As the recession continues, hotel industry operating metrics are showing no signs of improvement as both business and leisure travelers are cutting back.
OUTLOOK
The lodging industry is facing significant challenges stemming from the economic recession, as both business and consumers are cutting back on travel expenditures. When evaluating hotel companies like Starwood ( ) and Marriott ( ) during this down cycle, we will be paying especially close attention to changes in average daily room rates as an indication of how quickly the sector may recover once the economy improves.
A key operating metric in the lodging industry is RevPAR (revenue per available room). This metric is derived by multiplying the occupancy percentage of a hotel over a given period by the average daily room rate (ADR) over that same period. Changes in either occupancy or ADR will impact RevPAR, but with different implications for bottom-line profitability.
Given the current state of the U.S. economy, it is no surprise that hotel occupancy percentages have been down recently, and that additional deterioration is anticipated throughout 2009. In past downturns, some hotel owners have attempted to slash room rates in an attempt to fill beds. In most cases, this tactic will result in material long-term damage to the business, for two primary reasons:
- First, increases in occupancy are accompanied by increases in operating expenses. For every room that is filled, there are additional costs such as housekeeping, laundry and utilities that must be paid. When room rates decline while variable operating expenses remain stable, margins are compressed. Changes in ADR, however, fall almost entirely to the bottom line.
- Second, and more importantly, cuts to ADR are difficult to recoup when the operating environment eventually improves. After slashing room rates in an effort to fill a hotel, attempts to restore those rates to previous levels are likely to be met with significant resistance. As such, the ability to benefit from an improving economy will be delayed.
Ultimately, the ability of lodging companies to maintain room rates as much as possible should have the most significant impact on their ability to weather the downturn.
Cutting rates meaningfully should be an absolute last-ditch effort to survive, because changes in rate have the biggest impact on the bottom line, and are hardest to recoup when the operating environment improves.
