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Industry Forecast


Darker days ahead for travel trade, experts claim

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Hazel Heyer  Jun 05, 2008

NEW YORK (eTN) - The industry is not going down the tubes. Not yet, say industry experts at the 30th anniversary of NYU International Hospitality Investment Conference held at the Waldorf Astoria.

But don’t expect the market to turn the corner in 12 months. Experts are saying the ride is longer than what the industry might think.

In the face of a low 5 percent unemployment rate today in the United States, and a Gross Domestic Product rate showing 6 to 6.9 percent growth, the hotel industry will weather the present storm.

“I’ve been through six of this turmoil in my career. This will be my seventh turmoil in my entire lifetime. The business has long-term sustainability,” said J. Willard Marriott, Jr. chairman and CEO, Marriott International Inc. “The worst concerns we have today is the oil and the airline -- with a lack of profitability, air carriers can seriously impact the industry. A lot of uncertainty is out there but we’ll come out of it. It just depends on when. What I don’t know is if this is a quick up-and-down turn or saucer-curve of a drop. We don’t know. There is some softening in the market right now compared to the first quarter of 2008,” added Mr. Marriott.

Emerging markets such as the BRIC countries (Brazil, Russia, China and India) will thrive amid this global downturn. International markets may report a 10 percent revenue growth this year, while the domestic market can expect revenue growth of 3-5 percent. International markets will remain very strong as today there is an enormous number of foreign travelers to New York due to the weak dollar. “Hotel RevPar forecasts are at 2 percent for the second quarter revised from 3-5 percent as we see a drop, but we are protected on the downside because of the management fees we collect," said Marriott.

With the very little turmoil, weekend business will stay soft; but weekdays will do business as usual, said Marriott. On the very high end, Marriott is developing in Thailand. Marriott hotels is the strongest brand in the chain, and continues to perform amid the weak US economy.

Similar tenor was carried by Barry Sternlicht, chairman and CEO, Starwood Capital Group, who said the US consumer is stretched. “We’ve just been waiting for markets to collapse and I think it’s just about to hit the wall. Businesses will do as they do in any cycle. Businesses will tighten their belts,” he said. According to him, occupancy in the US has been dropping for almost two years now, and yet, hotels have been able to raise rates fairly aggressively despite occupancy decline which shows some properties seeing long-term success (usually something that breaks the ranks) by starting to cut costs rather than cutting rates like they do in Las Vegas (giving three free nights for 1-night stays) which is not a long-term recipe for success.

“This industry is terribly misunderstood because it can beef up 3-5 percent in a global slowdown, or even break-even. It is doing a lot better than retail, car rental and airlines. This industry has fundamentally figured out how to make money during the downturn and not just re-price for sustainability. For private owners who can remain patient, there’s real opportunity to raise capital, buy materials cheaper than it cost to build these days. It will be more expensive to build 2 to 4 years from now than it is to build today,” said Starwood’s CEO.

The strain on global financial resources, cement, steel, copper, PVC pipes and asphalt roads is real. It is not going away as it has evolved all over the world in the last 12 months. Problems of supply and demand are happening globally, Sternlicht said. ”Just go to the Middle East, they’ll end up paying anything for it today.”

Unlike worrying about any short-term decline in cash flows, which will be here and may get worst than people think - if there’s a right capital structure, the sector can make money 5-10 years from now. “There is light at the end of the tunnel but while there are very happy shareholders today, there are very angry private institutions watching cash flows these days,” revealed Sternlicht.

Experts firmly believe the airlines will take further blows. “The world will see that the airlines won't be able to fly travelers anymore, there will be serious issues to deal with. Having said that, one market will evolve. There will be a spurt in city/ state government travel. At this credit crisis level, the city/ state folks will move around,” disclosed Sternlicht.

People will get on the road, but may not fly or buy that extra t-shirt for their kids. Holidays and weekends will be observed, regardless, by people who may not necessarily fly. That’s the consensus among the panel of experts.

Jonathan Gray, senior managing director and co-head of the Blackstone Group, said there will be more issues to deal with in housing and gas prices, let alone the airline industry which concerns the hotels a lot. “Throw in the credit crunch, it looks like we’re not going to sort of V-out (in terms of downturn curve) of this. There are indications that it will take a while,” Gray said.

The positive things that are happening: the weakening of the dollar has certainly had a boost for some gateway cities such as Orlando where it is very cheap now and hence made it cheap to go to Key West and enjoy the US experience, said Gray. “Exporters have been benefiting; some commodity traders, too. Business has held up surprisingly well. Everybody is surprised that given the scenario the hotel business has held up so well,” he said.

Is there a possibility for discounting such as after 9-11? Mr. Marriott said he believes they have not seen any discounting yet. “There will be some. The market is liquid but we’ve not gone into the pricing season with big cuts taking place. Some will be pushing hard for discounts. Right now, there seems to be a gridlock,” he said.

“The pressure will be on the for leisure and weekend business. We will see pressure from market corrections but a lot of loyalty with brands. There will be some single digit discounts to come on stream,” advised Gray.

In a market characterized by inflation, Sternlicht thinks it can be good for hotels It is also a classic choice to own hotel real estate in an economic slowdown. “But be cautious right not, there are lots of risks running up to two years from now. Be careful.”

The US will always get through this in a hard asset value and inflationary environment going up. There will still be a difficult period of time. “Capital markets have been extremely marginalized, there wont’ be a snap back. We’ll have to ride through this for a while,” added Gray. “Still we have to be cautious; it will take a while before we get out of this,” added Gray.

Will the wait for some market about-face arrive longer than a year or two?

Sternlicht said, “It’s going to be 18 months until we see the market turning the corner. It is going to get worst before it gets better. The banking system is in dire straits; I have not seen anything like it before. When I started my own business in 1990-1991 in the RTC days, it was a joy ride compared to this. This is global! There’s a huge problem in the global banking market which will impact business in general. And throw in the consumer, there’s just no sweet spot at all for now.”

According to Starwood’s chief, few outside the biz are really laughing all the way to the bank. “The businesspeople in the farm belts - those who farm soybeans, corn and wheat - they are just the richest guys on earth right now.”

Darker days ahead for travel trade, experts claim
image via businesstravellogue.com



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