The Sleeping Sector
How Long Will the Decline in the Hospitality Industry Last?
The hospitality industry's struggle to regain some semblance of normalcy after the events of September 2001 is compounded by the travel industry, which is suffering through the worst short-term prospects since the Persian Gulf War.
The U.S. lodging industry could lose as much as $2 billion as a result of the attacks on New York and Washington, D.C., and their detrimental impact on consumer confidence, the economy, and U.S. air travel. The attacks' direct disruption of economic production reduced third-quarter U.S. gross domestic product alone by approximately $24 billion. Consumer confidence in the economy decreased 16.4 points in September 2001, the most significant one-month drop since October 1990. Preliminary reports suggest as many as 500,000 employees in the lodging industry were laid off during fourth-quarter 2001.
The three major demand segments — leisure, business, and conference and group activity — will experience both short- and long-term effects. Leisure travel will see heavy cancellations due to air-travel restrictions, plummeting consumer confidence, and a fear of flying. However, leisure demand should rebound in the coming months as consumers regain confidence in travel and the state of the economy. Domestic demand will recover more quickly than international leisure travel.
Business travel also will drop off as corporations implement travel restrictions in addition to already-restricted travel budgets. In the future, business travel should resume, but at more moderate levels than pre-September 11. However, business travel correlates highly with the state of the U.S. economy, which has been shaken even further.
Lastly, conference and group activity experienced extensive cancellations and postponements, which resulted in loss of room nights nationwide. Attrition will become a factor as convention turnout weakens and the rebooking of events extends over a longer time period.
Year-to-date figures through September 2001 indicated 2.5 percent growth in room supply, while room demand declined 2.2 percent, according to Smith Travel Research. Substantial layoffs through fourth-quarter 2001 may cloud the industry's prospects for a rebound in 2002. As of late November 2001, room demand is anticipated to decline 6 percent monthly through December 2001 as compared to 2000. The length and scope of the fight against terrorism also may disrupt convention rebookings.
Airport, urban, and resort markets such as Miami and Hawaii — typically more dependent on air transportation — are most susceptible to decreases in room demand, while hotels situated in regional “drive-in” markets such as Los Angeles and Orlando, Fla., are more likely to rebound in 2002.
Supply growth will continue to moderate as the development pipeline already had slowed last year in response to a tighter lending environment. Furthermore, markets on the verge of oversaturation prior to September 2001 will experience a decline in supply growth as good projects weed out those with unsound deal structures. Supply growth of approximately 2.5 percent and negative demand growth of 2.5 percent last year will result in significantly weakening fundamentals in 2002.
Occupancy Bottoms Out
Between 1997 and 2000, hospitality occupancy ranged between a high of 64.5 percent in 1997 and a low of 63.1 percent in 1999. Occupancy began to rebound slightly in 2000; however, year-to-date figures from STR through September 2001 indicated a rate of 62.7 percent, a three percentage point decline compared to the corresponding period in 2000. In the wake of recent events, U.S. occupancy most likely will average 60.5 percent at year-end 2001, lower than 1991 levels of 61.8 percent, the year of the Gulf War.
The second half of 2002 through early 2003 should bring signs of recovery to the hospitality industry, as supply growth slows significantly and demand recovers, resulting in soft but stable occupancy expectations.
Average Daily Rate Dips
Between 1997 and 2000, average daily rates moved upward, increasing at a compound annual growth rate of 4.5 percent. In 2000, the national ADR reached $85.24. Year-to-date figures through September 2001 indicate an ADR of $86.28, an increase of 0.3 percent over the same period the prior year. Declines of 2 percent per month are expected for the remainder of 2001 compared to the corresponding period in 2000, resulting in an ADR of approximately $85.
ADR is anticipated to exhibit negative growth during the first half of 2002 and recovery by the third quarter, resulting in little to no rate growth for the year according to preliminary estimates. Hotels will strive to maintain their rate integrity at the expense of falling occupancies to reduce operating costs and soften the impact on gross operating profit margins.
RevPAR Stays Negative
Revenue per available room in the industry exhibited an upward trend between 1997 and 2000, increasing at a compound annual growth rate of 3.9 percent and reaching a high of $54.13 in 2000. Year-to-date figures through September 2001 indicate a RevPAR of $54.10, down 4.2 percent from the corresponding period in 2000.
During the first full week following the attacks, RevPAR performance relative to the prior year declined 37.3 percent across all U.S. lodging markets, with New York, Orlando, Boston, Chicago, and San Francisco exhibiting declines in excess of 60 percent.
Furthermore, upper-upscale chains, as defined by STR, experienced the most profound adverse impact in RevPAR relative to other lodging segments. On September 11, the RevPAR differential between economy and upper-upscale segments was approximately $100, according to STR. In contrast, on September 22, RevPAR variance between the two segments was approximately $35. These luxury chains will continue to feel the impact of corporate belt-tightening, while economy and midscale chains will remain more resilient to travel cutbacks.
RevPAR is anticipated to decline at least 10 percent, resulting in $51 overall for 2001, a decline of 5.2 percent compared with the prior year. During the first and second quarters of 2002, RevPAR should see negative growth and then should improve slightly, resulting in flat to slightly negative growth overall for the year.
Proceed With Caution
At this point, the lodging industry's watchword is caution. Profits for 2001 were approximately $17 billion, down significantly from $22.5 billion in 2000. Profit growth still will exist in 2002, but magnitude and relative strength will be tested.
As most of the hospitality industry is projecting substantial revenue decline and cost overruns, entities need to continue to focus on operational strategies that manage cost levels for the foreseeable future.
The industry has not experienced negative RevPAR growth in more than a decade; however, the unforeseen circumstance in which the industry finds itself is probably one of the greatest challenges it has ever faced. With a sharp eye on the bottom line, lodging managers can squeeze additional value from their operations, continuing a decade-long focus on operational re-engineering, financial restructuring, and a disciplined adoption of appropriate new technologies. Further, the current environment is creating substantial interest and opportunities for acquisition activity, and a number of transactions should occur in the short- to midterm.