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Forecasters: Only way to go is up in 2010
January 25 2010

Metrics are going to improve this year, but there is a lot of lost ground to make up before a true turnaround, according to hotel industry research experts.

REPORT FROM THE U.S.—With 2009 squarely behind us and talk of “less worse” economic indicators, will the hotel industry soon see a recovery?

This question is top of mind with the big three forecasting firms—PKF Hospitality Research, PricewaterhouseCoopers and Smith Travel Research—that are preparing their answers for the Americas Lodging Investment Summit that begins today.

And those answers, as can be expected, are difficult to summarize. For every optimistic statement there is a pessimistic counterpoint. For every hint at demand increase there is an equal but opposite factor that could lead to continued strife. With that said, here is the picture of recovery as depicted by the men who spend the most time sketching its form.

Luxury will lead

“(It) is going to be a top-down recovery, and weekday travel will recover first,” said Mark Lomanno, president of STR. “The high- end business travelers will drive the shape of recovery almost certainly. If you look at the performance of the segment over last couple of months, there has been substantial recovery at the high end.”

“The majority of trends that are playing out are similar to trends in past downturns,” said Mark Woodworth, president, PKF Hospitality Research. “Luxury is the first to bounce back. The chain-scale behavior and where they’re going to be is very consistent with past recessions, but universally it’s not who’s first back or last, it’s everything in between—the pace and scale.”

Mark Lomanno, Smith Travel Research

And the infamous AIG effect might end up being a flash in the pan.

“The most misunderstood performance of a segment is luxury—it had the best demand performance in 2009,” according to Lomanno. “… The AIG effect was more myth than reality we’re beginning to think; from group standpoint it was. If it existed at all it went away in a real hurry.”

In December, occupancy in the luxury segment increased 5.0 percent to 54.6 percent.
PWC’s third-quarter 2009 forecast, its most recent, indicates an expectation that the luxury segment will see the largest RevPAR declines of any chain-scale segment in 2009 and 2010. End-of-year 2009 figures indicate that luxury was the worst performing segment based on RevPAR with a 23.6-percent drop in 2009, but for December it had the best growth rate at -5.7 percent, according to STR data.

Demand expectations

The forecasters expects demand to pick up in 2010.

PWC’s analysis indicates demand growth inflection for luxury and upper upscale occurred in third-quarter 2009.

“I certainly stand by the theory that demand will be stronger in first-quarter 2010,” said Scott D. Berman, the firm’s principal and U.S. industry leader, hospitality & leisure. “The uptick may be somewhat delayed, we may not see it in the first quarter, but we’re confident based on the economic forecasting that demand will see an uptick in room nights. That being said, all the pressure is on pricing.”

However, the important sector of corporate transient business looks to be slow.

Mark Woodworth, PKF Hospitality Research

“We’re not seeing the corporate transient business ramp up with any trend that you can bank on,” Berman said. “Corporate transient is still a very important driver of demand, particularly midweek, so we will be looking very carefully in the first two quarters at this.”

“It would be hard to imagine that anybody involved with the domestic lodging industry wouldn’t be feeling more optimistic today than a few months ago,” Woodworth said. “We’re finally seeing demand flattening, and we think soon it’s going to be growing again. I don’t know anybody that thinks we’ll stay at the bottom. We’ll a see positive uptick.”

While STR believes its demand forecast is in line with other forecasts, its supply numbers are higher, Lomanno said. This causes the forecasted occupancy change flat this year.

"We think there is no confidence in rate recovery in 2010," he said.

Pricing recovery

A rate recovery could be the last to turn.

“It will not be nearly as bad as 2009 … but the bad habits the industry developed from a pricing standpoint will linger,” Lomanno said.

Berman shared similar sentiments.

“There is going to be very healthy dialog at ALIS around pricing and whether there are long-term structural changes,” Berman said. “The reason we got to where we were in ’07 and ’08 is economics. The supply in ’07, it wasn’t coming online yet, which was an advantage to hotel operators so all of those playbooks around pricing are obsolete. That’s the wild card in looking at forecasting for our business, as I talk to owners and operators and banks, it really is going to be about how the industry manages its pricing strategy.”

Revenue woes

At the end of the day, revenue declines will continue to take their toll on the industry, according to the pundits.

“If the three of us are right and there is a RevPAR decline of zero to five percent or more and operating costs increase by 2 (percent) to 3 percent as expected, we’re looking at more erosion at the EBITDA line,” Berman said. “We expect more erosion of performance, particularly in luxury and upper upscale.”

Every day in 2009, the industry sold 159,000 fewer rooms, and revenue was down more than US$41 million, Lomanno said. That amounts to 58 million fewer rooms, and US$15.2 billion less in revenue.

“Those are huge numbers,” he said. “Even though we’re forecasting a little improvement in 2010 and positive numbers in 2011, that will only take the total U.S. to demand levels of 2005. It’s a little sobering.”

Outside issues

There are several issues outside of the travel industry that could impact performance, Woodworth said.

“Labor is the single largest expense of any hotel owner—it’s 43 to 45 cents of every dollar spent,” he said.

With potential health-care mandates and card check risk on the horizon, labor costs could increase.

“What’s the likelihood of passing that cost on customers when there’s so much slack in system?” Woodworth said. “Room rates in the back half of 2010 will finally begin to increase, but there’s an awful lot of softness. There’s a meaningful disconnect between supply and demand, and it’s going to be very difficult to pass the costs onto the customer given the relationship of supply and demand.”

Berman said the industry’s pain is real.

“If we take this RevPAR decline of 0 to 5 percent and add additional expense that’s built in, well how else do you define pain?” Berman said. “There are foreclosures, workouts, restructures and closures. … I have come to grim reality that that is a real possibility there could be more.

“We know the luxury resort market is under incredible pressure. These are expensive assets that cost millions of dollars to operate and maintain. Is there a chance that they won’t make it through this cycle? That’s a real possibility.”

Where’s the answer?

If you read this far you probably noticed there was no attempt to pin down a recovery date or even a recovery quarter. And perhaps that is the most important thing to take away from this recovery discussion: even the experts have trouble pinning it down and they don’t agree even when they try.

“Like every recovery, forecasting has to look like a measured recovery in specific quarters,” Lomanno said. “But it probably won’t happen that way. All of a sudden one day everyone will wake up and say, ‘Hey! Everything is better!’”

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