Best Western CEO: 'There’s a tremendous amount of pent-up demand' for traveling

Best Western CEO David Kong joins Yahoo Finance’s Zack Guzman to discuss his outlook on the travel industry, as the coronavirus pandemic continues.

Video Transcript

ZACK GUZMAN: As we've been highlighting, a lot of different sectors have been grappling with the pandemic in different ways. And today, want to spotlight what's happening in the travel and lodging sector, because we've seen the job losses continue to stack up there. More than two million hotel and hospitality jobs have been lost in the pandemic.

And that number is expected to rise without some sort of next wave of relief package passed in Congress. According to the American Hotel and Lodging Association, another 38,000 hotels in the US could be forced to close in the next six months. That would cost another 1.6 million jobs.

And here to discuss the pain that we are seeing in the hospitality and lodging space, with us is the CEO of Best Western, David Kong. And David, I appreciate you coming on, because you guys have about 5,000 hotels globally. I just want to ask, first question to you, what you're seeing firsthand at Best Western when you talk about the drop off in travel, the revenue hit. And everything else tied back to this pandemic.

DAVID KONG: Yeah, it's just been absolutely awful what we're seeing, is and our company is no different than what we're seeing in the industry. In total, I think most of our hotels have laid off at least half of their staff now, and that number is expected to grow.

And according to the American Hotel and Lodging Association survey, I think about 2/3 of hotels say they only have about six months of reserves left, and half the hotels are thinking that they might default on their loan. And when you talk about the job situation, 3/4 of the hotels are saying that they will lay off even more people because of the very weak recovery.

ZACK GUZMAN: Yeah, and I mean, we've been talking about this for a while now in terms of where the next stimulus bill might come into consideration here. Obviously, Republicans and Democrats can't seem to agree on that front. We've heard some talk from the president about separate bills adjusting for some of these things, whether it's airlines or hotels, trying to give the support there.

And you met with President Trump back in March. So what was your sense then of the understanding of the problem, and how has that maybe shifted the farther along we've gotten in this pandemic?

DAVID KONG: Yeah, at the time when we met with President Trump-- it was back in mid-March-- he was very understanding of the plight of industry, and he certainly knew that the industry is gonna be in for a rough ride. And he expressed his support, and he was very warm and very gracious, and we all felt good about that visit. And subsequent to that, I was very gratified to see that Congress passed the CARES ACT pretty rapidly and provided much-needed relief.

And the problem is, the PPP loans were only based on 2.5 times the monthly payroll, and it was supposed to last for only eight weeks. And for the hotel industry, we have such heavy investment in the land, the building, the furniture, fixtures, equipment, our debt share there is far greater than any-- than most of the other smaller businesses.

So when you think about that amount of money. It's simply not adequate. And I look at that as being a Band-Aid. It's better than nothing, but subsequently, we've all seen that this pandemic has continued, and in fact worsened in some cases. So the recovery is very anemic at this point, and the next six months is going to be very, very challenging.

ZACK GUZMAN: Again, on that front, I mean, we talk about the success of the PPP program and how that helped. But you talk about the timeline of that-- and that's obviously why a lot of people are calling for renewing the money attached to the Paycheck Protection Program-- versus what we've seen come through, or not come through, as the case has been, on the Main Street Lending program side, and what the Fed's been able to do with that. A lot of complaints there, noting that banks aren't really in the business of loaning to businesses that are struggling, which is exactly what we're seeing play out in the hotel space.

So talk to me about that, and how those struggles persist in maybe not getting the money through that we've-- in the way that we've seen the Fed trying to do. Where do your hotel managers turn to if that money is not there anymore?

DAVID KONG: They have nowhere to turn to is the short answer. The Main Street Lending program, when it was announced, I was pretty excited, because it was supposed to help small and medium-sized businesses. But regrettably, as the details became known and you look at the lending guidelines, the banks are on the hook for 5% of the loan. The SPVs are only buying back 95% of it, so the banks are on hook for 5%. They are not in the business to lend money to failing concerns. So you can easily see why, out of $600 billion that was set aside for this program, only $2.5 billion have been actually lent.

And there are other problems with it, with the Main Street Lending Program. You have problems like a pretty high interest rate. You have 300 basis points, plus LIBOR. You have a loan origination fee of 200 basis points. The term is only for five years. So you've got other problems related to the Main Street Lending Program. And then of course, the Main Street Lending loan cannot be subordinated to any other debt. And so all these things are not conducive to our hotels being able to avail themselves of that loan.

Now what I-- I'm certainly grateful to Congress for having considered our plight, and have approved the initial CARES Act, and also extended the-- provided more coverage, flexibility, and lengthened the usage of funds for the PPP Program. But at this point, that money is long gone. And you have lump events coming to an end, you have real estate bills coming due, and you have a continued depressed business environment.

So the hotel industry is really in dire straits to get further relief, and the Main Street Lending Program is not working. So we have to think about other ways that the Congress can help us.

ZACK GUZMAN: I also want to ask, too-- I mean, when we look at the recovery in travel-- just yesterday, in terms of the TSA traveler throughput data, first time we've seen it since the pandemic back above a million daily travelers. So there are hopes that travel will be coming back for the holiday season, especially as we approach that, because you have people cooped up. The holiday is something that a lot of people aren't willing to compromise on. But when you think about the risks of maybe going home, it seems like hotels would be a good option to turn to.

So what are you seeing in terms of forward demand for the holiday season, and how that might be something that investors who have stomached this, and even the employees and everyone else who've stomached this, are looking at it as maybe, hopefully, that's something that you'll see an uptick for?

DAVID KONG: Well, first of all, let me just say I think the long-term prospects for the hotel industry is excellent. People always want to travel. And it is true there there's pent-up demand on both the leisure side and business side, and also meetings and convention segment. So there's a tremendous amount of pent-up demand. We just need to get over the virus.

At this time, what the travelers-- what I'd like the travelers to think about is the very stringent and enhanced cleaning protocols that most major hotel companies have already instituted. For example, in our case, we have electrostatic sprays that helps disinfect the room. We have enhanced protocols to make sure the rooms are thoroughly cleaned. And we have social distancing requirements, we have face mask requirements. If you want to stay in a hotel, you have to wear a face mask. And so on and so forth.

So I hope that the travelers would feel reassured and comforted that most major hotel brands, such as Best Western, have already implemented these programs to safeguard their health and well-being.