Hotels Tally Far-From-Healthy Second-Quarter Earnings

The three major U.S.-based multi-brand hotel companies—Marriott International, Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide—last month announced drops in revenue per available room for the second quarter ranging from 4.3 percent to 6.9 percent over the prior year. Fallout from military action and a health crisis are bound to color negotiations now getting underway for 2004 corporate hotel rates.

For buyers, the industry's continuing tale of RevPAR woe bodes well. Ultimately, a healthy lodging industry is to buyers' advantage, but, in the short term, sobering RevPAR results suggest the present buyer's market likely will not abate.

The major multi-brand companies aside, second-quarter RevPAR results for other hotel companies equally were downbeat. Included were hotel companies as diverse as Four Seasons Hotels, an owner/manager of deluxe properties, which declined 7.4 percent, LaQuinta, a company with a single midprice brand, whose RevPAR fell 3 percent, and Choice Hotels International, a franchisor of midprice and economy brands, which was down 4 percent. Even the extended stay segment, one of the industry's brighter lights in recent years, couldn't stem the tide. RevPAR at Extended Stay America, for example, slipped 3.9 percent for the quarter.

J.W. Marriott Jr., chairman and CEO of Marriott, spoke for the industry when he attributed the poor RevPAR showing to the effects of the Iraq war and outbreak of severe acute respiratory syndrome. Marriott also acknowledged the continuing adverse effects of the global economic slowdown on business travel. In summing up the quarterly results, J.P. Morgan lodging analyst Harry Curtis described those elements as the industry's "triple whammy."

Hotel companies with large amounts of inventory in Asia and Canada, such as Four Seasons and Fairmont Hotels & Resorts, both of which are based in Toronto, particularly were vulnerable as a result of SARS. Fairmont's quarterly RevPAR was down 5.9 percent.

William Fatt, Fairmont CEO, remarked that the fallout from SARS was felt throughout Canada, even though Toronto most directly was affected. Most pronounced was "a sharp decline in international visitors, which is an important customer segment for us," he said.

Both Hilton and Starwood noted particular weakness in their group business, which in this economy has tended to pay relatively high rates. At Hilton, group business fell short during the quarter, attributing to an almost 4 percent drop in average daily rate. Groups also contribute disproportionately to a hotel's food and beverage revenues, so this revenue stream suffered as well.

Starwood offered even more ominous projections pertaining to its group business in a conference call with analysts accompanying its earnings release. As of late-July, group bookings confirmed for the key October-November business travel period were down significantly from the same period last year. This does not augur well for earnings later in the year. "Transient demand could pick up the room night slack, but not the incremental group F&B revenue," J.P. Morgan's Curtis cautioned.

Looking toward year-end in the extended stay category, George Johnson Jr., CEO of Extended Stay America, does not see much cause for optimism. Based on results through the third week of July, he expects third-quarter RevPAR to be down 1 percent to 3 percent, compared with the third quarter of 2002, and decline 2 percent to 4 percent for the year.

At LaQuinta, president and CEO Butch Cash took solace from the fact that RevPAR for his company improved toward the end of the second quarter. For the industry, the situation in Iraq had stabilized by then and SARS-related fears had subsided. "RevPAR trends turned positive during June," Cash noted.