a big way, with 88% saying they currently use or purchase energy-saving technology and 82% employing recycling programs. “In addition to being socially responsible, going green is becoming more affordable,” Magrans says. “And with rising costs, the green initiatives definitely have appeal. Going green goes a long with today’s hotel guests.”