<B>Room To Move</B>
By Bruce Serlen
Contrary to the optimistic projections of hotel owners, lodging analysts this month said occupancy rates and room revenues for U.S. hotels likely would remain weak for the coming months. Some analysts, in fact, predicted that the market won't turn until year-end or beyond, spelling opportunity for travel buyers.
When the hotel RFP season begins this summer, hotel companies might well be feeling vulnerable, given the current market conditions. Therefore, travel buyers could benefit in rate negotiations for 2002 by taking a more aggressive bargaining position than usual.
"Once the market started to soften this year, hotel companies were eager to promote value-added rates," said Erin Barth-Wilson, vice president for global travel at investment banking firm Credit Suisse First Boston. "As we begin to work with these companies for 2002, we expect they'll keep these aggressive rates in mind."
Barth-Wilson spoke at a hotel forum that Credit Suisse First Boston held last week in New York for its preferred hotel partners worldwide in anticipation of the RFP season getting underway. "We'll particularly be looking for more competitive rates in those cities that have seen the steepest drop in demand," she said.
PricewaterhouseCoopers this month said the industry will be into 2002 before demand and revenues fully right themselves and the industry recovers its growth momentum. "As a result, the softness the industry is experiencing now will likely have an effect on 2002 rates," said Bjorn Hanson, global industry partner for the firm's hospitality and leisure practice.
Timing of the RFP bid process especially will be crucial this year. "With rate negotiations for next year earnestly underway at most companies by September and October, the July occupancy and room revenue results are likely to be the most recent ones available," Hanson said. "Even if industry numbers have started to improve at that point, there won't be sufficient time for the seller side to become brazen."
As a result, the time may be right for travel managers to take the lead in negotiations. "This may be the year for travel managers to recognize their strength and negotiate aggressively," Hanson said.
The window of opportunity, however, is likely to be a small one. "In today's market, as things slow and supply of hotel rooms grows, there's more leverage on the buyer's side," said Michael Leven, chairman and CEO of U.S. Franchise Systems, which includes three midprice brands. "But that leverage switches back and forth. You've heard of 'buyer's markets' and 'seller's markets,' they're both part of the cycle."
It's to the hotel companies' advantage to wait as long as possible into the RFP season to undertake serious rate negotiations--;in the hope that market conditions improve in the extra month or two.
"There's no question that the softening occupancy and revenue numbers will influence negotiations. The question is, to what degree?" said Julie Hylton, director of hotel management for American Express Consulting. "Hotels obviously want as much experience of the year under their belts as possible. Travel buyers, on the other hand, want to make the most of the psychological advantage they enjoy now."
But buyers want to move sooner rather than later for other reasons as well.
"The trend during the past few years has been to start RFP rate negotiations sooner in the fall than before, so that the process can conclude sooner," Hylton said. "It's easier from an administrative point of view to have your hotel program finalized earlier, plus it helps ensure that accepted rates will be loaded into the system in a timely way."
The bad news that the U.S. hotel industry has been coping with continued unabated in May. According to Smith Travel Research, preliminary figures suggested that U.S. industry occupancy for the month would be down 4 percent to 5 percent versus May 2000. March and April data, meanwhile, indicate an accelerating rate of decline in occupancy as the year has gone on. In March, for example, occupancies were down 1.7 percent over the prior year, while in April they were down 3.7 percent against the comparable period a year earlier.
Even more telling for the business travel market are the occupancy numbers for the top 25 U.S. markets from Smith Travel Research. In March, occupancies were down in 17 of the 25 markets from the same month last year, while in April the number had jumped to 21 of the 25. San Francisco/San Mateo, New York, Dallas and Chicago were among the cities where demand had fallen the most precipitously from the previous April.
"San Francisco and New York, two of the best performers over the past 12 months, have done complete turnarounds over the past two months," said Jason Ader, lodging industry analyst at Bear Stearns & Co.
The degree of the abrupt drop in a traditionally strong market was particularly startling in San Francisco/San Mateo, falling 17.4 percent from April 2000 to April 2001. This was on top of the sobering March numbers when occupancies fell 16.9 percent over the prior year. The weakening of the San Francisco market overall is attributed to the concentration of high-tech companies in Silicon Valley, which have been hit hard by the general downturn in the economy.
"Considering the preliminary May numbers and the sense we have of the market moving forward, we expect June and July to be a repeat of these weak numbers," said Randy Smith, president of Smith Travel Research. "Looking further down the road though, the outlook is pretty positive. It then just becomes a question of getting from here to there. We believe that as the industry moves into year-end and into 2002, the situation will improve."
Likewise, room revenues are expected to remain depressed in the short term. PwC, in fact, predicted that revenue per available U.S. hotel room will decrease by slightly more than 1 percent in the second quarter of the year, compared with the same period last year. "This will be the worst decline in RevPAR that the industry has seen since the third quarter of 1991," Hanson said. Factoring in inflation, this means RevPAR in the quarter really fell 4.3 percent.
In January 2000, Hanson had predicted a major turning point for the industry in 2001, when RevPAR would slow dramatically. He also forecast that RevPAR would trough during the second quarter of 2001.
"We predict that RevPAR will grow by only 2.1 percent for all of 2001," Hanson said. "This compares with RevPAR growth of 5.7 percent in 2000."
Others in the industry, meanwhile, have contemplated the possibility that there actually might be negative RevPAR growth for the year.
"The industry is going to be disappointed this year," said U.S. Franchise Systems' Leven. "I wouldn't go so far as to say we're going to have negative RevPAR growth for the year, but I wouldn't be so optimistic to say it couldn't happen."
American Express' Hylton, who works with corporate clients around the country, in recent weeks hasn't gotten any sense that the travel cutbacks that were imposed when the national economy first softened are about to be lifted.
"No one is talking about easing the travel restrictions any time soon," she said. "If anything, corporations seem to be waiting for second-quarter earnings to be announced before making any decisions." This would be late July at the earliest.
Similar to Smith Travel's forecast on the occupancy front, however, Hanson predicted that RevPAR would improve in 2002. "We expect RevPAR will grow by 4.1 percent next year," he said, a rebound he described as "modest."
Understandably, discussions of how significant a potential rebound might be have been tentative. In the view of Salomon Smith Barney lodging industry analyst Michael Rietbrock, for example, any rebound is likely to be "subtle," and not occur until the first quarter of 2002.
On a positive note, the lodging industry should have learned a lesson from the experience of recent months.
"What we've learned from analyzing the first-quarter 2001 data is that, for the most part, travel does not stop," said Jack Corgel, managing director of the Hospitality Research Group, which is a unit of PKF Consulting. "What this means is that the industry as a whole should be able to keep its business. However, on an individual property basis, hotels will now have to compete on price to keep their top-line dollars, while cutting expenses to preserve the bottom line.