The impacts of the COVID-19 pandemic cut across industries and sectors. However, the hotel industry bore the greatest brunt of the pandemic. From travel restrictions to misconceptions about the spread of the virus, hotel managers had to grapple with unprecedented business downturns. But how did these events impact the EBITDA of hotels? 

EBITDA and its Importance to the Hotel Industry

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a performance metric that shows how well a business performs in its operating activities. It shows the revenue balance after deducting operating expenses. You can also view EBITDA as an operating cash flow since it eliminates all non-cash items and historical decisions, such as debt and capital expenditure. Moreover, it shows how a business performs before government taxes. From this perspective, we can deduce several benefits of calculating EBITDA for your hotel.

  • EBITDA shows your business’s ability to generate revenue from its main operations. It tells you whether your business is profitable or not.
  • An analysis of EBITDA helps business managers make informed decisions on areas that need adjustments to increase revenue and reduce expenses.
  • EBITDA is used by creditors and lenders to assess the ability of a business to meet its short and long-term obligations. A favorable EBITDA helps your hotel raise funds from creditors to support capital expenditures. 
EBITDA

You can calculate EBITDA using the formula: Total Revenue from Operations – Total Expenses + Finance Cost + Depreciation & Amortization + Taxes.

COVID-19 Impact on the EBITDA of Hotels

To understand how COVID-19 impacted the EBITDA of hotels, we must examine the factors affecting earnings before interest, tax, and capital expenditures like depreciation. From the formula, EBITDA is a function of revenue and expenses. A change in revenue or expenses impacts earnings before finance costs, tax, and depreciation.

COVID-19 affected the revenue and expenditure sides of the equation. From the onset of the pandemic, the hotel industry recorded a drastic decline in revenue. As of 2020, hotel occupancy was projected to fall below 1933 rates (during the Great Depression). Consequently, the industry revenues dropped by more than 50%. Expenses also increased as the budget for cleaning and fumigation agents expanded. 

With shrinking revenues and increasing operating expenses, hotels recorded a significant decline in EBITDA. The declining earnings drove some hotels into debt distress or insolvency. Some hotels never recovered from the impacts of the pandemic.

Immediate Effects of the Pandemic On Hotel Revenues and Expenses

The hotel and tourism industry experienced almost instant effects from COVID-19 restrictions. Movement restrictions and lockdowns reduced hotel occupancy to rates worse than those in the 9/11 period. The travel restrictions also affected the human resource sector of the industry. More than 70% of employees were laid off during the pandemic. Social distancing and ventilation requirements increased capital expenditure leading to an increased demand for credit and loans. All these impacts happened amidst plummeting revenue, further deteriorating the situation in the industry. 

Another immediate impact of the pandemic on the industry was supply chain disruptions. The supply disruptions lead to skyrocketing raw material prices, increasing the cost of doing business.   

Projections for EBITDA Recovery in The Hotel Industry

EBITDA

While isolated cases of COVID-19 are still reported, the virus no longer poses significant danger. Businesses have resumed even though some are still in the recovery phase. The hotel industry has been on an upward trajectory since the easing of pandemic restrictions. Key performance indicators have continued to improve since 2022. Here is a snapshot of industry performance in 2023 that can help us predict EBITDA Recovery in 2024 and beyond.

The following figures from AHLA (American Hotel and Lodging Association) show a bright future for the industry.

  • RevPAR (revenue per available room) reached new heights in 2023, surpassing 2022 November projections by 1.5%
  • Occupancy in 2023 inched closer to full recovery at 62.9%, although it slightly fell below the projected estimates by 0.9%
  • Average Daily Rate ADR increased by 4.2% in 2023
 

Recovery is expected to continue in 2024, with the following projections:

  • RevPAR is expected to grow by 4.1
  • Occupancy will continue to reach 63.6% as it approaches pre-pandemic levels
  • Average Daily Rate is expected to record a 3.0% increase

Accelerated recovery will improve the revenue side of EBITDA in 2024. However, inflation is expected to remain high, signifying an increased cost of raw materials. Inflation rates notwithstanding, hotel EBITDA will record a significant recovery in 2024.

Emerging Trends Likely to Impact Future EBITDA

Several emerging trends in the hotel industry are likely to impact future EBITDA. The emerging trends include:

  • Virtual and Hybrid Conferences. The advancement of video conferencing technology has enabled large conferences to go online. Indeed, virtual and hybrid meetings are increasingly becoming a preferred alternative to in-person conferences. This emerging trend may impact the EBITDA of hotels that largely depend on large in-person conferences.
  • Bleisure Travel. The demand for work-life balance has changed the workstation arrangements. Workers are now combining business and leisure, creating an emerging market that has the potential to grow hotel EBITDA.
  • Remote and hybrid workplace arrangements. The hospitality industry is embracing remote and hybrid workplace plans to enhance employee productivity. Increased workforce productivity enhances efficiency and guest satisfaction, which creates a competitive advantage. Guest satisfaction leads to good ratings, return customers, and referrals, which increases hotel transactions and revenue.
  •  Environment and sustainability. Clients are increasingly becoming concerned with business sustainability objectives. Hotels with elaborate environmental sustainability objectives can tap into this growing market to improve their EBITDA.

Potential Risks and Opportunities for Hotel Investors in The Post-Pandemic Market

Investors in the hotel industry can tap into the growing popularity of Bleisure Travel to make up for lost revenues as large in-person conferences plummet. Bleisure Travel is an emerging travel trend that blends business and leisure. Hotels can also expand their leisure occupancy to compensate for reducing large conferences. The hospitality industry can also invest in green energy and implement its sustainability objectives to attract environmentally conscious clients. They can also adopt remote and hybrid work arrangements to improve productivity and enhance efficiency. 

The following hotels have successfully tapped into the emerging opportunities to improve their EBITDA. 

  • Marriott International has developed a sustainability program called Connect Responsibly, which targets clients concerned with environmental sustainability.
  • Hyatt Centric Wall Street has positioned itself as a Bleisure Travel destination in New York.
  • Royal Lancaster London has tapped into the growing virtual and hybrid conferences market.

Lessons from EBITDA Decline

While the pandemic disrupted most sectors of the hotel industry, it left it with invaluable lessons. Industry players now understand the need to prepare for unprecedented impacts, such as the pandemic. They have also appreciated the importance of building a resilient workforce and business strategies to accelerate recovery. Innovation also helped most businesses to remain afloat amidst declining EBITDA.

Learn More About EBITDA

EBITDA provides a performance measurement tool for hotels that wish to analyze their revenue-raising strategies. It allows business managers to understand sectors that generate higher revenues and adjustments required to reduce expenses. At NewGen Advisory, we understand the post-pandemic EBITDA challenges and can help you tap into emerging opportunities to increase profitability.  Contact us to learn more about EBITDA and post-pandemic industry performance.