Lower oil prices may translate to more road trips for leisure travelers, and better margins for airlines, but they tend to have a negative impact on hotels, especially in terms of corporate travel.
Oil prices may be recovering now, inching closer toward $50 per barrel, (although that’s well below a record high of $145 a barrel in 2008), but that wasn’t enough to help weakened oil-producing markets — or the hotels that serve them — especially during the first quarter of 2016.
That was a sentiment shared by a number of CEOs during their respective first quarter earnings calls. Those with properties in oil-heavy regions and cities like Houston, Calgary, and even the Middle East said they saw declining revenues in those destinations because of impacted business travel, but they also expressed hope that those markets would rebound and eventually stabilize.
If this week’s news is any indication, it appears the CEOs were right to be optimistic heading into the second quarter. Here’s a closer look at how softened oil markets impacted some of the major hotel companies and hotel real estate investment trusts (REITs):
Where Low Oil Prices Hurt Hotels the Most
RLJ Lodging Trust, a hotel REIT with 125 properties spread out over a variety of brands from Marriott and Hilton, summed up the oil situation succinctly when CEO Thomas J. Baltimore said, “No doubt that there is a high correlation between RevPAR [revenue per available room, a combined measure of occupancy and rates] and oil.”
Baltimore, who is leaving RLJ Lodging Trust to lead Hilton’s new REIT spinoff, said, “The Houston market overall continues to be challenging as the weak oil and gas sector is impacting corporate demand” and later added, “Houston will continue to be one of our weaker markets this year.”
According to Wyndham Worldwide CEO Stephen P. Holmes, parts of Texas, Louisiana, Oklahoma, West Virginia, Ohio, Pennsylvania, Kansas, and North Dakota were impacted most by the oil markets, which continued to be weak for the company’s hotel group as a whole. Overall, Wyndham saw significant declines in its per-room revenues in the U.S. and Canadian oil-producing markets.
Marriott CEO Arne Sorenson said that the company saw the most negative impact from oil prices in regions like the Middle East, Houston, and the western “oil patch.” While occupancy in the Middle East was more than 80%, room rates declined in the region because of new supply on the market, as well as “geopolitical unrest and low oil prices.”
Hyatt CEO Mark Hoplamazian echoed Sorenson’s remarks about low oil prices in the Middle East, attributing a decline in revenues per available rooms to “ongoing geopolitical instability in the region, low oil prices, and reduced government spending.”
InterContinental Hotels Group’s (IHG) CFO Paul Edgecliffe-Johnson also said IHG also saw weaker business in the Middle East because of low oil prices and ongoing supply growth in the United Arab Emirates.
Although most hotel CEOs felt that oil markets would continue to pose a challenge in the year ahead, some, including RLJ’s Baltimore and Hilton CEO Christopher Nassetta, expressed some cautious optimism.
“If you look at the dive in those [oil] markets last year, first quarter not so much, second quarter it started, third and fourth quarter was in full swing,” Nassetta said in response to a question about the oil markets. “…And you have to believe, although I will say, we haven’t seen it yet that with oil prices off the bottom and moving back up, it will provide a little bit more of a stability on the demand side in those markets, but we’ll have to wait and see that happen.”
Baltimore said that recent renovations at some of RLJ’s properties, coupled with stabilization in the oil markets will help the company beat expectations. “I don’t want to be too Pollyanna-ish about, but I do think that we will significantly outperform the market and I know some were projecting the market to be down 7% to 9%.”
He added, “Job creation has been robust since the beginning of the year, consumer confidence remains high, and oil prices are showing signs of stabilization.”
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Photo credit: The Houston skyline at night. Hotels in Houston have been particularly negatively impacted by low oil prices and weakened oil markets. Randall Pugh / Flickr