News for the Hospitality Executive
Understanding the Exchange Rate
Impact on the Lodging Industry
|By Jim Butler, August 10, 2008
One of the most popular slides from Jan Freitag of Smith Travel Research posted on www.HotelLawBlog.com triggered quite a few questions about the impact of currency exchange rates on our industry, so I thought I would offer a little more detail to those who are intrigued by America being on sale because of the fall of dollar against most of the world's major currencies.
Exchange Rate impact on 2007 ADR
The slide below is authored by Jan Freitag of Smith Travel Research.
What is this all about?
The dollar devaluation against the Euro and other currencies is helping in providing a room rate bargain. ("The U.S. is on sale!")
Over the 2007 period covered by the slide, the U.S. dollar's exchange rate declined 9% against the Euro. Thus if rates went up only 6% in Boston, they went down 3% in terms of the Euro's buying power or they seemed cheaper by that amount to holders of Euros. (+6% - 9% = -3%)
And similarly, Boston's 12.4% actual ADR increase would be perceived as only a 3.4% ADR increase to someone using Euros. (12.4% - 9% = +3.4%)
In other words, the slide goes to the relative impact of U.S. ADRs to those using foreign currency. It does not bespeak actual decreases in ADR in the indicated markets.
Split rates for domestic vs foreign guests?
STR's Jan Freitag observes that the data supporting this phenomenon suggests that hotels should keep their rates flat or raise them slightly when marketing to Europeans. This observation leads to an intriguing idea!
The data suggests that hotels in some markets obviously felt that they would lose domestic travelers if they raised rates sufficiently to stay up with the Euro and the Yen. Why else would Orlando fail to capture 8.9% of ADR relative to the Euro?
But what if hotels could charge split rates -- one rate for domestic guests feeling the economic pinch of our current economic cycle and another rate for guests riding high on currencies worth 50% against the dollar than they were only a short while ago?
I encountered something like that a few years ago when the Australian dollar was at historic lows against the U.S. dollar. In fact it was about $0.55 Australian to the $1.00 U.S. Most of Australia seemed to be on sale at half price. If something cost a dollar in the U.S., it typically cost a dollar (Australian) in Sidney. But I could get almost two Australian dollars for every U.S. dollar I spent.
This worked great in the wine districts of the Barossa and the Margaret River. But when we went to arrange a 10-day live-aboard dive vacation of the Great Barrier Reef, we encountered different rates for U.S. travelers and Australian travelers. They made us pay more for the same event than our Australian friends on the same trip, because it was half as expensive for us -- or that was their reasoning.
It may be easier to arrange such price differentials on a single website for Australian dive trips than through the multiple channels through which hotel rooms are booked. But it does provide some food for thought.
What do you think? Could we have split rates? Should we have split rates?
About the Author:
Jim Butler is one of the top hotel lawyers in the world. GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and you will see why. He devotes 100% of his practice to hospitality, representing hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality Group®—a team of 50 seasoned professionals with more than $40 billion of hotel transactional experience, involving more than 1,000 properties located around the globe. In the last 5 years alone, they have brought their practical advice to more than 80 “hotel-enhanced mixed-use” projects, a term Jim coined to fill a void in industry lexicon. This term describes one of the hottest developments in real estate-where hotels work together with shopping center, residential, office, retail, spa and sports facility components to mutually enhance the entire project’s excitement and success. Jim and his team are more than “just” great hotel lawyers. They are also hospitality consultants and business advisors. They are deal makers. They can help find the right operator or capital provider. They know who to call and how to reach them. They are a major gateway of hotel finance, facilitating the flow of capital with their legal skill, hospitality industry knowledge and ability to find the right “fit” for all parts of the capital stack. Because they are part of the very fabric of the hotel industry, they are able to help clients identify key business goals, assemble the right team, strategize the approach to optimize value and then get the deal done. Jim is the author of the Hotel Law Blog, www.HotelLawBlog.com. He can be reached at +1 310.201.3526 or firstname.lastname@example.org.
|Also See:||Grand Forks, North Dakota Hotel Market Remains Strong as Favorable Exchange Rate Lures Canadian Shoppers / August 2008|
|Hedging Currency and Interest Rate Risk for Latin American Hotel Investors / Jones Lang LaSalle Hotels / Oct 2001|