HENDERSONVILLE, Tennessee—As many of you likely read in his article, Mark Lomanno recently explored the current state of demand, occupancy and rates in the hotel industry and theorized we might have finally hit the bottom.
(Read Mark Lomanno's "Maybe, just maybe ... the bottom.")
As we look at data over the past weeks, it appears that, for now, demand has troughed across the aggregate for the total United States. The million-dollar question at hand is twofold: First, is this the true bottom or a function of an easy comparison of March 2008; and second, if this is the bottom, how prolonged will the industry drag along before signs of recovery?
Room-demand losses among chain scales have been similar in direction, but the magnitude of these losses has been different among higher-end and lower-end scales. As the chart below shows, higher-end chain scales experienced sharp losses in the 28-day moving average of room demand throughout December and January. Luxury and upper-upscale segments, reeling from the impacts of canceled meetings and slowing demand from business travelers, saw its 28-day moving average for room demand bottom out in late January (down 12 to 13 percent from last year). The upscale segment also experienced significant losses in room demand in late January, as the 28-day moving average for room demand fell 9 percent compared to last year.
As the level of room demand appears to have stabilized during the past two months, the same can’t be said of room rates. Rates in the higher-end scales have continued to fall at an almost staggering rate, with the 28-day moving average in the luxury scale down 18 percent versus last year. If one believes this is the bottom of the cycle in terms of demand losses, continued rate discounting beyond current levels will serve only to reduce revenue throughout the industry—particularly if this trough continues for many months ahead. If demand levels remain steady through spring and into summer but room rates continue to fall, the industry will intensify already accelerating revenue declines.
As we look at the lower-end chain scales, the trend of declines in room demand mirrors the higher-end scales, however, the magnitude of those declines is less severe in the midscale-without-food-and-beverage and economy segments and more severe in the midscale-with-food-and-beverage scale. As seen in the graph below, the midscale-with-F&B segment has experienced the most dramatic loss in room demand among all chain scales while the midscale-without-F&B has fared the best. Similar to higher-end scales, room demand declines were sharp in December and January. However, it appears the midscale-without-F&B and midscale-with-F&B segments reached the bottom in February and March while the economy segment continued to experience a small demand decline.
While it appears the lower-end chain scales held rates longer than the higher-end scales through the end of 2008, the acceleration of rate declines throughout the first quarter of this year was rapid. As the chart below shows, if rate decline continues the freefall in the lower-end scales, they’ll match the levels of decline seen in the upper-upscale and upscale segments in the near future.
Following the sharp discounting practices in 2001 and 2002, the industry needed six years to recover rate to previous levels. What’s more troubling this time around is the magnitude of rate declines experienced during the past few months (room rates were down 9.6 percent in monthly March reporting). At no time during the recession and discounting period following 9/11 did rate declines reach 9 percent (September 2001 rates were down 8.7 percent in year-over-year change). If this trend continues throughout 2009, the rate-recovery time frame could be similar or worse than that experienced after the most recent recession in 2001-2002.