First-Quarter Hotel Earnings Illustrate Rising Fortunes

The major hotel companies reported strong first-quarter earnings in recent weeks that reflected the extent of the robust lodging industry rebound. Revenue per available room, a key measure of hotel profitability, rose more than 9 percent for the quarter at Hilton Hotels Corp., Marriott International and Starwood Hotels & Resorts Worldwide, compared with the same period one year ago. Occupancy levels and average daily rate also increased year over year.

The results signal travel buyers to brace for aggressive rate increases from their preferred hotels for 2006. Hotels typically begin framing their pricing strategy for the next year in July and August, at about the same time buyers begin compiling their bid lists.

Marriott, Hilton and Starwood each cited the strength of the demand. "The favorable demand momentum that we saw building in 2004 has continued into 2005," said Marriott chairman and CEO J.W. Marriott Jr. "Demand has been strong in most markets around the world." Marriott RevPAR for company-operated properties worldwide increased 9.2 percent during the quarter. Marriott attributed most of that to rate increases.

Hilton co-chairman and CEO Stephen Bollenbach singled out strength in business travel to explain Hilton's strong showing, in which RevPAR for company-owned hotels increased 9.1 percent from the first quarter last year. "Strong demand from both business and leisure travelers, particularly the former, enabled us to increase rates significantly at most of our owned hotels," Bollenbach said. "We benefited from limited new competitive supply and a significant gain in international travel, owing in part to the weak U.S. dollar."

Starwood quarterly RevPAR for owned hotels worldwide jumped 9.7 percent. "Demand is strong and supply remains constrained, which means we can continue to have above-average pricing power," CEO Steven Heyer said. "We clearly expect this to continue for the balance of 2005 and into 2006."

Marriott and Hilton pinpointed certain markets where their hotels performed especially well for either transient or group travel or both. Given this, buyers can expect rate negotiations for these cities into 2006 to be particularly difficult. Marriott cited New York, New Orleans, Miami and Orlando. Hilton added Boston, Atlanta and Washington, D.C. Chicago had a weak first quarter, but is expected to improve as the year progresses. San Francisco had a weak first quarter as well, though its full-year prospects remain uncertain.

Among industry categories, upper upscale and deluxe hotels continued the trend first seen in 2004 and turned in the strongest quarterly performance. For example, RevPAR at Ritz-Carlton, which is part of Marriott, jumped 16.7 percent for the quarter, while Starwood's deluxe St. Regis and upper upscale W Hotels saw quarterly RevPAR jump 11.6 percent and 13.9 percent, respectively.

Quarterly RevPAR at Four Seasons Hotels and Resorts and Fairmont Hotels & Resorts increased 13.8 percent and 12 percent, year over year, respectively. Unlike Hilton, Marriott and Starwood, which operate multiple brands across a range of price points, Four Seasons and Fairmont operate primarily in the deluxe tier.