Hotel groups optimistic despite cooling demand concerns
They say smart people can have two opposing ideas in their minds and still function. So hotel executives must be geniuses, as they see bookings staying strong as economic worries mount.
The post-pandemic travel boom has pushed hotel rates to record highs in recent months. Yet rising interest rates and energy costs could endanger the recovery.
Until now, the CEOs of major hotel groups were predicting a sustained boom in their business for the rest of the year. But their comments come as warning lights flash on economic dashboards in the United States, Europe and elsewhere.
To Hyatt, executives said they had seen no slowdown in bookings at all-inclusive resorts from the recently acquired Apple leisure group. Resorts tend to be booked in advance, and Hyatt said about a quarter of its all-inclusive business for the first few months of 2023 is already on the books.
The rest of Hyatt’s portfolio is more dependent on business demand, which remains depressed from pre-pandemic levels. Yet leaders are optimistic. As demand remains below pre-pandemic levels, Hyatt and other hotel companies are finding ways to profit from it.
“Major Hyatt brands are seeing a nice inflection in group demand, with a strong in-year recovery for the year at prices significantly higher than 2019 for rooms and banquets, as well as a nice recovery in the business spike. segment,” noted JP Morgan Research Analysts in a report this month.
Hyatt’s August-December group bookings are just 7% below 2019 levels. The company is also generating more profit from group operations. In the second quarter, banquet expenses, which made up 46% of the group’s revenue base, had margins of 51%, JP Morgan noted. The drivers were strong pricing power and Hyatt-specific cost improvements, such as improved analytics and software to help capture more business more efficiently.
Still, the hotel companies’ gains come amid mounting economic worries, such as a growing energy crisis in Europe. Some tend to assume that the travel industry will be negatively affected.
Analysts debate the issue. The average traveler tends to have higher disposable income and more stable finances than the average citizen, and may prove more resilient in travel spending than some realize in a garden variety recession.
“We still think there will be a drop in travel demand,” said Katie Briscoe, new CEO of MMGYan integrated marketing group with a division that recurring research on the opinion of travelers. “We just don’t expect the impact to be as big on travel as it is on some other sectors.”
Another part of the equation is the cost of operations. Assuming they can continue to charge higher than usual rates from fewer than normal guest numbers, hotel companies must also keep their costs in line. Inflation, especially for energy costs, makes this more difficult.
“I don’t know the level of inflation on day-to-day operations going forward,” said Jean-Jacques Morin, Accor’s deputy chief executive and chief financial officer, in a recent earnings call. “No one really knows.”
Morin pointed out that multiple demand drivers can enable Accor to pass on price increases to travellers. In Western Europe, for example, several events, such as Oktoberfest in Germany and the Paris Auto Show, are expected to attract strong demand from travelers who haven’t attended in years due to the pandemic.
Resilience may be the watchword of many hotel executives, but many vacationers may have reached their price limit for hotel rooms. A consumer sentiment survey conducted by Morning consultationa New York-based intelligence firm, found a weakening in intention to travel among American, but not European, travelers in July.
To Choice Hotels, about two-thirds of its revenue comes from leisure travel, mostly for domestic travel in the United States. The company has seen its average daily rates remain about 9% above 2019 levels since September 2021.
“We view a challenging environment to increase room rates on top of the near double-digit percentage increases over 2019 that Choice has captured,” wrote Robin Margaret Farley, analyst at UBSin a report this month.
Hotel groups as a whole have not lowered their forecasts for signing new hotels. But several industry practitioners told us anecdotally that hotel deals had started to stutter as capital lenders grew more cautious while waiting to see the trajectory of interest rates.
“There is very little funding,” said Andrew Benioff, a Philadelphia-based hotel developer and founder and chairman of the Independent Hosting Congress.
“There’s a disconnect in capital markets between what we call capitalization rates and funding rates,” Benioff said. “Essentially, owners won’t let go of the exorbitant valuations they want, but buyers are finding it harder to convince lenders to agree to finance transactions at high transaction prices, given rising interest rates. interest and other opacity in capital markets.”
Other disruptions are impacting hotel pipelines.
“What we’re seeing is that the pipeline has definitely fallen below par,” said John Hardy, president of The Hardy Group, an Atlanta-based hotel construction management company. “A labor shortage and supply chain issues are some of the factors.”
“I see these stats being released by the major hotel groups,” Hardy said. “But I don’t know how accurate those numbers are.”