Summary
While the economy plays a significant role in hotel RevPar results, their is much more to it than just that.
"Events and Meetings Management" (EMM)-still no signs of life.
Corporate travel budgets are typically built in the fall for following calendar year-so no growth until next year at the absolute earliest...MAYBE!
If you have a decline in air service you are going to have a decline in RevPar...it is that simple...and the hotels should have seen it when airlines first announced those cuts.
Analysis
Paraphrasing..."It is (more than just) the economy stupid"
The economy is only one (albeit significant) component effecting a Hotel chains RevPar performance, there is much more to it than just that. The major chains receive a good portion of their revenue in corporate meetings, conventions and incentive business (commonly referred to in the industry as, "Events and Meeting Management" or "EMM"). This business, while very profitable, is generally booked up to 3 years in advance and is currently on life support with no signs of improving. This is do more of the "AIG effect" than the economy as companies do not want to be perceived as spending money on "boondoggles" for customers or employees..especially if they had layoffs in the recent past.
Corporate business will come back sooner than "EMM"
Most corporate travel budgets are built inn the fall for the following calendar year. Given that this years budgets were built at the same time as the financial meltdown of the economy, corporate America significantly reduced their budgets in this area, as they generally consider these budget to be some what discretionary. While this will start show signs of life in 2010 because of the new calendar year and budget, the question remains, have corporations learned to do without when it comes to both transient travel as well as "EMM" functions? Moreover, how does a company justify a large YOY increase in travel expenses?
The Hotels always seem to be the last to "Get It"
When the airline announced their schedule reductions for the fall of 2008 in the spring of that year...the hotels should have seen the hand writing on the wall...but did not. It was not until late July/August did they realize that "Houston, we have a problem" ! Obviously, if there is a reduction is scheduled airline seats, there will a decline in at least that many travelers YOY (and in most months of this year there has been an even greater decline in YOY flyers). Now you might be thinking that if the economy comes roaring back (it won't)...airlines will pull their planes out of "moth balls" and start flying them again and thus increasing industry capacity. The simple fact is that they won't, because of the volatility of the cost of fuel, the expense of flying inefficient aircraft, the fact they need to improve their balance sheets and those aircraft have already been written off the books. So if the seats don't exist to get corporate travelers (or any traveler for that matter), how will hotels fill their rooms when the (corporate) demand does not exist? Lastly, the airline industry has already announced that will again be decreasing scheduled "seat miles", this fall and winter another 1-3 % in the US alone. That cannot be a god thing for any hotel or hotel chain. So while we a probably at bottom, and show some improvement YOY...they are far from being "out of the woods"!
Christopher Dane consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
