|Deloitte and Touche Travel Tourism and Leisure
- Executive Report
In this article, we focus on the hotel sector and assess how global operators are still counting the cost, using performance information from Deloitte and Touche’s HotelBenchmark Survey widely recognised as containing the most comprehensive and authoritative industry data outside North America.
To ensure direct comparability of year-on-year data, we have analysed the performance of a consistent sample of hotels representing more than 800,000 rooms. Our analysis has focused on Moving Annual Totals (also known as Rolling 12s) a statistical technique that illustrates trends over a set period of time. We look at revPAR (room revenue per available room) and its constituent components occupancy and average rate.
Following the millennium year, with its high demand for entertainment and accommodation, 2001 was always going to be something of a challenge. But even suffering from a holiday hangover, no one could have seen how badly things would turn out.
In the year 2000, The World Tourism Organisation estimated that international tourism grew by 45 million arrivals, reaching unprecedented levels. Then the global economic recession struck, with falling stock prices and a great deal of market gloom. This was exacerbated in the UK with the outbreak of foot and mouth disease, which had catastrophic effects on tourism. So, although the events of 9/11 are widely attributed for the industry’s weak performance in 2001, in reality the pressure was being felt a lot earlier. Global revPARs, when measured in US dollars, began to drop in April 2001. (See Chart A).
During summer 2001, hotel revPARs remained under pressure. There was a slight recovery in August, which gave the industry hope that the key conference months – and the most profitable – of September and October would be better than initially forecast. Then, the awful events of 9/11 happened, leading to double-digit revPAR declines.
Not surprisingly, in September it was the US market that was most affected with revPAR falling 23% compared to September 2000.Asia Pacific reported its worst declines in September too, with a revPAR fall of 19% compared to the previous year. Hotels in Europe and the Middle East experienced a time lag, with the deepest reversals reported in October and November. Within Europe, revPAR fell 14% in October before recovering marginally in November and falling back again 13% in December. With the prospect of retaliation against the Al Qaeda in Afghanistan, demand for hotels in the Middle East faltered, with revPAR declines of 35% and 37% reported in October and November respectively.
Many analysts predicted that the industry would experience a strong, sharp V-shaped recovery, with performance picking up by mid-2002. What actually happened was that encouraging signs in the first quarter were brought to a halt by the corporate accounting scandals that rocked the US and then other parts of the world, leading to stock market volatility and a plunge in business confidence.
While corporate governance issues continue to make the news, and the global economy continues to splutter, the hotel industry is still suffering. A recovery is not now expected until next year, although the last quarter of 2002 should look quite good when compared to the same period the year before.
Analysing the industry’s rolling twelve-month performance one can see this. This technique removes any seasonal bias from the equation and reveals that all parts of the World are still trading at a revPAR deficit to Jan 2000 levels. (See Chart B).
The deficit is greatest in the Middle East (-14%), due mainly to a significant fall in demand, (occupancy levels are down nearly 10% over January 2000 levels). The revPAR deficit is 9% in Europe and 5% in both Asia Pacific and the US. Across the world it appears, with the exception of the US, as though revPAR declines may have bottomed out and we anticipate a continual improvement in these markets over the next few months.
Occupancy and average rate
On average since January 2000, both the US and Middle East have averaged revPAR levels of around US$53, compared to US$63 for Asia Pacific and US$73 for Europe. This trend is mirrored in the regions’ occupancy performance, where the US and Middle East are trading at average occupancy levels of 64% compared to 70% for Asia Pacific and Europe. However, within Europe and Asia Pacific there are marked variances in different countries’ occupancy levels, with UK hotels, for instance, averaging occupancy levels of 75%, compared to just 65% in Germany. Occupancy levels remain on a slight downward path, but the decline in average room rates appears to have bottomed out in Asia Pacific and Europe, with a gradual return to growth. (See Chart C).
While average room rates remain under pressure in both the Middle East and US, the US is reporting average room rates above January 2000 levels, up 0.9%. One of the reasons is probably the higher proportion of budget accommodation in the US.This sector has typically been more resilient than upper and mid-scale hotels.
Segmentation – rest of Europe
We have analysed performance in both the UK and the rest of Europe by segmenting hotels into four different categories – luxury, first-class, mid-market and economy. These are based on Deloitte and Touche’s unique classification scheme, in which global brands are allocated a grading reflecting its target consumer.
As Chart D illustrates, adopting a rolling twelve-month basis, the luxury, first class and mid-market sectors across continental Europe have all experienced significant occupancy declines since 9/11. In the case of first class and mid-market hotels this decline actually started at the beginning of 2001, caused mainly by poor economic conditions that led companies to cut their travel budgets, but the rate of decline was exacerbated by the aftermath of 9/11.
Before 9/11, luxury hotels had managed to maintain their occupancy levels, but they suffered the most after the terrorist attacks, when occupancy levels fell rapidly from 70% to 62%, as consumer travel patterns altered.
The economy sector, however, has remained virtually unaffected by events and its occupancy levels remain unchanged at around 62%. This is mainly because this type of hotel is generally located in suburban areas or alongside motorways, and attracts domestic demand. As people opt to stay closer to home, and travel by road or rail rather than plane, these hotels have remained insulated from global events.
This sector has also managed to grow average room rates. Across continental Europe, rolling 12-average room rates between January 2000 and September 2002, when measured in euros, have improved 12.4%, with the economy sector achieving a 12% improvement. By contrast, the luxury sector, which trades at average room rates over 100% greater than the market average, has seen room rate growth of 30.6% between January 2000 and September 2002. Economy hotels have combined average room rate growth with sustained occupancy to experience revPAR increases of 12.8%.
Segmentation analysis – UK
Analysis of the UK hotel market confirms the resilience of the economy sector. Table 1 clearly indicates that on a rolling 12-month basis the UK economy sector has been unaffected by both the aftermath of 9/11 and the weakened economy, as occupancy levels have improved 4.7% between January 2000 and September 2002. Average room rates have moved ahead 2.5% during the same period, resulting in a revPAR increase of 7.3%.
Luxury hotels, primarily located in London, have not fared so well, with occupancy levels falling 15.3%, as shown in Chart E. Since March 2002, the rate of decline seems to have levelled off and there are real signs that occupancy levels for this sector may have reached the bottom of the cycle.
One response to the rapid drop in demand for luxury hotels would have been deep price discounts to try and bolster demand, but this didn’t happen. Consequently, hotels in this sector are now trading at a 0.1% average room rate premium over January 2000 levels. It’s clear that luxury hotels have suffered as business customers and consumers have traded down to lower grade accommodation, and this often happens when the going gets tough. It’s the luxury sector that tends to feel the pain first, but as conditions improve, this is usually the sector to lead the hotel industry’s recovery.
Segmentation analysis – gateway and provincial cities
Industry pundits predicted that another effect of 9/11 would be increased pressure on the performance of hotels located in gateway cities, as they are more reliant on international visitors. This view was given weight by a drop in international air travel, with consumers choosing to stay closer to home and opting for intra-regional travel instead. To check this out, we examined the performance of selected gateway cities against the performance of the rest of their country.
In the UK we compared the performance of London to regional UK; in Germany, regional Germany has been compared to Frankfurt; in Spain we compared regional performance with Barcelona and Madrid; and in Italy we looked at regional Italy compared to Rome and Milan (see Table 2).
All the markets, whether gateway city or provincial cities, were typically experiencing positive trading conditions during 2000. We limited the analysis to the percentage change in occupancy, average room rate and revPAR between January 2001 and September 2002 on a rolling 12-month basis.
The results reveal that gateway cities – with the exception of Italian cities – suffered more than the regions in terms of percentage change in revPAR. In general, all primary cities had occupancy declines almost twice that of the provincial cities, apart from London, where the decline was three times that of the regions. The picture for average rates is quite different. In Frankfurt, average room rates grew three times faster than the rest of Germany; hotels in Milan and Rome recorded a 100% rate premium over the Italian provincial hotels, whereas in Spain, Madrid hotels fared roughly the same as provincial hotels.
London hotels have been hit hard, with average rates suffering a six-fold decline compared to regional UK. London average room rates are now 13.9% below their November 2000 high and are still falling. As a result, London revPAR is still some 22.5% off the high and there is no sign of and end to the misery, although the rate of decline does appear to be slowing.
The global picture, then, is of a hotel industry struggling with tough trading conditions. The luxury end of the market and hotels in gateway cities are bearing the brunt. A ray of sunshine can be seen breaking through the clouds and markets are generally thought to have reached the bottom of the cycle. This last quarter of 2002 should appear fairly positive –especially when compared to the dreadful performance of the last quarter for the previous year. Despite this, we don’t expect hotel occupancy to return to 2000 levels until 2003, and it will be longer still for average room rates to see any substantial growth. This, of course, assumes that a diplomatic resolution can be found to the conflict with Iraq. A war in the region would certainly hold back recovery across the industry, with the most devastating consequences for the Middle East.
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|Also See||The 12 Euro-zone Countries Improve Average Room Rates During 2002 / Deloitte & Touche / Feb 2003|
|International Occupancy and Rate Report / November 2002 / Deloitte & Touche / Jan 2003|
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