After Dire Q1, Hotel Analysts See Steeper '09 Decline

First-quarter performance by multibrand hotel companies underscored the deep difficulties the industry is facing, particularly in upper-tier hotels, as analysts continue to move 2009 expectations downward.

In the first three months of this year, the U.S. lodging industry saw revenue per available room drop 17.7 percent compared with the same period in 2008, according to Smith Travel Research, which also showed occupancy down 10.9 percent and average daily rate fell 7.7 percent.

"With the first quarter of 2009 now behind us, it is clear that declining room rates are taking a harder toll on performance than we were expecting," Smith Travel Research president Mark Lomanno said in a statement. "It appears that many hoteliers are embracing the very same pricing and room distribution strategies implemented in the 2001/2002 downturn."

In response, STR in late April revised its 2009 U.S. hotel industry forecast to project a 9.8 percent year-over-year decline in revenue per available room, a much deeper drop than its late October 2008 projection of 2.5 percent, though it said some recovery also is likely in the second half of the year. For the full year, STR is forecasting 2009 occupancy to be 56.5 percent, down 6.5 percent from 2008 levels. The forecast for average daily rate is a 3.6 percent decline.

All publicly traded major U.S. hotel companies reported double-digit percentage decreases in RevPAR for the quarter. Starwood Hotels & Resorts Worldwide took the hardest hit, with domestic RevPAR down 22.8 percent in North America and 23.5 percent overall. Overall occupancy was down 7.4 percentage points to 57.3 percent, and average daily rate dropped 13.6 percent.

Starwood's luxury and upper upscale brands in particular suffered. Systemwide RevPAR for the St. Regis and Luxury Collection was down 34.1 percent and down 34 percent for the W brand, and average daily rate for the brands dropped by 19.9 percent and by 18.4 percent, respectively.

"We redeployed some sales associates to focus on new accounts that are actively booking group events, such as associations and smaller accounts," CEO Frits van Paasschen said during Starwood's earnings call. "We saw 3,000 sales and hotel executives hit the streets to call over 20,000 customers in North America."

Marriott International also saw a 16.2 percent drop in North America RevPAR, part of a 19.6 percent drop overall, and a 7.9 percent drop in average daily rate. Like Starwood, the drop was steepest at the top of the tier, with the Ritz-Carlton brand's RevPAR down 27.1 percent and average daily rate down 10.4 percent for North America.

Marriott CFO Carl Berquist said during Marriott's earnings call that persistent corporate demand weakness has sparked deterioration in pricing power, noting "significant competitor discounting of room rates for corporate business in many markets."

Marriott would "not lead the market down on rates," Berquist said, but added the company would not "lose share by failing to respond," adding, "Room rates are likely to remain weak until the economy shows meaningful improvement."

Berquist said transient demand showed its first signs of weakness a year ago, led by the financial services industry. "We saw some resilience in pharmaceuticals and defense in the first quarter," he said, "but this was only relative to the other sectors we tracked."

Both Wyndham Worldwide and Choice Hotels International, both of which have more of a midprice focus, fared comparatively better in terms of RevPAR. Wyndham reported systemwide RevPAR was down 11.3 percent, and Choice reported a 10.3 percent drop.

Though the second quarter also is forecast to be difficult for hotels, there will be some improvement in the second half of 2009, Smith Travel Research said. Looking further, STR said it now expects occupancy to remain flat in 2010 while rates increase by 1.5 percent.