Worst Days Of Hotel Downturn Likely Over
While Nervous Nellies are still ruling the roost, signs of an industry rebound are finally becoming tangible. During the last couple of months many industry insiders were saying a recovery was afoot, but the evidence was anecdotal. Now it looks as if there are some provable signs – and the numbers to back it up — that demand for hotel room nights is coming back.
However, the biggest problem going forward will be pricing power. That is, hoteliers will still have a hard time pushing that ADR back to levels enjoyed just a little over a year ago. As the hotel industry rapidly lowered prices to pump up occupancy, the industry will now have to reckon with a baseline price that is much lower than it’s been in about five years.
“It is getting a little better,” said Mark V. Lomanno, president of Smith Travel Research (STR), during this past weekend’s AHLA Fall Conference held in conjunction with the International Hotel/Motel & Restaurant show here in New York. “During the last couple of months, demand has begun to trend upward and I can say with a great deal of confidence it is not going to get any worse.”
Lomanno said that, while the hotel business has been in a malaise, on average there are 2.7 million rooms sold every day in the United States.
According to figures from STR, rates during the last year declined precipitously from an average daily rate (ADR) of $107 a night to about $96. However, that seems to have hit a plateau that is reminiscent of the previous downturn experience in fall 2001 after the terrorist attacks of 9/11. But it’s the revenue per available room (RevPAR) that has suffered most during the last year.
Lomanno said RevPAR is at the lowest levels since the company began tracking that statistic 16 years ago. RevPAR has plummeted 18.1 percent this year, a full 10 percent by last year’s most dour estimates predicted by PricewaterhouseCoopers last year at this event. RevPAR slipped just 1.8 percent in 2008. As for ADR, it’s dropped about 9.1 percent so far this year after a 2.5 percent decline in 2008.
Though Warren J. Marr, director with PricewaterhouseCoopers (PwC) said the U.S. economy has stopped contracting, he expects the economy recovery to be “uneven and a bit choppy.” Part of the reason is the severity of this past decline which has been extremely significant, especially for hotel occupancy. “The magnitude on occupancy during this decline has been greater than at least the last two previous cycles,” said Marr.
He said, however, that leisure business will still be strong, although it’s because the consumer is more highly engaged in finding the best deals. According to PwC, on September 15, 2008 – the day Lehman Brothers fell apart – consumer interest in travel deals was 13 percent below average. On November 5, 2009, interest was 7 percent above average. That’s a huge swing that is helping to further depress pricing power.
“The Internet has added to the challenge and the industry needs to be targeted as to how and why to discount. What is happening now is if I find at 8:00 AM you drop your rate, by early afternoon your competitors will too. That is something you didn’t have to deal with 10-15 years ago,” said Marr.
Interestingly Marr broke down exactly where the occupancy declines have come from during the past year. And it’s group business that is essentially responsible for the mess the industry is in. Call the AIG Effect or whatever, but 81 percent of the decline is due to vanishing group business, something many hoteliers don’t see fully coming back until 2011. Seventeen percent of the decline was due to transient business; however, Marr said it was offset by increases in leisure travel. Two percent of the decline was due to contract business, such as fewer airline crews utilizing rooms.
“Our real focus is on utilizing new strategies and technology for 2010 and beyond to drive revenue,” said Jeff Wagoner, president, Wyndham Hotels and Resorts. “We are all looking at 2011 for when things turn around. Unfortunately we have all of 2010.”
One area STR’s Lomanno said could help boost pricing is through better yield management. While the science of pricing rooms is the right way, it’s still not being used effectively to bump up weekend rates as leisure travelers still set their sights on getting away. “Yield management still isn’t beinf applied properly,” he said.