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NYCEDC To Quantify Impact of 9/11 Attacks On Hotel Industry

The NYCEDC has asked for help quantifying the expected impact of the 9/11 attacks on the New York City hotel industry and determining if the industry will need government assistance. Using a profit tree approach, the document models hotel industry profits before and after 9/11. It estimates that occupancy rates and profits will drop significantly as leisure travelers avoid NYC and half of business travelers cancel trips. This large loss of revenue could threaten the viability of individual hotels. The NYCEDC may need to promote tourism, provide tax relief, and seek federal funding to support directly impacted hotels.

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188 views20 pages

NYCEDC To Quantify Impact of 9/11 Attacks On Hotel Industry

The NYCEDC has asked for help quantifying the expected impact of the 9/11 attacks on the New York City hotel industry and determining if the industry will need government assistance. Using a profit tree approach, the document models hotel industry profits before and after 9/11. It estimates that occupancy rates and profits will drop significantly as leisure travelers avoid NYC and half of business travelers cancel trips. This large loss of revenue could threaten the viability of individual hotels. The NYCEDC may need to promote tourism, provide tax relief, and seek federal funding to support directly impacted hotels.

Uploaded by

vikas joshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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NYCEDC to Quantify Impact of

9/11 Attacks on Hotel Industry


It is October 2001, just one month after the 9/11 attacks. Our client is

the NYCEDC (New York City Economic Development Corporation). The

NYCEDC is a not-for-profit corporation that promotes economic

growth across New York City’s five boroughs. It is the City’s official

economic development corporation, charged with using the City’s

assets to drive growth, create jobs, and improve quality of life. The

agency has its headquarters in Lower Manhattan.


The NYCEDC partners with a variety of governmental and non-
governmental firms, serving as an engine for economic
development. Like a Chamber of Commerce, the NYCEDC shapes
policy for local business interests. Our client NYCEDC is
requesting our help in looking at the city’s hotel industry in the
wake of the September 11th attacks. The NYCEDC would like to
know two things:
1. Can we quantify the expected impact of 9/11 on the New York
City hotel industry?

2. Will the New York City hotel industry need government


assistance?
Solution
Questions to Ask:
In what way NYCEDC helps Hotel Industry?

Possible Answer: Lobbying for tax changes etc.

Assumption: There are two types of Travellers looking for Hotel Rooms
- Business
- Leisure

The whole question revolves around - Are they still


Profitable?
Approach:
Profit tree of NYC Hotel Industry
- Pre 9/11
- Post 9/11

Equation to be used:

Profit = Revenue - Cost


Number of
MECE Hotels
Number of
Rooms
Revenue
Occupancy
Rate
Average
Rental Rate
Profit Salary /
Wages
Property
Fixed Cost
Tax

Insurance
Cost
Room
Variable Service
Cost
Laundry
Number of
Per Day Hotels 400
Revenue
Number of
Rooms 200
Occupancy
Rate 80 %
Average
Rental Rate 250 $
Profit Salary /
Wages
Property
Fixed Cost
Tax

Insurance
Cost
Room
Variable Service
Cost
Laundry
Calculations :
Revenue = 400 * 200 * 250 * 0.8 = 16 M $

Let’s assume the Average Margin in the Hotel Industry is 12.5 %

The Average Margin will be = 16 * 0.125 = 2 M $

Hence, Cost will be 16 – 2 = 14 M $


Since in a Hotel Industry Fixed Cost is usually Very High,

Let’s assume that the Fixed Cost = 80 %


And the Variable Cost = 20 %

Which is equivalent to

Fixed Cost = 14 * 0.8 = 11.2 M $

Variable Cost = 14 * 0.2 = 2.8 M $


Hence,

Profit = Revenue – Cost


= 16 – 14 M $
= 2 M $ Each Day
Post 9 /11
Let us Assume there is 1:1 ratio between Business and Leisure travellers
looking for Hotel Rooms

Leisure Travellers choose not to come to NYC in the short term

50 % of Business Travellers still need a room and other 50 % cancels their


trips

Occupancy becomes 80 * 0.5 * 0.5 = 20 %

Assume Rental Rates will not change in Short term


Number of
Per Day Hotels 400
Revenue
Number of
Rooms 200
Occupancy
Rate 20 %
Average
Rental Rate 250 $
Profit Salary /
Wages
Property
Fixed Cost
Tax

Insurance
Cost
Room
Variable Service
Cost
Laundry
Calculations :
Revenue = 400 * 200 * 250 * 0.2 = 4 M $

Fixed Cost won’t change,

So Fixed Cost = 11.2 M $

But the Variable Cost will change in proportion to the fall in


Revenue
Hence Variable Cost = 2.8 / 4 M $ ( A drop in by a factor of 4 )
= 7,00,000 $

The Total Cost = 11.2 + 0.7 M $


= 11.9 M $

Loss = Cost - Revenue


= 11.9 – 4 M $
= 7.9 M $ Each Day
Yes, it need Government’s help !

But to whom ?
• Individual Hotels
• Chain of Hotel

The chain can generate the revenue from other


locations, Individual Hotels can’t.
What to do?
Assessment of the Damage by NYCEDC based upon,

Proximity to the Twin Towers

Some hotels may be inhabitable in Short Term


How ?

Promote Tourism

Tax Relaxations

Federal Funding to Individual Hotels

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