The hotel industry is resilient, but needs to adapt to change: EY’s Umar Riaz

The latest survey by EY indicates a resilient recovery in the hospitality industry, with a strong leisure market boosted by changing work patterns more than offset continuing weakness in the business travel market, particularly in transient business.

Although more and more economic indicators indicate a coming recession, EY’s Hospitality Lead Umar Riaz says the combined momentum of the pent-up demand and secular changes in travel patterns are likely to keep the recovery on track.

HOTELS Magazine spoke to Mr. Riaz about the report and the outlook for the industry. The interview has been edited for length.

HOTELS Magazine: What are the main takeaways from your recent survey?

Umar Riaz: The top-line conclusion is a much more rapid recovery to 2019 levels than anyone had been forecasting a year and a half ago. When we were in the pandemic, most analysts were expecting the industry would recover back to 2019 levels in 2023 or 2024. But when we did the survey, 9 of the 20 CFOs expected recovery to be by the end of this year, and 16 of 20 expect the recovery to be in the first quarter of 2023.

HOTELS Magazine: What is driving the optimism?

Umar Riaz: I think there are two factors. One is the huge resilience of leisure travel. When we looked at all the different segments of travel, clearly domestic leisure travel is leading the charge globally and that is what is driving the business. And coupled with that is a very strong ADR (Average Daily Rate) performance across the globe: it’s up 13% in the US vs 2019 levels, up 9% in Europe, and 13% in the Middle East and Africa.

The second factor is that changing workplace trends — people working from home and companies not expecting people to work as much — are leading to a lot more travel. There is a lot of anecdotal evidence to suggest that when people have the flexibility to work from home, they travel.

I think this is a different category from bleisure: bleisure is when people travel for work and then they combine their leisure travel with it. This is people having much more flexibility to travel whenever they want because they can work remotely.

So I think there are current trends that are driving increased demand for travel. Whether those trends last or not is another topic, but I think that at least for the next six months to a year at least, these trends should be very much in play.

HOTELS Magazine: How did the respondents feel about business travel?

Umar Riaz: Business travel is clearly not recovering back to 2019 levels, but it is recovering. Group travel is extremely robust in terms of forward bookings also. The transient business market is a soft spot, but it has recovered quite a bit. It was down about 40% in 2021, and it’s forecast to be down about 20% or so in 2022.

There are two main reasons for the continuing weakness. The first is that international transient business travel is still down because of cost and people are not as eager to get on a plane and travel. And second, I think some companies figured out during the pandemic that they could get a lot more work done without having to travel as much, so they are conserving spending on travel as a method to boost profitability.

Umar Riaz, EY’s Hospitality Lead

HOTELS Magazine: How should hospitality companies prepare themselves for these shifts?

Umar Riaz: Hotels have to prepare themselves both from a revenue management perspective and a customer experience perspective: they have to expect a lot more leisure travel than they are used to and that is going to create a different demand pattern and I think the industry needs to make adjustments at both the property level and the corporate level.

It’s a bit unclear whether historical patterns of demand which are used for revenue management will continue to hold in this new environment. Booking windows are getting shorter and shorter: People are traveling much more on a whim than they used to.

So if you’re a hotelier, you’ve got to make sure you’re up on the current travel patterns so you can adjust your revenue management and your yield management processes appropriately. That I think is key. And I think this extends to staffing levels. Hotels used to be full of business transient demand during the week and on weekends they filled the rooms. But now there is more and more leisure travel. I think you’ve got to figure out how to support that throughout the whole week and how to staff your hotel appropriately and what kind of services leisure travelers want over and above business travelers.

HOTELS Magazine: How do you think the macroeconomic outlook will affect the hotel industry?

Umar Riaz: The good thing is that despite the constraints, the industry is very healthy right now. When you look at the outlook for the global economy for the next year or so, most people are expecting some sort of a recession. There is a discussion on how deep it is going to be, but there is consensus that it is going to be a mild recession at least for the first two or three quarters of 2023.

Historically there has been a strong correlation between GDP growth and RevPAR because travel is one of those services that can be turned off quite rapidly. But it’s my opinion that given the current dynamics of the travel industry, even if there is a mild recession in the next six months or so, the travel industry is going to do very well still. When you look at secular factors like China opening up once airlines rejigger their capacity, there is no evidence to suggest from forward bookings that there is any let up in leisure demand at this point.

Umar Riaz: Sustainability and environmental responsibility are top agenda items for almost every entity in the industry: it’s a social imperative and everyone wants to make sure they abide by that.

I think one of the issues the industry has to grapple with is the supply chain because you might want to get rid of plastic water bottles in your hotel, for example, someone has to supply you with an alternative. So if the industry wants to pivot to more sustainable operations, it has to focus not just on its own operations, but also on all the operations of its supply chain.

There is no reason that that should degrade the level of service if you’re a luxury hotel – there’s no inherent conflict between being environmentally conscious and still having a luxury portfolio. There are parts of environmental consciousness that are also considered luxury at this point. But what I’ve seen in the industry is making sure that the supply chain is there and you have the suppliers provide you with more environmentally conscious products that you can then stock in your hotel.