Who’s leading the recovery and why?

Hotel demand in Q3 2020 improved off the back of record lows recorded in Q2 2020

The Covid-19 pandemic triggered a seismic shift in the global travel industry, with various lockdowns preventing international travel throughout Europe, resulting in historic lows in regards to hotel occupancy rates. According to the UNWTO, global international tourist arrivals in 2020 are expected to decline by c.70% compared to 2019 levels. However, the staggered reopening of hospitality sectors across Europe through the summer months coupled with pent-up demand to travel has kick-started the recovery process for a number of locations.

In Q3 2020, European average occupancy rates grew to 38.6%, representing a marked improvement off the back of the historic lows of 15.3% recorded in Q2 2020. Regions with less stringent lockdowns or earlier lifting of restrictions have enjoyed slightly more robust operational recovery. For example, Northern Europe has not been as adversely impacted by the virus and subsequent restrictions compared to the rest of Europe, and has therefore reported a higher average occupancy rate since April (see chart below).

Despite recent operational improvements, we can expect the various temporary lockdowns across Europe to put the brakes on any further recovery in Q4, albeit at a far less severe level compared to the extensive lockdowns earlier in the year.

Leisure-led domestic travel laid the foundation for recovery, while international and corporate demand remains necessarily subdued

The risk of quarantine has largely increased the reluctance to travel internationally this year, therefore operational improvements are being primarily steered by domestic demand. The International Civil Aviation Organisation (ICAO) reported that European airline seat capacity for domestic demand improved to -23.2% year-on-year in August, surpassing the global fall of -37.9%, as well as outstripping the -58.0% decline in capacity for international trips in Europe.

As a result, markets less exposed to international visitation have experienced a far more pronounced post-lockdown recovery. Some coastal regions across the UK, France and Germany witnessed occupancy rates in excess of 90% over weekend periods through the late summer months, driven by sizeable domestic traveller demand.

Regions with a larger dependence on international travel, typically Southern European fly-to locations, have suffered weaker recovery thus far. For example, international demand in Greece and Croatia accounted for approximately 73% and 89% of total arrivals in 2019 respectively, according to UNWTO, compared to just 25% in the UK. As a result, occupancy across Southern Europe remained comparatively suppressed in Q3 2020, averaging 34.5%, below the 38.6% European average.

Cross-border demand has begun to return, propelled largely by drive-to and rail-connected intraregional movement. For example, international arrivals across the DACH region (Germany, Austria and Switzerland) has been supported by strong transportation connections, as well as a local relaxation of cross-border restrictions amidst similar virus infection rates.

Germany outperforms the wider market

Germany’s comparatively quick response to the pandemic allowed for an earlier than average reopening of services, with travel bans on non-essential trips being lifted for 31 countries as early as 15 June. This led to a much quicker reopening of hotels compared to other European counterparts, supported further by Germany’s huge domestic demand base and stronger economic recovery.

Hotel demand across Germany has historically been supported by domestic travellers – in 2019, 405.7 million domestic overnight stays were reported, accounting for an 81.9% share of total overnight stays (see chart above). Over the same period, Germany tracked 76 million outbound tourism trips, many of which are likely to redirect attention to domestic markets this year and into 2021, forming a sizeable base upon which to kick-start the hotel recovery.

As a result, Germany witnessed a relatively sharp V-shaped recovery to domestic overnight stays, which reached almost 45 million in August 2020, representing a relatively modest year-on-year decline of -4.7% and boasting the largest monthly domestic demand since August 2019. This rebound has supported improvements to occupancy rates, which exceeded the European average in September, to report 43.8%.

Perhaps one concerning factor for Germany remains the historically sizeable corporate demand for larger conferences and events, which is expected to be among the slowest segments to recover. Germany hosted by far the most international Meetings, Incentives, Conferences and Exhibitions (MICE) last year in Europe, according to the ICCA. This has driven widespread hotel development across key MICE markets in recent years, which could pose further headwinds in corporate-dominant markets such as Cologne and Frankfurt.

One element of relief, however, is Germany’s relatively strong economic bounce post-Covid. Cities such as Berlin were also tracking similar mid-week occupancy compared to weekend levels in September according to STR, suggesting corporate demand has already returned to some markets.

What are the next six months likely to bring?

The winter season will provide an unquestionably difficult period for much of the European hotel market in line with the ongoing lack of corporate and long-haul demand, whilst further lockdowns across Europe are temporarily limiting internal movement once again. While tenant protection measures could protect some suffering operators in the immediate term, countries with weak fiscal support packages for the hospitality sector are likely to experience an uptick in permanent hotel closures.

While the immediate outlook appears uncertain, many sources are in agreement that hotel occupancy will improve over the medium-term off the back of the historic falls experienced this year, and in line with anticipated improvements to traveller confidence.

Recovery rates are likely to vary throughout Europe, depending largely on individual governmental approaches to controlling the virus as well as the timing of a possible vaccination. With this in mind, a full recovery to hotel demand is not expected to return across Europe until at least 2023, according to STR, with RevPAR recovery likely to take until at least 2024 to reach the levels experienced in 2019 for most markets. Nonetheless, this isn’t to say that certain staycation-orientated markets including Germany and the UK won’t considerably outperform in the interim, as well as particular product segments such as extended stay.

_{Read the article within Spotlight: European Hotel Trends Outlook below.}