Hotel performance statistics from April and May indicate that the trough in occupancy and room revenues may be over and a slow return to normalcy for the hotel business has begun.
The prospect of a revitalized lodging industry is a mixed blessing for travel managers. Financially robust hotel companies help assure that quality standards will be maintained, and the services and amenities business travelers expect will be available. Yet, since 2001, financially weakened hotels have given buyers, in many instances, the upper hand in rate negotiations, with corporations reaping significant dollar savings from this leverage.
Still, the situation remains fluid. Travel buyers know that by the time 2004 rate negotiations begin in earnest in the fall, market conditions again may have changed.
Stephen Bollenbach, president and CEO of Hilton Hotels Corp., last week cited pent-up demand among business travelers as a prime driver behind the increase in hotel occupancy in April and May, following a flat first quarter of the year.
"Things are getting better," he said. Reservations on the Hilton Web site suggest that this summer should show a moderate increase over last summer.
Given the recent industry performance, J.W. Marriott Jr., chairman of Marriott International, described his company as "cautiously optimistic." He also noted that the downturn, which saw annual industry profits fall to $16.1 billion last year, from $22.5 billion in 2000, was the worst the hotel business had ever experienced.
As evidence that the tide may have started to turn, Marriott cited high levels of consumer confidence as an especially promising sign. Yet, any business travel rebound still is dependent on a healthy return of corporate profits.
"This will result in companies reinvesting in their businesses, which, in turn, will be accompanied by increased levels of business travel," he said. He added that Marriott's meetings business for 2004 is seeing an uptick.
Bollenbach, Marriott and other senior-level hotel company executives last week spoke at the 25th annual New York University Hospitality Investment Conference in New York.
Despite the hotel executives' relatively recent optimism, industry performance in the first half of the year still is likely to weigh down 2003 results overall.
According to Bjorn Hanson, leader of the hospitality and leisure practice at PricewaterhouseCoopers, U.S. hotels' growth in revenue per available room is expected to drop 2.1 percent in the first six months. Prospects for the second half are better, when RevPAR growth is expected to be 1.3 percent, resulting in a slight decline in RevPAR growth of 0.4 percent for the year.
"This will be the first three-year consecutive decline in annual RevPAR since the 1961-1963 period," Hanson said.
Occupancy rates, meanwhile, followed a similar trajectory. In the first quarter of the year, occupancies fell 1.2 percent, compared with the same quarter last year, and are expected to fall 1.1 percent in the second quarter. Only in the third and fourth quarters may they rise slightly.
Randy Smith, CEO of Smith Travel Research, said he found the current state of the supply-demand ratio to be good news for the industry, if not necessarily for buyers.
"Demand started going negative earlier in the year, corresponding with the onset of the war with Iraq, so it was not really unexpected that demand would decline," Smith said. "The good part of this was supply growth, which gradually fell. In April, for example, supply growth was only 1.5 percent."
Smith said he expected this positive scenario to continue for the remainder of 2003, adding that there was an underlying strength in the industry at the moment, which was quite resilient. "Supply growth continues to drift downward," he said, "while demand growth pretty much bobs right along at the same level."
He also expected the summer season to be solid, buoyed by demand on the leisure side. "The real question will come in the fall when we see how business and group travel performs," Smith said.
As has been the case since late 2001, hotels in locations that business travelers can drive to have continued to outperform hotels in destinations that require flying in recent weeks.
"This has benefited midprice brands, which tend to have most of their inventory in suburban or highway locations," said Henry Silverman, chairman and CEO of Cendant Corp. Cendant's brands operate in this price point.
Bollenbach and Marriott confirmed that their midprice brands also are doing better relative to their full-service operations.
Any industry rebound likely would be led by such specific industries as pharmaceuticals and telecommunications, rather than an across-the-board upturn, noted Marilyn Carlson Nelson, chairman and CEO of the Carlson Companies. "Technology companies that had not been traveling have shown signs that they are beginning to resume traveling," she said.
According to Nelson, Carlson's hotel and cruise businesses showed a strong pick up in the past couple of weeks. She also noted that Carlson Cos.' meetings and incentive business is well ahead of its goals for next year, already having booked 80 percent of its projected revenues.
As in any market analysis, certain cities or regions of the country tended to outperform others, regardless of the state of the economy.
"The Florida market, for example, has held up surprisingly well," according to Jonathan Tisch, chairman and CEO of Loews Hotels. With properties in Miami's South Beach and Orlando, Loews' covers the transient, group and leisure segments in the Florida market.
In terms of individual markets, Atlanta and New York are among the key business travel destinations that did not have a good first four months of the year, according to Smith. "Demand in both cities declined a bit more than 4 percent," he said.
Compared with the pace of domestic travel, international travel has continued to lag. "The timing of the return of the international traveler remains a big question," Tisch said.
One assumption all of these industry leaders make is that the geopolitical and world health situations will stay stable, moving into the second half of the year.
"Any positive momentum in either business or leisure travel could be reversed by a new terrorist attack or other bad news, such as the spread of the severe acute respiratory syndrome virus," Nelson said.
She noted, however, that travel levels had not dipped during the most recent federal terrorist alert before the Memorial Day weekend as they had during previous alerts.
"This suggests the traveling public is more comfortable that the travel industry will be prepared to handle any eventuality," added Bollenbach.
One of the developments that has been blamed for badly suppressing hotel revenues in the past 18 months—and hence impeding a rebound—has been the spread of discounted room rates, available mostly through third-party Internet sites.
According to Smith, the discounting has not proven very effective in driving demand. "When you review the data, you see that the markets that most heavily discounted rooms also had the sharpest declines in occupancy," he said.
Smith Travel Research data confirmed the findings of a recent study by Cornell University's School of Hotel Administration. "The prevailing wisdom—that reducing room rates to entice new consumers to enter the market and buy more rooms—has never worked for the industry and won't in this era of proliferating Web-based travel deals," said Cathy Enz, co-author of the study. "New consumers don't come into the market for this reason. Instead, existing consumers simply get more for less and hotel revenues fall."
The rise in popularity of Web rates has been frustrating to travel buyers since Web rates often undercut buyers' negotiated rates
(BTN, April 28).While depressed RevPAR growth in the first quarter will prevent RevPAR in the United States for the year from moving into the black, despite a stronger second, third and fourth quarters, PwC's Hanson is more bullish on the industry's chances for 2004 and 2005. For 2004, he projected that RevPAR growth will jump to 4.5 percent and then level off slightly to 4.2 percent in 2005. While these are respectable results, they are still short of the 6.2 percent RevPAR growth achieved in 2000, the industry's most recent banner year.
"The next two years will provide a window of opportunity to achieve occupancy gains, while supply growth remains modest," Hanson said. "However, the improvements in RevPAR through the end of 2005 still will bring RevPAR back only to the levels achieved in mid-1995."
What no one questions is the critical role business travel will play as the hotel business struggles to sustain its recent positive results.
"Lodging demand is highly dependent on business travel trends," said Keith Mills, industry analyst at UBS Warburg. "Business travel, in turn, is dependent on changes in corporate revenues. If companies realize greater demand for their products and services, business travel spending will accelerate."