HENDERSONVILLE, Tennessee—The Official Airline Guide recently reported the airline industry experienced a 7-percent decline in seat capacity and number of flights in the last three months of 2008 compared to the same period last year. This exceeds the 5-percent decline the airline industry experienced after the 9/11 attacks in 2001.
STR has five location segments that are characterized by the physical location of a property and chain corporate office classifications. They include urban, suburban, airport, interstate, and resort. Given such classification, it is possible to examine how the hotels closest to airports are affected by current and past declines in airline seat capacity and number of flights.
Currently there are 2,090 airport location hotels in the U.S. hotel industry, representing more than 292,000 rooms. Since 1989, room supply for airport hotels has continued to grow at a positive rate, only falling to negative levels twice—1994 and 2006. Demand (room nights sold) for airport hotels has seen its ups and downs. By the end of 2008, room demand was down 1.8 percent. Year-end 2008, airport location hotels reported a 4.2 percent decline in occupancy to 66.5 percent and a 2.2 percent year-over-year drop in RevPAR to US$67.70.
Looking at the fourth quarters of 2001 and 2008, periods during which the airline industry experienced high declines in capacity, key performance indicators show corresponding drops in performance.
The 9/11 events in 2001 clearly had a greater impact on airport-location hotels than the slowing economy did in the fourth quarter of 2008. Occupancies during fourth quarter 2001 dropped 14.2 percent to 55.6 percent, compared to fourth quarter 2008 occupancy declines of 7.2 percent to 59.7 percent.
Fourth quarter 2001, airport hotels experienced double-digit declines in RevPAR (down 22.6 percent to US$42.44), which is significantly worse than what was reported for fourth quarter 2008.
Airport hotels across the nation rely on airline crews and contract business as their primary customers, along with offering an alternative option for leisure travelers. Airline seat capacity and flight schedules are projected to continue to decline through the second quarter of 2009, and with domestic flights expected to experience the largest cuts, it is worth examining airport hotel performance in three key markets: Oakland, California; Houston, Texas; and Orlando, Florida.
In the summer of 2008, American Airlines reported that it would no longer fly into Oakland, and OAG preliminary data reported a possible 25.6-percent decline in daily seat capacity in April 2009 compared to April 2008. The possible silver lining for this market is that Southwest Airlines reported Oakland as one of its busiest departure cities.
Within the Oakland market are around 16 airport hotels representing slightly more than 2,200 rooms, most of which are midscale without food and beverage (e.g., Hampton Inn, Holiday Inn Express) and economy (e.g., Motel 6, Days Inn) hotels.
Room supply grew 7.0 percent by the end of 2008, driven by the opening of two new airport hotels in June and July. Year-end 2008, Oakland airport hotels reported a 9.5-percent decline in occupancy to 62.3 percent, and RevPAR dropped 12.3 percent to end the year at US$58.53. Focusing on the fourth quarter of 2008, occupancies declined 19.5 percent compared to the same period of the previous year.
The Houston market is the home of two airports, George Bush Intercontinental and William P. Hobby (domestic air service). Both are projected by the OAG to decrease daily seat capacity by around 6.0 percent in the second quarter of 2009.
Of the three markets analyzed, Houston airport hotels are the largest group: 95 hotels representing more than 9,900 rooms, with hotels ranging from upper upscale (e.g., Marriott, Hilton) to economy.
Fourth quarter 2008, Houston airport hotels reported a healthy 70.8-percent occupancy rate, with an increased percent change over the same period last year of 11.7 percent. Year-end 2008, occupancy declined slightly to 66.8 percent, down 2.6 percent. In contrast to the downward trend experienced elsewhere in the U.S., RevPAR for Houston area airport hotels grew 9.7 percent to US$61.03, which was driven by a large growth in average daily rate of 12.7 percent compared to year-end 2007.
Many airlines cut services to Florida in the summer of 2008. For example, Delta stopped point-to-point services between Orlando and several other destinations. According to a recent article from the Orlando Sentinel, Orlando International Airport is expecting January seat capacity to be down 12 percent.
There are 41 airport hotels in the Orlando area, totaling over 7,000 rooms. At the end of 2008, room supply for this location type grew 3.7 percent, resulting from the opening of two new airport hotels: Springhill Suites Orlando Airport (130 rooms) and Residence Inn Orlando Airport (132 rooms).
By the end of 2008, Orlando airport hotels reported an 8.0-percent decline in occupancy to 67.7 percent, and RevPAR dropped 7.7 percent to US$61.63. Singling out the fourth quarter of 2008, occupancies dropped 10.7 percent compared to the fourth quarter of 2007. While this is a dramatic decline, it is not as severe as the 2001 fourth quarter declines of 23.5 percent.
The performance data prove that declines in airline seat capacity and flight schedules have negatively impacted some airport properties. With the airline companies projecting declines for the foreseeable future and the economy on a slow track for recovery, the operating environment for airport location hotels will be challenging. Like their colleagues in other hospitality segments, airport hotel operators will need to be creative in offering value-added packages and delivering high levels of service to get through this downturn.