Hotels' Year-End Financial Results Illustrate Negotiating Strength

Benefiting from the rebound in occupancies and average daily rate, hotel companies reported significantly better results in 2004 than in any year since 2000, the hospitality industry's last banner year. The strong year-end results bear out the aggressive approach hotel companies took in driving negotiations with travel buyers for 2005 rates. With Wall Street analysts forecasting that the rebound still is in its early stages, buyers can expect hotel companies' performance to remain strong—and their negotiating strategy aggressive—at least through 2006, including the bid season for 2007 rates.

While the rate of growth in 2004 was up for both occupancy and ADR, compared with 2003, the most dramatic gains were in revenue per available room, which is the indicator most commonly used to measure hotel profitability. Increases in RevPAR, year over year, ranged from 5.1 percent for franchisor Choice Hotels International to 16.2 percent for Fairmont Hotels & Resorts. RevPAR at the Big Three U.S. multi-brand companies—Marriott International, Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide—jumped 9.6 percent, 6.8 percent and 13 percent, respectively.

Demonstrating the strength of the deluxe segment, Four Seasons Hotels & Resorts, which only operates in that tier, saw 2004 RevPAR jump 15 percent from 2003 levels.

As a means of comparison, RevPAR in 2004 for all U.S. hotels gained 7.8 percent, according to Smith Travel Research, indicating that branded hotels generally outperformed independent properties.

While demand during the year was increasingly strong in all customer segments, the rebound in business travel was most pronounced, according to J.W. Marriott Jr., chairman and CEO of Marriott International. "Strong corporate demand increased midweek transient RevPAR in most markets and brands," Marriott said. "Across the board, ADR strengthened significantly, especially late in the year."

Hilton co-chairman Stephen Bollenbach confirmed that Hilton also saw performance strengthen as the year progressed. "The momentum that built starting in late 2003 continued through 2004 and culminated in a very strong fourth quarter," Bollenbach said.

Much to buyers' frustration, increased pricing power came with the return of demand. "The return of pricing power enabled us to raise rates across our system and particularly at our big-city hotels," according to Bollenbach.

The number of international travelers, specifically from Europe, visiting U.S. hotels increased markedly. U.S. properties benefited from the weakness of the U.S. dollar versus the euro, British sterling and other local currencies.

The strong performance in 2004 especially was dramatic in light of recent history. "The rebound in profitability came on the heels of almost three of the most difficult years in the history of the industry," said Four Seasons chairman and CEO Isadore Sharp.

While full-service brands, which are more likely to be located downtown, generally outperformed multi-brand companies' midprice chains, there were exceptions. At Hilton, for example, RevPAR in the fourth quarter at midprice Hampton and Hilton Garden Inn grew 10.9 percent and 8.1 percent, year over year, while RevPAR at full-service brands Hilton and Embassy Suites increased 8 percent and 5.7 percent, respectively.

Hotels in Miami, New York, Orlando and Washington, D.C., performed especially well. Starwood CEO Steven Heyer added Boston, San Francisco and Los Angeles to the top performers list. Buyers bringing significant room night volume to these cities faced an uphill struggle on rates. By contrast, Chicago remained problematic due to the lack of citywide conventions, so buyers bringing significant volume there were in a better negotiating position.

While the major hotel companies largely have moved from owning hotel assets to either managing these assets on behalf of others or franchising them, Starwood and Hilton still retain ownership of key hotels in New York and Honolulu, a major meetings destination, among other key cities. Starwood, for example, in 2004 generated 14 percent of its total earnings in New York, while Honolulu contributed 12 percent to Hilton's bottom line, according to JP Morgan Chase analyst Harry Curtis.

"Clearly, our results were helped in part by our well-located urban concentration of owned assets," Heyer said.

RevPAR is composed of both occupancy and rate. As the industry rebound continues to gain momentum, analysts predict that the rate contribution to RevPAR will grow faster than the occupancy contribution, meaning that buyers can expect hotels to continue to press for significant rate increases. "While the rate contribution in 2004 at all U.S. hotels was 54 percent, we forecast it will increase to 61 percent in 2005 and to 74 percent by 2006," said Bjorn Hanson, leader of the hospitality practice at PricewaterhouseCoopers.