HENDERSONVILLE, Tennessee and KNOXVILLE, Tennessee—Newfound pressures are changing the historical dynamic between business and leisure hotel demand. In a whitepaper released on 09 September 2008 at the HSMAI Sales Strategy Conference in Washington, DC, Steve Morse, Ph.D., director and economist, Tourism Institute, University of Tennessee and Chad Church, manager, industry research at Smith Travel Research, analyzed the effect of increased transportation costs and an unstable economy on the current state of the U.S. lodging industry.
The analysis of hotel performance from 2006 through July 2008 looked at the effect economic and transportation issues had on demand and the business/leisure mix across the U.S., the top 25 metro markets and their price points (chain scale).
“2006 was when the first big gas spikes hit and drove transportation costs upward,” Church explained. “As these costs increased and the economy slowed, we looked to see if RevPAR decreased.”
Their research found that in the face of downward pressure on demand, average daily rate remained strong across all sectors. Morse added “It is a healthy sign for the hotel industry that ADRs are stable and increasing in most markets and have not decreased. Most hoteliers and revenue managers understand that facing higher transportation costs and slow economic times, the practice of deep discounting does not generate higher demand for lodging.”
Still, their research indentified market share shifts between various hotel price-points (chain scales). The winners: Among 17 metro markets analyzed, 13 showed an increase in market share to the upper upscale segment. Conversely, in 16 of 25 markets, the economy sector showed market share declines.
Morse and Church went further to investigate the effects of transportation costs on the weekday/weekend mix, a prime indicator of business and leisure travel demand.
Today’s leisure consumer is more sensitive to transportation costs than they are to hotel costs explained Church. “The price of a flight or gas is more likely to make up the leisure consumer’s mind when making a travel decision,” he said. “Therefore, increased transportation costs have gone a long way in shifting the balance between leisure travel and business travel, which is typically less price-sensitive.”
The average for all top 25 U.S. markets show that in 2006, weekend demand (a bellwether for leisure demand) generated 32.1 percent market share of total rooms sold, while weekday demand (business demand) generated 67.9 percent market share of all rooms sold. By July 2008, year-to-date weekend demand represented a significantly lower percent market share of all rooms sold (27.9 percent), while weekday demand represented an increased market share of all rooms sold (72.2 percent).
The number of rooms sold on weekends decreased in all of the 25 major markets studied. Alternatively, the number of rooms sold on weekdays increased in all but 6 markets. These factors combined to cause a decrease in weekend market share and increased weekday market share from July 2007 to July 2008 in all but two markets. Philadelphia and St. Louis stood alone in opposing this trend.
Morse added, “Business demand by weekday stays remains strong during 2008, while leisure demand by weekend demand has weakened. To compensate in their travel budget for higher gas prices and airfares, consumers may be ‘trading down’ in the ADR price points of chosen hotels, shortening length of stays, and taking more day trips in a slowing economic environment.”
The full analysis includes data for each of the top 25 U.S. markets and their price levels (chain scale) within each market. The study will be valuable to managers looking to improve their marketing strategies.
“Understanding the current market and developing strategies for maximizing revenue should be a focus of every hotelier, especially in our current economic conditions,” explained Church.
Faced with a rapidly changing business environment, hoteliers need to be informed of the latest industry trends, Morse cautioned. “Those hotels dependent on weekend travel may need to rethink their marketing strategies and localize their efforts.”
Have Higher Transportation Costs and a Slowing U.S. Economy Shifted Lodging Demand Within Lodging Sectors?