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Hotel occupancy in the U.S. was the highest it’s ever been during a second quarter — 69.5 percent, according to STR in 2017. Unemployment is at a record low of 4.3 percent. The gross domestic product, or GDP, is sluggishly moving up.
But you wouldn’t know it if you were to examine the major hotel companies’ revenue per available room (RevPAR) indices, or their average daily rates for the most recent quarter, says Michael Bellisario, senior research analyst for Baird Equity Research.
“Consumer confidence is at near all-time highs,” he said. “Almost any macro indicator we’ve looked at would say the setup for 2017 would be a lot better, election and improved sentiment aside. Why isn’t RevPAR better?”
While domestic RevPAR was up for most major hotel companies in the second quarter, it wasn’t quite as high as you might expect given the current economic indicators. The second quarter was also, generally, still weak in the areas of corporate and group travel, as noted by the CEOs of Hilton and Marriott International.
Hilton CEO Christopher Nassetta described the corporate travel environment as “cautiously optimistic” and said he hoped there would be more activity in terms of tax reform to “help change the psychology with our corporate customers.”
He noted: “The impact of it would be positive in the sense of driving more free cash flow into people’s businesses, so they’d have more to play with to hire and invest.” Nasetta also noted that group business at his hotels was “weaker.”
Marriott CEO Arne Sorenson echoed similar sentiments, saying “companies…are being very cautious about travel and very cautious about managing expenses, and [there are] others which seem to be spending as if they’re having a great party.”
He described corporate transient travel — or business travel that doesn’t include conferences or meetings — as being “anemic” and said Marriott’s group business was also “weaker” in the second quarter. Sorenson believes the best indicator of the health of the economy is the GDP, and he said that too “has been quite anemic.”
Many hotel company executives noted weakness in their group business, primarily due to calendar shifts: Easter moved into April during the second quarter and because Jewish holidays are shifting into late September this year, companies anticipate the third quarter will also be weaker for group business, said Bellisario.
Even so, Bellisario said, “We don’t want calendar shifts to be an excuse for weakness. Ninety days later, we might find some weakness. It does feel like there’s something else going on out there that’s not just calendar shifts that are impacting weaker near-term results.”
What might be causing this softness? Bellisario isn’t sure, and it seems like the industry doesn’t quite know yet, either. The early optimism we saw from the hotel industry at the beginning of the year, post-election, hasn’t quite played out the way we thought it would, even though consumer sentiment has improved and the stock market is doing well.
He said that while demand for corporate travel is still there, “it’s really a price sensitivity issue” whereby “big companies are cutting costs and watching them very closely.” He said companies are having their employees travel for fewer days, and staying at select-service brands versus full-service ones. “It’s a combination of new supply and customers having a lot more options, so they’re being more price sensitive and not paying up for the better room.”
Bellisario also said that real estate investment trusts — also known as REITs, which usually fund the development for and often own the hotel properties consumers stay in — are suffering in big cities because so much of their business is skewed toward corporate travel. Those REITs, he noted, were “more negative and pessimistic” in their second-quarter earnings calls than the hotel management companies.
Another factor that may be coming more into play is what many in the industry refer to as “shadow supply,” the result of the growing popularity of alternative accommodations platforms like Airbnb. These are situations during which extra accommodations become available during high-demand times like a city-wide event, making it harder for hotels to raise their rates as much as before.
“That average daily rate pop is what’s missing in hotels today,” Bellisario said. “That has structurally changed because of all these home sharing options.”
Still, some CEOs aren’t so convinced that alternative accommodations are having an impact on their corporate travel business.
“It’s easy to get caught up in these big shifts that are going on, quarter to quarter. If you cleanse [that data], there’s really not that much going on quarter to quarter,” Nassetta told analysts. “You can’t say, when you sit where I sit, that the factors you just described — or heaven forbid I talk about the other things I know that are on your mind for fear of going into the black hole of Airbnb — but that some of those things don’t have some impact. But here’s the thing…nothing that we’re looking at suggests any of those things are having a material impact. It really is the economy. It really is that you’ve got growth, but it’s fairly anemic, broader growth.”
In fact, Nassetta also noted he thinks competition from Airbnb may actually be assisting hotel companies, at least in terms of their distribution agreements with the online travel agencies such as Booking.com and Expedia.
Sorenson, who also noted that his company had a system-wide occupancy rate of nearly 80 percent for the second quarter in North America, said “you would expect a little bit more pricing movement. But I think underneath that, you’ve got relatively more strength in leisure, which is more price-sensitive than corporate business is.”
He added that because the lodging industry has “thousands of franchisees who are pricing their own hotels on a day-to-day basis” and there is “radical transparency in pricing” thanks to online travel agencies and metasearch sites, “that may have some impact on our ability to move rates in this cycle compared to prior cycles.”
Whatever the reasons for this weakness in corporate and group travel, it will be interesting to see how the Marriott and Hilton’s recent cancellation policy changes also have an impact on their ability to keep average daily rates high. Those moves are signs that the hotels are trying to find other ways to keep revenues up, and to keep hotel owners happy.