The worldwide hotels industry has incurred significant losses in 2020, even as regions that contained the spread of the COVID-19 virus have been able to weather the storm far better.

However, other major factors impacting prices may have been at play... and for far longer.

While the hotels industry has had an unprecedented level of discussion around room rates and how to best set pricing during the ongoing pandemic, there have also been significant factors outside of COVID-19 which have received little to no attention whatsoever.

We've taken a hard look at this topic by comparing both the short- and long-term trends in average hotel prices1 of 50 popular destinations across the world, with a global sample aggregated from over two million hotels.

Our findings may come as a surprise to even a number of industry experts.

Key Findings

• The effect of COVID-19 may often be overestimated, as long-term market forces have had five times as much impact as the pandemic. Although international travel effectively disappeared during the pandemic, the seasonally adjusted global average hotel price dropped by only -13.2% from March to August 2020. This low price elasticity could be explained in part by the ability of the travel & tourism industry to quickly respond to the short-term demand shock by scaling down operations and maintaining quarterly losses under control.

• Prices are also beginning to trend upwards...: By August nearly a quarter (22%) of global tourist destinations were trending upward. Although this is an encouraging sign and likely reflects returning demand, it is still substantially below the pre-COVID levels when 40% of the destinations were already on a long-term price increase trend.

• ...but only in some destinations: These changes in average hotel prices vary substantially by destination city, with the city hit the hardest seeing a price drop of -50.8% and the city with prices doing the best reaching an increase of +34.6%**. There are a number of reasons that can explain this wide range, and we'll look at a few examples of these in detail below.

Most Price Trends Prior to Pandemic Are Still Continuing

Our analysis classified each of the 50 most popular travel destinations based on their price changes in both the long and short-term. Depending on the slope of the change, trends varied from mild to strong3. The first chart below summarises the distribution of price trends before and after March 2020, when the World Health Organization declared COVID-19 as a pandemic.

There were a few effects worth noting:

1. After March 2020, 45% fewer destinations continued to follow a previous trend of increasing their prices.

2. The share of destinations showing prices declining went from 60% prior to the pandemic to 76% after March 2020.

3. No locations have shown a very strong increase in hotels prices in the period from March to August 2020

Hotels Price Changes Must Be Examined City By City

There’s a clear linear relationship between the direction in which prices have been evolving in the long term and what prices did after the COVID-19 outbreak (see second chart to the right).

In fact, our statistical model shows that 35% of the variation in price changes after March 2020 can be accounted for by the direction in which prices had already been trending for the last two years. This implies that third of the recent price changes up or down are determined by long-term forces such as:

• Changing local competitive landscape: Hotels will of course tend to lower their price under pressure from vacation rentals such as AirBnb and other new supply.
• Changing global competition: When new, alternative destinations become safe enough for travel, demand for previously available destinations will decrease. To keep occupancy levels high some hotels in these “more traditional” destinations will have to lower their prices.
• Demand growth from positive sentiment: A number of key destinations are in fact increasing demand today due to various factors (see Seoul below), which of course will result in upward price pressures
• Demand declines from negative sentiment: As is evident from COVID-19, when a destination becomes perceived as unsafe to travel to, in general hotels will decrease prices in the short term.
• Overly aggressive promotional campaigns: Without well-established ROI reporting and analytics support, marketing departments will tend to increase the number of promotional campaigns and discounts, quickly dropping prices over time.
• Organic changes in exchange rates & inflation: Hotel prices will follow increases and decreases of the prices on the local market.

To help simplify the analysis, we’ve placed every top destination city in one of the quadrants to the right, based on how far they’re up or down for their:

a) Long-term price trend - from February 2018 to February 2020 and

b) Short-term price trend - from March to August 2020

• Red - Long Term Up, COVID Down: Cities in this quadrant enjoyed an increase in hotel prices from April 2018 through to the start of 2020. However, prices in this group still dropped during COVID-19, especially when some countries started closing their borders March 2020. An example of this group is Beijing.
• Green - Long Term Down, COVID Up: This mostly-unpopulated quadrant holds the two truly exceptional locations that managed to make a u-turn on their long-term downward trend and increase the average price of hotels in the 6 months since March 2020. These are Sydney and Hong Kong.
• Yellow - Long Term Down, COVID Down: Cities in this quadrant had the average price of its hotels decrease over the last two years. That trend continued and in some cases was accelerated after the start of the COVID-19 pandemic. An example of this group is Chicago.
• Blue - Long Term Up, COVID Up: These most-successful cities managed to continue their positive price trend set before the pandemic and increased the average price of their hotels even through COVID-19. One of the best examples here is Seoul.

To explore a few of the factors that account for these price fluctuations, let’s example some of the circumstances unique to the cities called out in each quadrant above.

BeijingLong-term: Prices Increasing
COVID-19: Prices Declining

Prices were declining, yet leapt up in Beijing during COVID. To say the travel industry in the Chinese capital has gone through exceptional times in the past few months will be an understatement. While the average price for a standard double room had been growing slowly during the past two years, prices surged +31% from February to March 2020.

Closure of cheaper hotels is likely to blame. By the end of January the nationwide Chinse occupancy level plummeted to 17% and forced chains such as Wyndham Hotels to close 70% of their hotels. Demand for budget rooms in Beijing effectively disappeared and only the luxury resorts remained open. This fact alone may account for the upsurge in average prices we saw beginning in February 2020.

Swift action by the Chinese likely helped. Nevertheless, the swift and effective reaction by the Chinese government to limit the spread of the COVID-19 virus allowed hotels to reopen relatively quickly. For example, the InterContinental reported 97% of its hotels open in April, and at the end of July Hyatt reported 87% of its hotels opened while maintaining a 65% occupancy. As hotels started to reopen, averages price have been decreasing to return to their previous levels.

Hong KongLong-term: Prices Declining
COVID-19: Prices Increasing

Protests had been having an impact: Hotel prices in Hong Kong had been trending downwards since the start of the protests in July 2019. Despite the local unrest, during the initial spread of the corona virus in China, the region managed to limit the number of infections to a total of 1,040 people by the end of April 2020.

Nevertheless, a second wave of infections at the beginning of July did not allow the hotel industry to recover at the rate of Beijing, even though daily new cases did not surpass 150. Unlike other popular tourist destinations, Hong Kong does not have a large domestic market to support its tourism industry and had almost zero inbound travel, hence occupancy rates reached only 49% in July.

August adjusted average prices recovered 12% from its lowest in May, when occupancy rate was at 37%. Naturally, this recovery has been fuelled by an increase in demand, and specifically by a boost in staycations - something the local hotels industry worked hard to promote at the time.

Staycations were a big way many Asian cities managed to keep at least some revenue coming in, as Singapore and Tokyo as well both promoted great rooms to locals at decent prices.

A cautionary note: at current levels Hong Kong room prices are still 27% below the historic average.

ChicagoLong-term: Prices Declining
COVID-19: Prices Declining

Chicago had already been seeing a long-term price decline: While Chicago remains one of the most best-known US cities worldwide, hotels prices in Chicago have been declining for years as other US destinations increased in popularity, at the same time as more exotic non-US destinations were becoming more attractive. The Bean is certainly a wonderufl attraction, but Chicago still had a gap in tourism demand generation.

The pandemic then didn’t help: The United States’ response to the corona-virus pandemic has been fragmented and plagued by contradiction. The failure to limit the spread of the virus had a devastating effect on the Leisure and Hospitality industry which lost nearly half of its jobs by the end of April. When American tourists did start looking to travel again, they primarily were looking for hiking, beach or other destinations outdoors.

Few US destinations were hit harder: As of mid September, Illinois was not among the hardest hit states in the US, having almost three times fewer cases than California and almost half the cases of New York. Yet, Chicago recorded a low occupancy rate of 38% in the week ending July, 1 even with some hotel chains reporting only 61% of full service hotels being open. The average hotel prices were on a long term downward slope before, but the pandemic accelerated that trend by forcing hotels in Chicago to compete on prices. The result was a drop in price of 20% below its historical average.

SeoulLong-term: Prices Increasing
COVID-19: Prices Increasing

Korea’s tourism was already booming before the pandemic. The economy of South Korea has not been among the fastest growing in Asia Pacific, but Korean tourism has been booming and average hotel prices in Seoul have been increasing steadily since 2018.

Why? K-pop… and a fascination with Korean culture in general, especially among the Chinese. This spike in Korean tourism demand has been partially driven by the increasing interest in Korean culture (movies, cuisine, and especially K-pop music), as well as increasing interest in Korean products, especially from the Chinese. In fact, business travels from China accounted for more than twice that of all American and European countries combined.

And then Korea simply handled COVID well: In mid-September, South Korea had 435 cases of COVID-19 per million people. This is an outstanding achievement, which towered about even the best of the countries in the west include Germany (3,133 cases per million), United Kingdom (5,461pm), Spain (12,334pm) and the United States (20,293pm) must quickly learn a lesson. This low infection rate means that South Korea remains an attractive tourist destination, with both booking sites  and hotels reporting a re-surge in domestic bookings as early as the beginning of March. It should come to no surprise then that despite the initial plunge, prices were back in line with the long-term growth trend.

What’s the Relevancy?

• While COVID-19 has certainly had a short-term effect on prices, longer-term forces are far more important, as prices and demand for many major destinations had already been declining for years
• Revenue management still matters: Some longer-term forces such as promotions and brand sentiment are within the control of individual hotel chains, and could be understood and controlled via well established analytics practices
• Destination management is key: Other longer-term factors must be managed by local authorities through strategic investment and balanced legislation
• BTS saves the industry: K-pop’s influence on Asian demand for Korean tourism combined with successful Korean management of the pandemic led to a winning combination

Footnotes
1. Price for standard double room for one night.

2. Our statistical model shows the COVID effect accounted for only 7.1% of the variation of the price, while the long-term trend accounted for  35.2%. COVID effect was measured using the deaths per million inhabitants per country. The COVID effect was statistically significant with p-value < 0.05. The effect of the long-term trend is significant at p-value < 0.001. This is to say that we are also more certain in the estimate of the long-term effect.

3. We determined the long-term average price for hotels in each city via linear regression with a seasonal adjustment component. Using data from April 2018 to August 2020, we were able to extract the trend for each of the 50 cities individually. Adjusting the data for seasonality means our estimate will not be biased by the hotels’ price variation between high and low season. We calculated the short term trend from March 2020 to August 2020 using the coefficient of a linear regression, similar methodology as the one covered above. For the long-term trend we classify as “strong” the coefficients  above or below +/-1, and “mild” between  +/-0.1; for the long-term trend we classify as “strong” the coefficients  above or below +/-0.1, and “mild” between  +/-0.01.