Suppliers girding for long fight as Covid 19 takes toll

As the coronavirus outbreak continued to spread through
Europe and the U.S. last week, the travel industry began signaling that it was
girding for a protracted fight. 

And while some analysts seemed to think it was an
existential battle, others viewed it as yet another crisis the industry would
eventually overcome. 

In a video message to travel advisors, Richard Fain, CEO of
Royal Caribbean Cruises Ltd., was blunt about the toll the outbreak was taking
on the company. 

“In fact, to use a technical term I learned in business
school, it sucks,” Fain said. “Like you, we’re hurting. We’ve had to cancel
cruises. We’ve lost revenue.”

But he also reminded advisors that the industry has
weathered many other crises that at the time seemed insurmountable, including
9/11, H1N1 and Ebola.

Royal Caribbean and the cruise industry at large is “strong
and growing,” he asserted, and when the crisis ends, “We are going to be in a
position to take advantage and move forward in a fast pace, and you will be,

Analysts echoed that sentiment, even though cruise companies’
share prices have plummeted around 40% over the past month and cruise lines are
cutting prices and relaxing cancellation policies to stave off a booking
slowdown and a rise in cancellations. 

UBS financial analyst Robin Farley said that cruise sellers
were reporting cancellation rates of between 20% and 30% and website and call
center traffic being down in the mid-20% range. On the upside, she said, they
indicated that summer bookings and beyond were “holding up.”

Farley also said it was an “encouraging sign” that booking
activity had improved almost immediately after the Diamond Princess quarantine
until it was hit again by the Italy outbreak.

“There was visible resilience to underlying demand,” she
wrote in a note to investors. 

Robert Kwortnik, associate professor of services marketing
for the School of Hotel Administration at the Cornell SC Johnson College of
Business, said he also believes that the cruise industry will survive this.

“If there is a vertical in hospitality and travel that is
prepared for this, it is the cruise industry,” he said. 

Kwortnik cited the industry’s adaptability and ability to
move its assets. 

“You build a resort somewhere and all of a sudden there’s a
geopolitical shock, and you’re kind of in trouble because the building is not
going to go anywhere,” he said.

Being able to move ships means cruise lines can “hunker down”
as they did after 9/11, when people were afraid to fly. 

“That’s when the whole homeporting model happened,” Kwortnik
said. “If they’re afraid to fly, let’s move the ships closer. … It was a way
to wait out the consumer’s hesitation.”

That doesn’t mean it’s easy.

“It’s not like you can do that effectively overnight,” he
said. “You’ve got all kinds of considerations,” such as crew visas, the time it
takes to move ships from one region to another and then having to fill them,
especially ships with 2,000 or more cabins. 

“That’s not something you can just fire emails to travel
partners and say, ‘OK, we have a great deal, let’s fill the ship for next week,’”
Kwortnik said. “Cruising is something consumers take a lot of time thinking

He added that another industry advantage is that while the
lines might fill ships for less, “a significant portion of revenue is driven

Hotels reeling

Some hotel analysts last week predicted the crisis would
have a significant and sustained impact on the sector.

David Eisen, director of intelligence for the hotel
benchmark service HotStats, said, “When the hotel industry talks about black
swan events that have the potential to disrupt business and cause irreparable
damage, [Covid-19] is it. The outbreak and worry over further contagion has
left the hotel industry reeling in its wake.”

Eisen said the virus has had a “deleterious impact already
on hotel profits.” As an example, he cited Marriott International reporting a
RevPAR decline of nearly 90% in China and Taiwan for February.

“The virus’ impact on domestic travel has been smaller,”
Eisen said. “But containing it and stamping out its spread quickly is all the
hotel industry can hope for to erase what likely will be a difficult first
quarter, at the least.”

He also expressed concern over the “worry and uncertainty”
that permeated many of the hospitality industry’s recent fourth-quarter 2019
earnings calls, with Eisen calling moves like Hilton’s decision to shutter some
150 hotels across China “extraordinary.”

Jan Freitag, senior vice president of lodging insights for
the hotel data firm STR, echoed a heightened concern, saying that what had been
a more regional issue in Asia is now “clearly a global issue, the depth of
which is yet to be determined.”

STR has seen significant impact ripple across key markets
beyond mainland China, including in Macau, Hong Kong and Taiwan, where
occupancy dropped 97%, 64% and 59%, respectively in recent weeks, and Bali and
Thailand, where occupancy plummeted by 26% and 24%, respectively.

Given the developing situation, analysts said they expect
the crisis will be a drag on hotel performance in North America. Freitag said
STR is waiting to see which sector of the region’s hospitality industry will
become “the canary in the coal mine,” with the firm paying close attention to
airport hotels, convention travel and gateway cities such as New York, Los
Angeles and Vancouver.

Thus far, U.S. performance appears soft, with STR reporting
that U.S. hotel occupancy fell 2.1% from Feb. 16 to 22, as RevPAR dropped 1.4%.
The steepest U.S. occupancy decline, 4.8%, was at airport hotels.

Drop in airline bookings

After early carnage to Asian carriers, the virus has begun
wreaking havoc on U.S. carriers, including their domestic and transatlantic

Citing stagnating demand, United planned to unveil on March
7 a new domestic and Canada schedule for April, with a 10% cutback in flying.
The carrier also said it has begun planning similar cutbacks for May.

Those cuts will be accompanied by a 20% pullback by United
on international operations next month and likely for May, as well. The carrier
has also suspended hiring, postponed planned raises for management and
administrative staff and begun offering optional unpaid leave. United and
several other U.S. carriers have also suspended change fees on new bookings.

Data shows why such measures have become increasingly

Globally, airfare transactions were down 34% year over year during
the seven days ending Feb. 25, compared with the previous week’s year-over-year
decline of 24%, ARC and IATA data shows. Of particular importance to U.S.
carriers, though, is that ticket sale transactions for flights to, from and
within North America were down 8% year over year during those seven days. That
was the first year-over-year weekly decline for the region since Covid-19 was
identified. It came in the same week that outbreaks occurred in northern Italy
and South Korea, sowing fears of a pandemic.

The Italy outbreak has dealt an especially large hit to the
transatlantic networks of U.S. carriers. According to analysis by Forward Keys,
bookings for arrival to Europe from North America were down a whopping 68.1%
year over year during the last week of February. The dismal figure corresponded
with a global collapse in bookings to Europe in the immediate aftermath of the
northern Italy outbreak. 

Robert Silk, Christina Jelski and Nancy Trejos contributed
to this report.

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