Specter of travel cutbacks looms over hotels
LOS ANGELES (Reuters) - Business travel, which has propped up the hotel industry amid a dip in demand from leisure travelers, now looks ready to weaken as the recent carnage on Wall Street reverberates through businesses of all sorts.
"There is a lot of uncertainty and everyone is trying to cut costs where they can. Travel is one of the first things businesses will look at," said Jeremy Glaser, a hospitality industry analyst at Morningstar.
JP Morgan analyst Joe Greff lowered earnings estimates on Thursday for all lodging companies under coverage, citing factors such as lower corporate volumes and higher group cancellation rates. He also lowered ratings on Marriott International Inc (MAR.N) and Starwood Hotels & Resorts Worldwide Inc (HOT.N) to "neutral" from "overweight."
Hotel industry tracker Smith Travel Research lowered its forecast this week for 2008 revenue per available room -- a combination of room rates and occupancy that is a benchmark of industry health -- to 1 percent, compared with its forecast of 5.2 percent at the beginning of 2008, when business travel was expected to hold firm.
"I think in the next few months we are going to see a lot of (travel budget) cutbacks," by companies looking to defend their bottom lines, said Kenneth Simonson, chief economist at Associated General Contractors of America, the largest trade association of builders.
He spoke here on Wednesday before some 5,000 franchisees, hotel owners and managers at InterContinental Hotels Group Plc's (IHG.L) annual Americas conference.
InterContinental, the world's largest hotelier, said earlier this week the hotel market in the Americas came to a standstill in August as the economic downturn in the United States began to be felt.
The British-based owner of the InterContinental, Crowne Plaza and Holiday Inn brands, which earns almost 70 percent of its income from the United States, said revenue per available room (RevPAR) across the Americas was flat August.
"The investment banks are capturing the headlines, but when you peel it back, the number of people moving around is not much less than it was," Andrew Cosslett, IHG's CEO, told Reuters in an interview.
Mark Lomanno, president at Smith Travel Research, said any softness in travel volumes has so far been offset by higher hotel room rates now that operators have gotten savvy about the pitfalls of discounting.
After the dislocation of the 2001 terrorist attacks, hotel operators, aided by the take-off of Internet price comparisons, slashed room rates to attract visitors.
"What's different now is the behavior of the industry -- systems are better, more sophisticated," Lomanno said. "It doesn't work to employ a discounting strategy in a declining market."
Prime locations are likely to fare best.
Lomanno said a weak U.S. dollar has aided top-tier U.S. markets such as New York and Orlando, Florida, while plans by airlines to significantly cut back on capacity is a worrisome trend for secondary and tertiary U.S. markets.
Morningstar's Glaser also said well-located hotels in major cities are likely to fare relatively well, while properties in other markets are on much shakier footing.
"I think we are starting to see weakness in the middle of the week -- which means the weakness is spreading into business travel," he said.
Glaser expects flat to negative RevPAR growth for U.S. hotels this year and negative numbers in 2009.
"If this is an extended downturn, ADRs (average daily rates) will go flat or slightly negative," Lomanno said.
Cosslett told the meeting that the hotel industry is "not immune to the upheavals taking place ... and while we might have every confidence in Hank Paulson, the reality is that credit is tightening ... costs are rising ... and travel budgets are being squeezed."
(Editing by Andre Grenon)
