Europe’s Luxury Hotels Bounce Back from the Bottom

Luxury hotels across Europe have made an about-face and are back to producing profit at the almost same rate as 2019, according to data from HotStats. It’s an extraordinary turn of events for a sector that saw its gross operating profit per available room (GOPPAR) plummet during the dark days of the global pandemic, hitting a historical low of-€43.21 in May 2020.

Now, March 2022 GOPPAR of €66 is only €4 off its March 2019 number and, at €24.12 year-to-date, it is 187% higher than at the same period a year ago.

It’s a striking comeback that is still not complete and more remarkable given the depths of where it came from. The luxury segment drifted into negative territory from March 2020 through July 2020, before briefly returning to positive GOPPAR in August, at €16.71. The bounce into positive territory, however, was fleeting. It was disaster forward: GOPPAR was in negative territory from September 2020 through May 2021. Nine months of operations where luxury hotels—the ones that remained opened—hemorrhaged cash.

Globally, luxury hotels in Europe trailed their regional counterparts, a likely outcome of disparate lockdowns across the continent. The Middle East reported the highest profit numbers of any global region, spurred by such as mega-events as Expo 2020, a World Expo hosted in Dubai from October 2021 through March 2022.

Within Europe, capital cities are finally back to producing solid GOPPAR output. London’s luxury segment profit recovery has followed a quasi V-shaped pattern from Q4 2021 through Q1 2022. After hitting €118 in November 2021, GOPPAR dropped sharply in January 2022 to -€16, before progressing and finishing March 2022 at €131, which is the highest level it’s been since the pandemic.

Conversely, Berlin has had a more difficult time producing profit. Since December 2021, the German capital’s luxury hotels have had three consecutive months of double-digit negative GOPPAR before breaking even in March 2022.

Luxury’s Curse and Fortune

The trajectory of luxury hotel performance, though halting, was not an unexpected twist. Luxury hotels are the first asset class to suffer in crises situations with 9/11 and the Global Financial Crises of 2008 illustrative of events that presaged COVID-19, just not on a similar level of distress.

Global disasters like COVID are a system shock that sap luxury demand, both leisure and corporate, as travelers pull back discretionary spending and companies, especially Fortune 500 companies, banks, law firms and other well-heeled organizations, curtail overall employee travel and spend.

Luxury hotels are typically complex assets that beyond the sale of rooms, have a high concentration on food & beverage and other ancillary revenue streams and employ a heavy workforce that services it. Despite GOPPAR remaining negative for a bulk of 2021 and the latter portion of 2020, labor in Europe’s luxury hotels continued to be a cost to owners. In fact, total payroll on a PAR basis increased month to month from May 2020 forward after dropping to its lowest rate of €32.3o in April 2020. It reached more than €63 in September 2020, before regressing to a low of €38 in January 2021. Total payroll on a PAR basis was up to €101 in March 2022.

On the revenue side, food and beverage revenue hit its low in April 2020 at €1.13, but progressed from that point and is at €65 YTD 2022. TRevPAR, accordingly, hit its low in April 2020 at €15.37, but is now at €205 YTD 2022—a strong comeback from its nadir.

Though luxury hotels are typically the first segment to feel the sting of calamity, they, on average, have a sharper recovery compared to other segments. Though luxury hotels saw precipitous declines out of the COVID gate, other asset classes in Europe did not absorb the same steep drops. To be sure, they suffered, but not to the same extent. Full-service, limited- and select-service and extended-stay hotels all dropped the performance ball as of March 2020, but only full-service hotels suffered negative profit as the others either broke even or sustained small profit. At its lowest depth, full-service hotels hit -€13.72 GOPPAR in April 2020, €30 more than luxury hotels at their lowest.

Fortunes began to turn for European luxury around the summer of 2021, when GOPPAR got off its negative run, hitting €39 in June, a nearly 1,700% increase over the previous month of May. GOPPAR hit a high of €119 in August 2021, still €38 off its August 2019 number, but demonstration of a summer return to travel and vacation—albeit brief. By January 2022, luxury hotels were back to negative GOPPAR of -€12.19, which could be more a function of seasonal trends, though a resurfacing of COVID cases across Europe are an always-present specter.

The fight back to higher profits is not only an issue of revenue, but expense. Certainly an outcome of inflationary times and war in Ukraine, utility costs on a PAR basis in the luxury segment are escalating at an alarming rate, up 105% YTD versus the same period a year ago. At €12.16 as of March 2022, it’s 32% higher than March 2019. Gas, electricity and contract services (the cost for services from firms that are engaged in energy audits, water reclamation, infrared detection for energy consumption, etc.) are the prime culprits for the rise in hotel utility bills, all up more than triple digits YTD versus the same period a year ago.

Luxury hotels across the European continent are battling back to profit prominence, but it remains an uphill climb. Key European cities have seen a recent return of international demand, which has aided the profit recovery. Still, conference and events continue to lag and operational cost inflation could be impacted further by the current labor market, energy costs and supply-chain interruption. Operational efficiencies, particularly in the undistributed departments, will go some way to offsetting these challenges.