Tail risk removed – it's time to focus on big-picture change
Leveraging eight new UBS Evidence Lab studies and our deep-dive sector analysis, we are selectively positive on the European hotel sector. Uncertainty is still high and we see evidence of disruption but vaccine hopes have reduced the tail risk. Our new tools in this note allow us to advance the key debates ahead and we believe the market is underestimating the extent to which second-order effects will now open up opportunities. The earnings recovery ahead looks priced in to varying degrees. New challenges emerge, old challenges re-emerge – new tools for the recovery
We believe the sector faces three challenges in the new world:
- behavioural changes from corporates on travel budgets (UBS Evidence Lab survey analysis sees a risk to 5-15% of 2019 market demand);
- a resurgence in the shared accommodation threat (our models suggest c4% new demand disruption); and
- the economic downturn.
Deploying a range of UBS Evidence Lab tools (corporate travel survey, consumer surveys and inventory/activity trackers) in combination, we find that c20% of 2019 demand could be at risk. This is material, but the base case looks manageable, and we model a RevPAR recovery taking 5-6 years, with confidence that budget hotels will recover fully by 2022. We note quicker vaccine deployment could anchor estimates towards our upside scenarios of a 4 year RevPAR recovery (+37% sector upside from today's levels).
Balance of power shifts to the brands as disruption opens up opportunities
A slow recovery increases pressure on new and current supply; UBS Evidence Lab data is already showing evidence of both. These pressures see brand unit growth slowing to 1-2% (vs. 5-6% pre Covid-19), which is seen as net negative for some companies. We see two trends: (1) higher brand conversions; and (2) brands reasserting outperformance through market share gains.