Hotel CEOs Lament Softening Demand, Foresee Some Discounting

Chief executives of three multibrand hotel companies today acknowledged tougher times ahead for the next year and a half and an upcoming corporate hotel program negotiating season that will be, from their perspective, more difficult in which to achieve rate increases.

Speaking at the New York University International Hospitality Industry Investment Conference in New York this morning, Marriott International chairman and CEO J.W. Marriott Jr. said he is seeing softening in both corporate and leisure travel and that the company expects North American revenue per available room to increase year-over-year by about 2 percent in the second quarter of 2008. Marriott, who said business travel accounts for about 80 percent of his chain's revenue, said corporations are cutting back on travel, that last-minute group bookings are slowing and that the company is preparing for "a tough economic environment and some very difficult negotiations."

"We haven't gotten into the pricing season with our big customers yet, but we'll be expecting them to push for some discounts," Marriott said. "We haven't seen much discounting yet, and there will be some."

Barry Sternlicht, chairman and CEO of Starwood Capital Group, said to expect the softening to continue for at least 18 months. Some markets, such as Las Vegas, already have begun discounting, and hoteliers have been raising rates in past years despite declines in occupancy, leaving them in a precarious position.

"The U.S. consumer is stretched, and we've been waiting for him to collapse for quite some time. Businesses will do what they've always done in every cycle: tighten their belts," Sternlicht said. "It's going to be worse before it gets better."

In addition, hoteliers should expect a slowdown in state and city government travel, particularly from secondary and tertiary cities, said Lalia Rach, dean for NYU's Preston Robert Tisch Center for Hospitality, Tourism and Sports Management. "There is a credit crisis at the city and state level," she said. "When you look at these secondary cities and tertiary cities, city and state government makes up a huge part of their business."

Blackstone Group senior managing director Jonathan Gray, whose firm acquired Hilton Hotels Corp. last year, said he also is cautious in the current economy, although there were some factors that are tempering demand softening. "The weakened dollar has certainly helped the gateway cities," Gray said. "Business has held up surprisingly well."

Sternlicht also said hoteliers also face further demand softening should airlines continue capacity cuts, although he said thus far increasing fuel costs have not visibly deterred travelers. He added that Wall Street analysts often don't give the resiliency of the industry enough credit, as companies generally are able to stay afloat even in the more difficult periods, and Marriott said the company's business model is well-equipped to handle down cycles.

"I've been through six of these, and this will be my seventh," Marriott said. "People will still travel, though they may not travel quite as much. I don't want you to walk out of this room thinking this industry is going down the tubes, because it's not."