Challenges & Opportunities For Hotels

The hotel industry posted its best week of 2009 last week, with revenue per available room, or RevPAR, down “only” 12.3% versus the year-ago period. Looking behind the numbers, however, we find signs that could lead to more difficult challenges ahead for companies such as Marriott International (MAR), Starwood Hotels & Resorts (HOT) and Intercontinental Hotels Group (IHG).

According to data released last Thursday from Smith Travel Research, the RevPAR decline of 12.3% during the week ended March 21 was comprised of a 4.7% decline in occupancy, and an 8.0% decline in average daily room rate (ADR).

Weekly RevPAR declines have been running in a range of approximately 15% to 25% to date this year. While the relative improvement in RevPAR decline is modestly encouraging, the makeup of the improvement is potentially concerning.

To this point in the year, the majority of RevPAR declines have been comprised of declines in occupancy, as hotel companies had focused on maintaining room rates as much as possible. This was the first week of the year that the decline in room rates exceeded that of the decline in occupancy.

While RevPAR is a critical operating metric in the industry, its composition can be just as important.

And while gains in occupancy are obviously important, for every room that is filled there are additional expenses such as housekeeping, laundry and utilities that must be paid. Changes in room rates, however, have the greater impact on profitability, and fall almost entirely to the bottom line.

One week does not a trend make, but if we were to see the hotel companies make additional cuts to room rates in an effort to boost occupancy, it would likely indicate that the industry will take longer to rebound once the economy stabilizes. If, however, the hotel owners can hold room rates steady without sacrificing occupancy, we would become more optimistic about the 2nd half of the year.

We will continue to monitor the weekly operating metrics and make the appropriate adjustments to our outlook for the industry. We currently maintain our Sell rating on shares of MAR, and our Hold rating on shares of HOT.

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