In this report we analyze how exchange rate fluctuations affect the hospitality industry. We consider the case of Switzerland, which is a small open economy located in the heart of the European monetary union. As you can see in Figure 1, Switzerland is characterized by a relatively high average degree of openness (measured as Exports + Imports over GDP ).
Having observed the fluctuations in hotels’ demand and pricing, we study whether these fluctuations are associated to exchange rate movements.
In order to do so, we classify hotels by geographic market, class (luxury, up upscale, upscale, up midscale, midscale and economy) and type of operation (independent, franchise and chain) and we analyze how the different categories of hotels respond to exchange rate appreciations.
In the past ten years, the performance of hotels in the Swiss hospitality sector has gone through ups and downs. The three main Performance indicators are Average Daily Rate (ADR), Occupancy Rate and Revenue per Available Room.
Luxury class hotels respond less to exchange rate appreciations and, thanks to their strategy, manage to contain their losses in terms of RevPAR. Occupancy does not move a lot and, therefore, it is never a good idea to react to exchange rate appreciations with strong ADR reductions.
Additionally, luxury hotels (and higher classes in general) are very good at using market shocks to their advantage. When the Swiss franc is free to appreciate (which can be interpreted as a negative shock) they reduce ADR but in a very limited way. When Swiss franc appreciations are controlled by the Central Bank (good news), they use the optimism generated by this policy to strongly increase ADR.
Franchises and chains both react to exchange rate appreciations by reducing ADR. However, franchises’ intervention is too strong and does not manage to be balanced by an increase in occupancy. In general, it is important to change prices in response to shocks. However, hotels should always remember that quantities (occupancy) are relatively rigid. As a result, prices should be weakly reduced in response to a negative shock and strongly increased in response to a positive shock.