Hoteliers saw sluggish domestic demand in the first three months of 2008, and with travel buyers and consultants expecting further hotel demand cutbacks on the horizon, some already are seeing clear signs of a more favorable negotiating climate for buyers this summer.
"We don't see a full-blown pendulum swing into the buyer's corner, but there will be some significant opportunity for buyers," said Priscilla Campbell, advisory services hotel practice leader for American Express Business Travel. "Just how much is going to be determined by what happens over these next eight to 10 weeks."
Hotel companies in recent weeks largely have reported first-quarter increases in the 2 percent to 3 percent range for revenue per available room in North America (see story, page 31), compared with increases in the 5 percent to 6 percent range in this period last year and even higher increases the year before. Overall, for the first three months of 2008, Smith Travel Research reported that occupancy dropped 2.7 percent and that RevPAR increased by 1.9 percent.
PricewaterhouseCoopers' latest forecast shows that overall average daily rates should increase by 4.8 percent this year, said Bjorn Hanson, the firm's hospitality and leisure group principal. PwC data indicates that overall corporate rates, not weighted by company size, increased by 5 percent this year and should moderate even more as buyers enter the next round of negotiations.
"For 2009, we haven't issued any kind of forecast for demand segments, but overall, the forecast shows slowing rate growth to 4.2 percent," Hanson said. "As we get into fall, the outlook is that corporate rate negotiations should start around 4 percent in a much more favorable environment for buyers."
Anecdotal reports also include good news for buyers. One buyer said hotels that initially had refused even to bid on rates now are calling her back for her business, and American Express' Campbell said it was not an isolated case.
"A few months ago, they had a very bullish outlook on negotiations for 2009, but after seeing the effects of the first quarter, they're rethinking their approach to negotiations," she said. "We see many more suppliers who are willing to enter into negotiations where they haven't in the past."
Bob Brindley, vice president of the Americas for Advito, BCD Travel's consulting division, said that a lot of new U.S. capacity is coming online, lessening demand pressures to push prices up. Despite troubles in real estate and finance segments, PwC's Hanson said the forecast for a 2.1 percent increase in lodging supply this year remains unchanged.
At the same time, overall economic woes are lessening demand, Brindley said. Both he and American Express' Campbell said some clients are facing travel and entertainment cutbacks of as much as 20 percent, and without the ability to make up the savings purely on rates, much of that will have to come out of demand management in the hotel sector.
"They're cutting back the length of trips, still buying the airline ticket but making it into a day trip," Brindley said. "In high-price places like New York, it's not effective to add on the cost of a hotel stay."
Even the most difficult markets, including New York, might be easier this time around, he said. "It's been so strong for the last few years," Brindley said, "that given what's been happening in the financial markets, there should be some softening."
Still, consultants and analysts had some caveats. Key international cities would still be a challenge for buyers, some still with double-digit rate increase, as the combination of stronger demand and a weaker dollar gave hotels much stronger RevPAR growth overseas, Brindley. In addition, the weaker dollar would continue to attract more international visitors, boosting demand in many key U.S. cities, he said.
Also, hoteliers will continue to push rates to make up their own costs, including escalating energy and development costs, he said. "They're looking to recoup investments in new properties and renovated properties," Brindley said.
Hoteliers, meanwhile, remain optimistic in their outlooks. "Our read on the situation is that the U.S. economy slowed down in December, and here we are, four-and-a-half months later, seeing a deceleration in the business, but we are not dropping off the cliff," Starwood Hotels & Resorts CEO Frits van Paasschen said in a conference call to investors. "Early indications for the year are very encouraging."
Marriott International CFO Arne Sorenson told investors that while leisure travel was weaker, business travel's strength varied by sector. "Demand from guests employed by professional services firms, defense contractors and even consumer goods companies continued to show solid increases in room nights and revenue," Sorenson said. "Guests associated with the automotive and pharmaceutical industries traveled less than last year."
Marriott also reported that group travel cancellations were lower than 2007 levels, attendance was on track with expectations and group meetings bookings for the rest of 2008 were strong. Advito's Brindley said meeting and incentive travel usually was the first to soften.
Analysts also cautioned that first-quarter numbers this year were skewed by the early appearance of the Easter holiday on the calendar, a period of slowed business travel that usually appears in April, part of the second quarter. Still, PwC's Hanson said that represented only a small part of the demand drop seen in March.
It remains too early for consultants to give definite rate expectations for 2009, and Advito's Brindley said buyers looking to get an early start might face resistance from hoteliers. Although budgets and rates generally are set in July, hoteliers might try to push it back this year in hopes of a better picture of what the economy holds.
"There's uncertainty with the economy and uncertainty with energy prices," he said. "They want to be prudent and not overreact."
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