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US Hotels: Business Travel To the rescue

U.S. hotels pin hopes on business travel

Jun 25, 2008

NEW YORK — U.S. hotel executives, expecting soaring fuel prices and the broad economic slowdown to slow leisure travel through 2008, hope that business travel will somehow save the day – and the year.

According to a recent Reuters/Zogby poll, many Americans will forgo vacations this year, with nearly 39 per cent saying they may change their vacation plans.

Expensive gas is the culprit. U.S. average gasoline prices have topped $4 (U.S.) a gallon, up roughly a dollar from a year ago, according to the federal Energy Information Administration.

Many in the hotel industry are counting on business travelers – its bread and butter – to prop up their sector, especially when the summer vacation season ends.

But there's a limit to how much the industry can depend on business travel, as many companies cut travel and entertainment costs – a relatively painless way to improve results.

In the end, though, hotel companies know that eliminating all business travel is not an option.

“For businesses, there is only a certain amount of travel that can be reduced or eliminated,” said lodging industry veteran Bjorn Hanson, an analyst at consulting firm PricewaterhouseCoopers.

“That doesn't mean that people might not trade down, send fewer people to conventions, send fewer people to meetings, have shorter meetings or something,” added Mr. Hanson. “So there still can be an effect, but not the nature of the effect that we have observed on leisure travel.”

The industry's dependence on business travel could give companies a much stronger bargaining position this fall, as they start negotiations for 2009 hotel contract rates.

“That makes up a significant piece of corporate travel,” said John Fox, president and chief executive at hospitality consultant PKF Consulting.

If the U.S. economy slows any further and layoffs mount, already-reduced travel budgets may be cut even more, removing a crucial crutch for U.S. hotels.

While the U.S. hotel industry has historically followed in near lockstep with the economy, there may be some mitigating factors this time around, said Brian Tress of Ernst & Young's hospitality group.

A downturn in new hotel projects due to the credit crisis, an uptick in international visits driven by the weakness of the U.S. dollar and new airline rules requiring Saturday night stays could help keep hotels well-booked, he said.

PKF Consulting has forecast that nationwide hotel occupancy will slip to 61.6 per cent this year from 63.1 per cent in 2007, but will then start rising again, hitting 62 per cent in 2009.

Travel by car may be having an effect on the industry. Americans reduced the number of miles they drove for the sixth straight month in April, resulting in the biggest six-month decline since the oil shock of the 1979-80 Iranian revolution, according to the U.S. Transportation Department.

“We are unenthusiastic about the U.S. economy,” said Steve Weeple, head of U.S. equities at Standard Life Investments. “We think there's going to be real pricing problems in the leisure industry.”

Rising costs for fuel and food come at a vulnerable time for the U.S. economy, already on shaky ground because of the housing market slump.

In April, two leading U.S. hotel operators – Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. – reported lower quarterly profits.

The benchmark of hotel industry health is RevPAR, or revenue per available room, a combination of room rates and occupancy. PricewaterhouseCoopers has forecast it will grow this year at its slowest rate since 2003.

Marriott has warned it is likely to report second-quarter RevPAR growth in North America of only 2 per cent, compared with its earlier forecast of 3 per cent to 5 per cent. It also said it would be surprised if North America RevPAR strengthened in the second half of the year.

“You have more supply and slowing demand and those two things coming together are going to hurt occupancy and hurt RevPAR,” said Jeremy Glaser, an analyst at Morningstar.

A major concern for the hotel sector is its reliance on the airlines, which are cutting routes and fighting for their survival amid unprecedented fuel prices.

For example, Continental Airlines Inc is cutting flights from its hubs to more than 40 domestic and international destinations as of Sept. 3.

“I've been doing econometric forecasts for the lodging industry since 1990 and the degree of uncertainty today is the greatest it has ever been,” said Hanson of PwC.

Oil prices have roughly doubled in the past year, forcing major airlines to cut jobs and capacity, hike fares, retire planes and introduce fees to survive.

At least seven small airlines have filed for bankruptcy or stopped operating in recent months. If oil prices do not retreat soon, some analysts believe it is just a matter of time before a major airline files for bankruptcy.

Despite the uncertainty, Hanson and other industry veterans say the lodging sector can cope with the harder times.

The PwC forecast predicts that while RevPAR will show slower growth through the end of this year, occupancy rates should hold up reasonably well at just below the levels of the past three years.

But much of the industry's hopes appear to rely on the resilience of business travel.

“Business travelers for the most part are the bread and butter of at least the publicly traded (hotel) companies and they certainly are starting to cut back,” said Morningstar's Mr. Glaser.

U.S. hotels pin hopes on business travel

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