Hotel Consolidation Tightens Chains' Hold On Hawaii

Marriott International last month added established hotels in Maui and the Big Island of Hawaii to its local portfolio through a franchise agreement with the hotels' owner, Outrigger Enterprises. In another transaction by a global hotel company—an outright purchase in this case—Fairmont Hotels and Resorts in December acquired another upscale hotel on the Big Island and converted it to the Fairmont brand.

The dual transactions represent a larger trend. Due to the continuing weak economy and decrease in travel, many hotel owners are eager to divest hotels to take out the underlying value of the asset or at least shift day-to-day management responsibility to others.

For buyers and meeting planners, consolidation of choice Hawaii properties into fewer hands can be a positive development. If they already are working with these suppliers, they can use the consolidated room night and meeting space requirements to leverage more favorable rates. On the other hand, as control of Hawaii's trophy hotels and resorts gets concentrated into the hands of fewer owners and managers, buyers may find their bargaining power has diminished.

Although Hawaii has struggled during the past 18 months along with other leading U.S. resort and meeting destinations, the state remains a desirable location for both domestic and international travelers and its long-term prospects are positive.

According to Smith Travel Research, Hawaii's occupancy rates stayed virtually flat in 2002, compared with the prior year. However, average daily rates as well as revenue per available room fell, compared with 2001. ADR dropped 2.6 percent, while RevPAR slipped 2.4 percent. As in other destinations, this suggests that hotels cut back too steeply on rates as a way of shoring up occupancies.

For hotel companies seeking to be world class, having a significant presence in Hawaii is important. Fairmont acquired the 539-room Orchid at Mauna Lane in Maui and reflagged it The Fairmont Orchid, Hawaii. Regarding his company's expansion strategy, Fairmont president and COO Chris Cahill said, "If you want to be a truly global brand, you need to be in the key destinations with as much distribution as makes sense." Yet, high barriers to entry and the lack of available choice development sites make outright purchase or assumption of management contracts a reasonable option. Fairmont already manages the 413-room Kea Lani on Maui, which it acquired in early 2001.

The two properties in the Marriott-Outrigger transaction are the 524-room Outrigger Wailea on Maui and the 545-room Outrigger Waikoloa on the Big Island. Both have been rebranded with the core Marriott name. In announcing the deal, Ed Fuller, Marriott president and managing director of international lodging, acknowledged the importance Hawaii plays in the company's long-term growth. "Marriott customers now have more lodging choices when they come to Hawaii on business or leisure," he said.

Meanwhile, Outrigger president and CEO David Carey said the arrangement provided his properties with valuable access to Marriott's extensive marketing operation. This includes access to travel managers and meeting planners that a company the size of Outrigger would not have on its own.

Prior to the Outrigger agreement, Marriott's Hawaii portfolio included seven hotels as well as two vacation ownership properties, totaling 3,220 rooms. Marriott brands Ritz-Carlton, J.W. Marriott and Renaissance are represented in addition to the core Marriott brand. By comparison, Starwood's Hawaii portfolio includes 13 properties with 6,750 rooms.

In terms of price point, Marriott's portfolio ranges from deluxe to upscale. While Hawaii was never known for midprice hotel inventory, this will start to change next year when Marriott opens a 134-room Courtyard on Maui.

The rationale behind the deal, Outrigger's Carey said, was the importance of Marriott's frequency program, both in terms of travelers wanting to be able to collect points for their stays as well as for possible redemption. With Hawaii consistently among the top redemption destinations, hotel companies need sufficient inventory to satisfy redemption demand.