Hilton Hotels Corp. began May by announcing robust first-quarter earnings boosted by strong demand from business travelers, which drove up average daily rates and resulted in a 9 percent spike in Q1 revenue per available room. Hilton's announcement came on the heels of first-quarter reports from Marriott International and Starwood Hotels & Resorts that were equally strong and may cause more headaches for travel buyers once 2007 rate negotiations begin.
Hilton said that strong demand from business travelers translated into single-digit or double-digit percentage-point average daily rate increases in many of its U.S. markets. Both Marriott and Starwood, which each posted gains in systemwide revenue per available room in the first quarter, also credited their thriving RevPARs to gains in ADR.
With some buyers already handicapped in 2006 by 12 percent to 15 percent increases in corporate negotiated rates, according to PricewaterhouseCoopers, 2007 could prove even more difficult for buyers looking to keep rates down.
PwC's hospitality and leisure practice head Bjorn Hanson forecasted that hotels would enjoy record profits this year—upwards of $25.6 billion. This would surpass the prior record of $22.5 billion attained in 2000. "This is based on factors including three years—2004, 2005 and 2006—of the highest RevPAR growth since the early 1980s, with RevPAR growing at around 8 percent again in 2006, revenue increases in other departments and continued effective control of costs."
PricewaterhouseCoopers forecasted that construction of 119,800 rooms would begin in the United States this year, a 45 percent increase over last year, but PwC's Hanson said that this wouldn't absorb the growing demand.
While the announcements reaffirm the sustained profitability of the hotel companies, it too underscores the clout wielded by suppliers, often leaving travel buyers in an untenable position when negotiating corporate rates. With 2007 negotiations approaching, Maria Chevalier, vice president of hotel relations at BCD Travel's Travel Procurement Solutions division, likened buyers to customers at the gas pumps and noted the 50 percent increase in projected profits over the next two years for the hotel companies.
"It's frustrating. The same thing that you're thinking about the oil companies, you think about the hotel side," Chevalier said. "You look at this as a buyer and say, 'What is a reasonable level of competitive increases?' As you go to procure you have to say, 'What is that reasonable point of increase that still allows you to meet your business objectives?' "
Hoteliers see it differently.
"Business fundamentals continue to be very strong, with high demand among both business and leisure travelers for our hotels in gateway cities," said Hilton co-chairman and CEO Stephen Bollenbach in a company statement. "High occupancy levels are enabling us to achieve a more desirable mix of business."
"North American business and leisure transient demand remained strong during the quarter, driving RevPAR and house profit margins higher," said J.W. Marriott Jr., Marriott International's chairman and CEO. "While hotel industry supply in North America is still growing only modestly, particularly in the full-service segment, we are taking a greater share of new hotels being developed around the world."
Starwood cited continued travel demand, rising ADRs and the integration of the Le Meridien brand, which it acquired in November
(BTNonline, Nov. 28, 2005), as the reasons for a similarly strong first quarter. Starwood also completed the sale of 28 properties to Host Marriott early last month with the transaction valued at more than $4.23 billion.