Upbeat earnings reports issued last week by Hilton Hotels Corp. and Starwood Hotels & Resorts underscore the findings of a recently released study by global accounting firm Ernst & Young LLP which documents strong hotel industry performance in 2005 and forecasts continued profits for 2006.
The 2006 U.S. Lodging Report cites steady capital flow and increases in average daily rate and occupancy and presents data and analysis for hotel segments and 16 U.S. cities. In each case—excluding New Orleans, where numbers decreased due to Hurricane Katrina—ADR climbed in 2005 and was predicted to rise at least nominally in 2006, if not substantially.
Hilton and Starwood both reported fourth-quarter increases in revenue per available room and net income that considerably outdid their numbers from the same quarter one year ago. For the hotels that Hilton owns, RevPAR was up 13.5 percent, while Starwood's RevPAR at its North America owned hotels increased 12.2 percent. Furthermore, Hilton's net income of $105 million for the quarter beat out its previous year net income quarterly performance by $40 million. Likewise, Starwood's $159 million quarter-four net income was $59 million more than last year. Both companies also reported gains in occupancy and ADR.
Hilton and Starwood are equally optimistic about 2006, expecting more RevPAR growth and subsequent profitability. "Demand for hotel rooms, particularly among business travelers, continued to accelerate in 2005," said Hilton Hotels co-chairman and CEO Stephen Bollenbach, in Hilton's fourth-quarter earnings report. "In 2006, we look forward to a continuation of the strong business trends we experienced in 2005, along with the new worldwide growth opportunities presented by our acquisition of Hilton International." Starwood CEO Steven Heyer echoed Bollenbach during Starwood's fourth-quarter earnings call.
Ernst & Young put Hilton's and Starwood's enthusiasm into perspective on both an individual segment and city basis. The luxury segment, in particular, posted stout gains as a result of increasing demand and a migration of guests from the lower end of the upscale tier into the luxury section. These movements translated into an estimated ADR that topped out at $251, a 7.8 percent leap from 2004. The higher room rate was accompanied by an estimated occupancy rate of 70.6 percent, a 2.6 percentage point rise over 2004's luxury room occupancy of 68 percent. All told, RevPAR in the segment managed to rise almost 12 percent in 2005 to $177.
According to Smith Travel Research, demand in both the upper upscale and upscale segments increased approximately 4 percent in 2005, which combined with a supply growth around 1.5 percent. Both profited from occupancy rates that hovered just below 71 percent. The only distinguishing categories were ADR and RevPAR, where the upper upscale segment posted numbers of $140 and $99, and the upscale segment posted $104 and $73, respectively.
The midprice and economy segments continued to prosper, albeit more modestly in the economy sector. Midprice with food and beverage realized an increased RevPAR growth of 8 percent to $46 in 2005, while midprice without food and beverage finished 2005 with a striking double-digit percentage jump in RevPAR, at an estimated 11.5 percent.
The economy segment operates at an ADR about 30 percent below midprice hotels, which reduces its overall pricing power. Coupled with brands eliminating underperforming properties over the last three years, the economy segment's growth rate is on a decline. However, the segment still saw gains in 2005. Demand increased about 3.5 percent and because of declining supply, occupancy rates increased, although at a small rate of 1.8 percent over 2004.
New York continues to outperform the rest of the domestic market. Ernst & Young predicted a 13 percent jump in Manhattan's ADR for 2006, a number that Michael Fishbin, national director of hospitality services at Ernst & Young, said is fueled by decreasing supply. "In Manhattan, there is more compression on the market due to conversions of hotels to residential use," he said. "That will enable hotels to raise their rates in 2006." Ernst & Young predicted Manhattan's ADR to be slightly higher than $250.
Occupancy rates were up in 2005 and Ernst & Young anticipates further growth in 2006 due to steady demand and historically low supply growth. "It's an indication of the strong fundamentals with the demand for hotel rooms outpacing supply," Fishbin added.
Others cities, although growing incrementally, are not enjoying the same strong numbers as Manhattan or Washington, D.C. "With Dallas or Atlanta, for example, you're talking about a market where occupancy rates are in the low to mid-60s—20 percentage points or more lower than Manhattan, which provides for a lot less pricing power for hotel owners," Fishbin said. "These markets have a longer way to go before they can focus on more rate growth."