The rest of 2008 and the coming year 2009 will have industry stakeholders anticipate a tumultuous period in the history of vacation ownership and the entire hospitality industry.
At the 10th Annual Vacation Ownership Investment Conference, experts presented an in-depth outlook on the market performance, giving an unnerving picture (as we already know) of the state of the industry.
Expect demand to go flat, supply to go up and occupancy go down, across the board, said Jan Freitag, vice president of Smith Travel Research (STR). “Average daily rate posts the $110 B question. Resorts are going to face tougher headwinds down the road,” he said.
Up until 2007, the industry has seen continuous profitable cycles with total revenues reported at $139.4B and income at $28B. However, as of August 2008, the market showed negative growth for room demand at -0.3% (700 M) and occupancy of -2.6% (63.2%) all across America’s room supply of 1.1B which grew by 2.4% year to date. Average daily rate was reported at $107 growing at 3.8%, RevPar at $68 still growing at 1.0% and room revenue of $75B which went up by 3.5% YTD.
Due to prevailing trends in the market, all US hotels who reported increasing occupancy by 14% had a 24% average daily rate growth; while those who suffered -17% growth in occupancy had kept 45% growth in daily rate. “Seven out of 10 hotels increased their rate till August 2008, gaining 45% increases despite losing occupancy,” said Freitag adding as usual, as developers build into the downturn, the 12-month moving average sees the supply curve rising high above and against the falling demand curve to date. He recommends against dropping room rates as doing so will only ultimately ‘squeeze out’ whatever remaining profit hotels make. He warns it can be disastrous for business to do so now.
In resort locations, the demand cyclicality is more pronounced with the demand vertex ending negative while the supply endpoint just slightly above zero. They just don’t intersect. Never. Total US demand versus resort demand shows both curves dropping further, with resort demand dropping faster and more steeply than overall US demand rates.
According to Freitag, the demand in three major/ select markets of Phoenix, Orlando and Hawaii has fallen dramatically. STR sees further declines in the business and leisure business for all weekday and weekend travels. Revenue percent change for August 2008 measured at an inflation rate of 3.5% showed revenue growth slowing rapidly.
Due to increased fuel prices, these select vacation ownership markets are losing out big time from air traffic. Decrease in airlift in Hawaii has already taken a severe toll in September 2008 with -15% to -20% demand drop for the islands. Orlando is following in close second with demand dips of -20% in the middle of September to -10% end of September. Total US demand dip by end of September hovered around -5% range. Orlando rooms sold per one deplanement decreased to 1.8 million in 2007 compared to 1.9M in 2006. Airline seat capacity shows Orlando to lose -13.4 M in October, -10.8M in November and -9.6M in December, according to Expedia’s forecast of the coming winter season.
“The remainder of the year looks very choppy. The coast markets both east and west have stabilized given the influence of demand from Europe and Asia. As the global economy weakens, that’s going to jeopardize where the sector is going from there,” said Scott Berman, principal and US leader, Hospitality & Leisure consulting practice, PricewaterhouseCoopers LLP.
“We have not seen a ‘tanking’ in occupancy until today. We’ve seen only erosion – couple of occupancy points here and few dollar rates there. If that is the worst of it, then the industry will weather this storm just fine. But there’s so much uncertainty in 2009,” added Berman.
All indicators for the three basic market segments: commercial, group and leisure demand, clearly show a downward trend. “Obviously with what’s happening in Wall Street and all cutbacks of the investment banks and other institutions who are big users of hotel rooms, meeting space and catering services, this business has vaporized,” added Berman.
With respect to the group market, cancellations in 2009 are now down at 30%. The leisure consumer, dependent on disposable income, cannot adapt positively and has absorbed all the shock waves from a weak economy, said Berman, adding this has been true across all sectors including traditional lodging, vacation ownership and the passenger cruise sector. Freitag said there will be 0% demand change versus a 2.4% supply change in 2009. Occupancy will dip by -2.3% in 2009 after 2008’s -2.7% rate change, translating an average of 61.4% occupancy in 2008 and 60% occupancy in 2009 for all US hotels.
Amid the US meltdown, the current financial crisis could hold the future supply in check, said STR’s VP. Today, there are .7% growth in hotel construction, 87% in final planning, 14% in planning and 28% in pre-planning stages. As of last month, mid-scale hotels without food and beverage and upscale properties remain high on travellers’ choice.
According to Freitag, ADR’s will drop to 3.5% in 2009 from 3.8% in 2008 but RevPar’s will slightly go up from 1.0% change in 2008 to 1.1% in 2009. Definitely, it won’t be smooth-sailing for the hotels and timeshare business in the next 12 to 18 months. Resorts will surely see tougher headwinds!