Analysis: At What Occupancy Rate Can a Hotel Break-Even?

By David Eisen, Director of Hotel Intelligence and Customer Solutions for HotStats and Laura Resco, Sales Account Coordinator at HotStats Limited

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David Eisen Laura Resco

COVID-19 has made breaking-even more tolerable than the alternative—going broke. It's not the hand hoteliers wanted, but it's the hand they've been dealt, forcing them to approximate at what occupancy rate they can operate their hotel such that cost and revenue are equal. In these extraordinary times, it's been all pain, no gain. But as the global economy resets, hoteliers are digging themselves out from the coronavirus carnage. And a break-even analysis is one way to jumpstart the excavation project. One hotelier who knows this is Imesh Vaidya, CEO of Premier Hospitality, which is based in Albuquerque, NM, and has a portfolio of nine hotels in the select-service space. The company opened a SpringHill Suites in Durango, CO, at the end of April because, as Vaidya put it, "it was the difference of losing $6,000 per day or $5,800 per day." A break-even analysis, he said, "motivates us and is a deciding factor for purchasing a property. It helps determine how we staff, our purchasing decisions—it's used for all aspects of the property." Subsequent past system shocks, including 9/11 and the Great Recession, prompted many hotels to drop rates in an attempt to jumpstart demand. Not so this time around, according to Vaidya. He's not interested in making rate part of his break-even calculus. "We are not worrying about achieving a break even with low ADR," he said. Beyond revenue, once countries, states and cities begin reopening, expectations are that costs could climb based on the sharpened vigilance paid to areas such as disinfecting and cleaning. "Payroll," Vaidya said, "will increase for extra time spent on rooms and public spaces and paying someone to wipe elevators and the pool down." At the newly opened Durango SpringHill, lobby areas are wiped down on the hour. At the same time, cleaning rooms takes longer due to extra and intensified cleaning, which is adding as much as 10 minutes per room. "That's an extra 10 minutes per room not budgeted for," Vaidya said, adding that the cost of items, including sanitizing stations, masks, thermometers and disinfectant wipes, will go up. "Cleaning supplies are adding $1,200 in cost per month," Vaidya said. The Break-Even Point Hotels don't have the luxury of staying closed forever. Just because a property is shuttered doesn't mean that it no longer incurs costs—there is still debt service to cover, property taxes to be paid and other expenses, such as utilities and paying a skeleton crew to maintain the property. The idea behind a break-even analysis is to understand at what point a property can operate at neither a loss or gain. The subsequent graphs seek to show that; they analyze the break-even points by asset class across the U.S., Europe, Asia-Pacific and the Middle East. YOU MAY ALSO LIKECOVID-19, Oil Spat Shock Hotel Profit in the Middle East Asia-Pacific Hotels Continue Profit Free Fall A Rough Start to the Final Quarter of 2019 for UK Hotelsview all The trends are similar regionally: the further down the chain scale, the higher the occupancy rate needed to break even.