Marriott executives said the company currently is focusing on three areas of assistance in dealing with the effects of the coronavirus: emergency assistance for employees, preserving business liquidity and tax relief to ease near-term cash flow challenges.
BETHESDA, Maryland—Marriott International’s strategies to help its stakeholders and guests during the coronavirus (COVID-19) outbreak include helping reduce cash outlays for owners, implementing corporate-level cost-saving measures, providing emergency assistance for employees and maintaining flexibility with guest cancellations and group bookings.
Still, Marriott President and CEO Arne Sorenson told analysts on a call Thursday morning that the current revenue per available room scenario is “meaningfully worse” than post 9/11, and hotels are facing layoffs and closures.
Marriott’s occupancy rates in North America and Europe are under 25% compared to about 70% a year ago, Sorenson said. The crisis outside of the Asia-Pacific region is much more recent, and the trends are still negative, he said. This situation will likely continue to get worse before it gets better, and Marriott does not expect to see a material improvement until there is a sense that the spread of the virus has moderated, Sorenson said.
Hotel closures and openings
The company’s worst quarter following 9/11 was the fourth quarter of 2001 when RevPAR was down about 24% in the U.S., Sorenson said. During that time, there were a couple dozen hotels that couldn’t cover their operating costs.
“I think that the circumstance we've got today, to be fair, is meaningfully worse than that because we've got RevPAR … at the moment running down substantially lower than those numbers,” he said. “So, to some extent, we're in uncharted territory.”
Sorenson said Marriott is responding aggressively at the hotel level with hotel franchisees who are making these decisions themselves and at managed properties where the company is deeply involved in decision-making. On a hotel-by-hotel basis, they are looking at sizing hotel operations to meet the demand in their environment, he said.
“If there is not sufficient business to support the hotel, obviously some of those hotels will close for a period of time,” he said.
Marriott is working to ease the burden for owners and franchisees, implementing measures that are primarily focused on reducing cash outlays, Sorenson said. The company is delaying all regular cycle renovations due in 2020 by one year and deferring required funding of furniture, fixtures and equipment reserves for six months. The company also is suspending brand-standard audits for the time being, and will work closely with owners to evaluate when closing a hotel on a temporary basis.
“While owners are responsible for maintaining adequate levels of working capital, we are focused on easing their burden as together we manage through this crisis,” he said. “These are clearly tremendously difficult times in the lodging industry, and my team and I together with other industry leaders are working hard to lobby for near-term assistance from governments and agencies around the world.”
The company has focused on three areas of assistance: emergency assistance for employees, preserving business liquidity and tax relief to ease near-term cash flow challenges. Sorenson said he has worked with both Congress and the White House to advocate for immediate action.
Marriott also is working to reduce its costs that are reimbursed by hotel owners, such as marketing funds and loyalty charge outs, which vary with hotel revenue, EVP and CFO Leeny Oberg said. Given the dramatic drop in RevPAR, the company is taking substantial action to reduce the costs associated with these programs by hundreds of millions of dollars to better align the costs with the expected revenue reduction, she said.
The main source of revenue coming from the loyalty program comes from its co-brand credit card partners based on cardholder signups and credit card spend as well as Marriott Bonvoy member paid stays, she said. The amount of funding from the credit card program far outweighs the amount from hotels, which is helpful in this environment, she said.
“Given the lower occupancies in our hotels, we are right-sizing our expenses in loyalty to offset the reduction in revenue that we expect in the program,” she said. “So far in March, we’ve seen redemption volumes drop in similar proportion to paid stays.”
As occupancies and rates decrease, the redemption costs also drop given the sliding scale for redemption payments, she said. Though it’s too soon to make a prediction about overall cash flow from loyalty, past downturns have shown that redemption declines as members tend to conserve their points when rates fall to save them for when rates are higher, she said.
Marriott has seen a historically high level of cancellations for stays during the first half of 2020, Sorenson said. However, there hasn’t been a meaningful number of group cancellations for 2021 related to the outbreak, he said. Many group customers are at least tentatively rebooking for dates in the second half of the year.
The company updated its cancellation policy to provide flexibility. Marriott Bonvoy members have had their points expirations extended until 31 August 2020 and their suite night awards expiring by the end of 2020 extended by one year, he said. It also extended the use of free night awards expiring in 2020 to January 2021, he said.
Marriott waived cancellation fees, including for advanced purchase prepaid reservations, to business to and from China and some of the other hardest-hit markets around the region, Sorenson said. About two weeks ago, the company extended that to the U.S. through the end of April, but that might be expanded based on conditions as they evolve, he said.
The process for group business has been a bit less uniform. Sales teams are working with group customers to rebook depending on the precise timing of the meetings and make sure they are preserving their relationships, he said.
Internal cost saving measures
At Marriott’s corporate level, its contingency plan includes suspending both Sorenson’s and Executive Chairman and former CEO Bill Marriott’s salaries for the balance of 2020, Oberg said. The company will also reduce salaries for the senior executive team by 50%. The company will only hire for essential positions, and will implement temporary leaves in North America and shortened workweeks around the world, she said. There will be a general pullback on all non-essential spending, she said.
The cost-cutting measures currently in place are estimated to reduce 2020 G&A costs by at least $140 million, she said.
“We’re still in the process of implementing some of these plans and expect there will be additional savings beyond that amount,” she said.
Looking at investment spending, the company found it can eliminate or defer at least one-third of the $700 million to $800 million it anticipated to spend this year, Oberg said. About $300 million of investment spending was related to new unit development, and those are commitments the company made over the last several years as deals were signed, she said. The company is contractually obligated to contribute those amounts when the hotels open, but if some of those openings are delayed, the company would not need to pay those funds this year, she said.
APAC’s return, and what this means for deal volume
Sorenson told analysts the company saw revenue-per-available-room growth in every region except for the Asia/Pacific region during the first two months of the year. During that period, RevPAR declined by nearly 25% year over year in the region overall, with Greater China dropping 52% and the remainder of the region down 8%.
As workers begin returning to their jobs and regional travel starts picking up in China, occupancy rates are slowly beginning to rise, he said. The company had more than 90 hotels closed in Greater China during the height of the outbreak, but that is now under 30 today.
“It is encouraging to see the trend line,” he said. “China and the entire Asia/Pacific region is starting to improve. However, as the virus has spread, there has been a sudden sharp decline in demand throughout the rest of the world, and RevPAR (at) our hotels has dropped dramatically over the last few days.”
The company expects to see fewer openings and signings in 2020 than previously anticipated, Sorenson said. The company is working on a 13-hotel deal in Japan currently and there’s actually some conversations about development coming back in China, he said. However, in the U.S., there are many hotels likely not rushing to open until there’s greater clarity, he said.
Over the next few months, there will be a delay in openings in the U.S. as well as a delay, though less severe, in signings, he said. Deals that were on the precipice of being signed may still close, but construction might not start until there’s more certainty, he said. Some owners are accelerating their renovations because they feel there is a cost and displacement advantage in moving forward now, he said.
While openings and signings might be delayed, he said they won’t turn off entirely because the rational economic behavior will be to move forward with some percentage of them, he said.
In a separate video message published on Twitter Thursday morning for Marriott employees, Sorenson updated associates on the impact of COVID-19 on the company’s business and what steps it is taking to respond.
A message to Marriott International associates from President and CEO Arne Sorenson. pic.twitter.com/OwsF14TZgb— Marriott International (@MarriottIntl) March 19, 2020