As the hotel industry hunkers down for an economic recession that may impact its revenue per available room growth, corporate travel managers--long-awaiting supply and demand balance--may be disappointed in less-than-anticipated rate reductions. In fact, lodging analysts are advising hotel revenue managers not to lower daily rates too quickly--if at all--and to keep supply at minimum levels. Additionally, these industry watchers are predicting that any rate reductions will occur only in economy hotels and other market tiers less desirable to corporate travel buyers. Overall, rates in the top 25 U.S. markets will continue to increase, they said.
Hotel companies are "much better positioned to weather financial downturn," said Smith Travel Research president Mark Lomanno during the National Business Travel Association's annual financial forum here last week. "Yes, it will be painful for them, but not nearly as it was in the past two downturns. They are in a better position than they have been historically." He added that travel managers shouldn't be too quick to rejoice: Although supply and demand trends have shown some leveling, average U.S. daily rates for 2008 have increased by 5.2 percent.
PricewaterhouseCoopers lodging consultant Bjorn Hanson also said buyers will have to hang on for a few more years before they start to see reduced rates. PwC projected a 4.5 percent increase in U.S. average daily rates for 2009, compared with the projected 5.4 percent increase for 2008 and the record-setting 7.5 percent increase in 2006. "We won't continue to have record-setting RevPar growth, but it is very favorable," Hanson said.
PwC projects the U.S. downturn to spill over in the United Kingdom market, ultimately causing a slowdown to occur elsewhere. PwC said RevPar in Britain would grow by 4.1 percent in 2008 and 3.6 percent, while a worst-case scenario calls for RevPar to increase by just 2.8 percent in 2008 and 2.9 percent in 2009.
"We are beginning to see signs of business travel slowing, as there is anecdotal evidence of declining hotel bookings in gateway cities such as London and Frankfurt, which are heavily dependent on the financial sector and the lucrative meetings, incentive, conference and exhibitions segment," according to investment services firm Jones Lang LaSalle's 2008 outlook.
Analysts are recommending that hotel companies maintain or increase rates in the top 25 U.S. markets, which generate about 42 percent of total U.S. hotel revenue, and work bottom up to reduce costs. Suppliers are advised to keep rates high to maintain RevPar and not to "overreact" in order to avoid long-term financial damage--if they can withstand short-term hardships.
"Just make sure you aren't discounting for the sake of discounting," said Lomanno. "Spend a lot of time thinking through the math. You have to be really careful when you start sacrificing those rates."
Reducing rates right off the bat without fully analyzing all aspects of industry trends proves to be the worst policy in preparing for a downturn, according to Lomanno. Supply still has not met demand needs in the top 25 markets, and "even though there's new construction and new supply, it's likely to be absorbed at a reasonable pace," he said.
For the first 60 days of 2008, demand growth yielded a 0.3 percent increase and occupancy appeared "sluggish," showing at a 1.7 percent decrease. But first-quarter figures do not provide an accurate outlook for the whole year, Lomanno said.
Still, "suppliers should solidify their relationships with buyers in order to prepare for the downturn," said Management Alternatives Inc. consultant Carol Ann Salcito. "It will soon become a buyer's market. This happens every few years; the pendulum swings to the other side."
However, if rates increase in the top 25, it will be a hard blow to the travel managers who had high hopes for seeing the market shift in the buyer's favor.
"The top 25 markets are probably not going to be affected as quickly. That means pricing there is going to stay stronger, longer," said Lomanno. Occupancy rates are still showing positive numbers and until it goes in the red, hoteliers have nothing to fear, he added.
For 2008, PwC predicts U.S. occupancy rates will decrease by 0.9 percent, which would be the first major decrease since 9/11. Also, occupancy rates in the United Kingdom will see signs of decline, according to PwC. However, in many Asia-Pacific business centers, corporate rates will rise further, including some double-digit percentage increases, according to American Express Business Travel.
Both Hanson and Lomanno praised lodging firms for managing costs and maintaining construction debt in preparation for a downturn. Although demand will "certainly" decline, the industry still has limited supply. In the most recent economic boom year, 2006, hotel demand only grew 1.5 percent, but RevPar also grew because even though there was "slow demand growth, there was lousy supply growth keeping occupancy up," Hanson said. "Why is the industry doing so well? [They] had a strong demand growth, but had really, really low supply growth."
The industry's elasticity has seen a one-to-two economic ratio, meaning as the economy grew 1 percent, lodging demand grew 2 percent. The industry now faces a one-to-one ratio, indicating a slight decline, causing hoteliers to bank on generating other forms of revenue, like increasing fees and surcharges, Hanson said. Indeed, Hanson reported that $1.75 billion was generated by hoteliers in 2007 from such items as mini-bar restocking fees, baggage holding fees and in-room safe surcharges.
"Downturn is something that goes along with the industry cycle," said Lomanno. "It's going to be less of a factor now as opposed to before, but the industry will come back."