Directions and projections for the hotel industry varied
wildly throughout the last year, but hoteliers and analysts could agree on at
least one point: 2009 ranks as the worst year the industry has seen in its
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For the full year, U.S. hoteliers saw occupancy drop to 55.1
percent, down 8.7 percent from 2008 levels, and average daily rates plummeted
by 8.8 percent, according to Smith Travel Research. As a result, revenue per
available room dropped by 16.7 percent, year over year. Corporate travel
buyers, meanwhile, found themselves constantly returning to the negotiation
table to keep up with rate drops.
"What happened last year was really the perfect storm,"
Best Western CEO David Kong said at this month's New York University
International Hospitality Industry Investment Conference. "Demand went
down substantially, almost 6 percent, and at the same time supply grew by 3.2
Corporate demand was at the heart of that drop, leaving few
possible directions besides up this year. "Corporate business just fell
off a cliff, group and transient," said Monty Bennett, CEO of upscale and
upper upscale hotel owner Ashford Hospitality. "When all these companies
cut back all corporate travel, they made their profits by cutting expenses. Now
that they're looking to grow profits, they can't cut expenses anymore."
As that demand has begun to improve, however, hoteliers are
seeing increasingly sunnier forecasts for 2010. Both Smith Travel Research and
PKF Hospitality in recent weeks have reversed calls for year-over-year declines
in revenue per available room this year, instead expecting a slight increase.
To this point, upticks in occupancy have not translated into
upticks in rates, though they have largely stabilized. Marriott president and
COO Arne Sorenson said he expected they would, however, "very, very soon."
"If you look at the cycles in history, the years after
a recession have been spectacular," Sorenson said. "In some markets,
we're already seeing positive rate growth."
Richard Kelleher, CEO of full-service hotel owner Pyramid
Hotel Group, said the depth of the drop could indicate a speedy rebound. "Looking
at the five cycles since the 1970s, this one has been the worst and the
deepest, and this one can be the fastest recovery," he said. "Based
on the numbers we've seen through the first quarter into May, let's just hope
that this trend line continues."
Sorenson said corporate and group rates negotiated in the
past year were the reason industry figures have not yet shown a recovery in
rate. "We booked whatever group business we could find with a pulse in the
last year, and the rates of that business are not great," he said. "We've
got to work our way through some of that."
InterContinental Hotels Group chief executive Andrew Cosslett
said the Asia/Pacific region in particular already is seeing rate increases.
Best Western's Kong said increasing corporate rates at hotels across other
regions would be a necessity this year.
"We have to raise the rates," Kong said. "The
rates we have up to this point are not sustainable. We have to increase rates
to have a viable business."
Adam Weissenberg, vice chairman and U.S. leader of Deloitte
& Touche's tourism, hospitality and leisure sector, said results will vary
by market, but buyers should expect rate hikes at least in the quicker
rebounding markets, such as New York. Some markets outside the United States,
particularly in the Asia/Pacific region, already are recording rate increases.
"No one wants to say anything too aggressive, but there
will be some increases," Weissenberg said. "I can't imagine it's
going to be flat across the board."
Analysts and hoteliers said group business recovery would be
key to any rate growth. Hilton Worldwide president and CEO Christopher Nassetta
said group business in recent months has rebounded much more quickly than
expected. While group business in November and December was down about 15
percent year-over-year, by the end of April, it was 7 percent up from the
"It's not the kind of group we're necessarily used to,
and it's not necessarily altogether the groups we want longer-term: very
short-window, small- and medium-sized groups," according to Nassetta, "but
that's where we're seeing the most momentum."
Typically in downturns, group and transient business demand
decline in comparable levels, said W. Edward Walter, president and CEO of Host
Hotels & Resorts, which owns 110 hotels largely in the upper upscale and
luxury tiers. In the past two years, however, Host saw group room nights fall
in the 18 percent to 20 percent range, compared with a 4 percent to 5 percent
decline in transient room nights, he said. While group typically represents
about 42 percent of Host's business, it has fallen to about 37 percent, he
Even so, Host has been investing heavily in group business
infrastructure, including about $250 million in its ballrooms in Chicago,
Atlanta, Fort Lauderdale and San Diego, Walter said. "As we see group
business recover, our expectation is that we'll not only get back to the 42
percent level but that we'll get higher than that," he said.
The affiliate company that manages about half of upscale and
upper upscale hotel owner Ashford Hospitality's properties hit its monthly
group booking goals in March for the first time in two years, Bennett said, "and
that's not because we're lowering the goals."
Demand growth is not tied solely to group resurgence. La
Quinta Inns & Suites, which does relatively little group business, has seen
its demand return quicker than expected, said executive vice president and
chief marketing officer Julie Cary.
"We performed better than expected these last two
months," Cary said. "We didn't expect to turn positive until June."
Mark Lomanno, president of Smith Travel Research, said that
while hotels might begin to see year-over-year upticks in average daily rate as
early as this month, full rate recovery for U.S. hotels is still several years
off. Following the previous downturn, it took four years to regain rate levels
in absolute dollars, and with rates falling for the past year and a half, it
probably will take longer this time, he said.
Currently, U.S. group demand is down about 5 million room
nights on a monthly basis from where it was in 2008, according to Lomanno. For
rates to recover, not only will that group demand have to come back, but
meeting planners also will have to move away from the short-term booking
windows that have come to dominate the industry.
"The group part of the business is where the foundation
is, where there are rooms on the books to give confidence in pricing rooms,"
Lomanno said. "The fact that there's not that foundation of rooms on the
books, and people are booking late, really conspire to make it a difficult
Deloitte's Weissenberg said recent airline capacity cuts
actually would help hotels in that regard. As their passenger volumes rebound
and they operate nearer to full capacity, corporate and group travelers once
again will have to make their bookings further in advance, he said.
Beyond 2010, the supply picture has hoteliers even more
bullish on potential pricing, meaning travel buyers in a few years could be
facing difficult pricing situations, similar to what they saw in 2006 and 2007.
Many projects, particularly in the upper upscale and luxury tiers, have been
delayed or scuttled completely during the downturn, and financing for new
projects has remained tight.
Laurence Geller, president and CEO of Strategic Hotels &
Resorts, said that if demand continued on its present upward trajectory with
little supply entering the market, it would be leading to a situation in which
hoteliers "in theory have infinite pricing capacity for the first time
ever in this industry."
It's not that the major hotel companies are not developing.
Much of that development, however, is on the international front. Starwood
Hotels & Resorts, for example, has reported that 70 percent of its hotel
openings this year will be outside of North America.
Lalia Rach, divisional dean of NYU's Tisch Center for
Hospitality, Tourism and Sports Management, said the development focus for most
major brands will continue to center around development in India and China.
Hoteliers are looking to capitalize on the rising middle class in those
countries, who soon will travel more frequently, she said.
"Together, these countries have 2.4 billion people,"
she said. "The middle class in China as estimated is larger than our
entire country, and it's the rising middle class that then will become domestic
Brazil also would be a developmental focal point, as the
country is poised to become a dominating member of the global society, Rach
said. Hotels also are looking for further development in Eastern Europe, though
financial and structural problems preclude some of that growth, she said.
Within the United States, most development is expected to
center on adding midprice and limited-service properties into urban markets
lacking in those tiers. "Does that mean you won't see any four- or
five-star builds? No, but the luxury model for the last decade has been built
upon mixed-use," Rach said. "That's how they got the funding and went
forward. Are they going to be able to sell that business model anymore, because
who's buying those apartments?"
Although the overall sentiment in the hotel industry has
shifted to optimism, it still faces some potential snags that could derail a
recovery. IHG's Cosslett said hotels' pricing strength also could be undercut
as governments begin to crack down on their travel costs, particularly in
"Whilst corporations have taken the axe to their travel
programs, it has not been true of governments," Cosslett said. "The
austerity measures which now every government across Europe in particular and
the rest of the world are looking at are going to take vast amounts out of the
marketplace. That could potentially be a problem, because we are an industry
that relies on government business."
During the downturn, many corporations increased their use
of remote conferencing technology, particularly for internal meeting purposes,
and they have indicated that they would continue to use the technology even
after economic recovery. At the same time, both Marriott and Starwood in the
past year have added remote conferencing capabilities to gateway properties as
an added revenue source.
"We're trying to offer that technology to businesses
that can't afford the installment in their offices," Marriott's Sorenson
said. "It seems reasonably clear that they are best suited for relatively
small meetings, maybe a dozen people max. "
Hoteliers, however, remain confident that such technology
will not replace larger groups and customer-facing travel.
"For now, there's something to being in a room with
someone and getting things done," Deloitte's Weissenberg said. "I don't
see that being replaced anytime soon."
NYU's Rach said the industry also could face increased
competition for group business from the cruise industry in the years ahead. "The
cruise industry is going to make a determined effort to become the meeting
place of choice," Rach said. "They had 13 ships come online last
year, and they had 14 ships this year. We are talking thousands of rooms."
Hilton's Nassetta said the downturn also has shown the
fragility of corporate travel, particularly group business, as it relates to
political rhetoric. "A couple of bad comments can destroy that piece of
business pretty rapidly," he said.
Marriott's Sorenson said the political climate rhetoric
around group travel made its declines deeper in this downturn than it has in
past ones. Choice Hotels International president and CEO Stephen Joyce said the
industry has made headway in communicating the return on investment of group travel
to keep its growth moving. "We've got a number of politicians who have
learned now the cost of bashing travel and intimating travel is just a bunch of
fat white guys smoking cigars on the golf course," he said.