Hotel industry dreams of sunnier times
By Roger Blitz
Published: March 15 2009 23:01 | Last updated: March 15 2009 23:01
Arne Sorenson is cheerful, and for good reason. Marriott International’s finance director has just been promoted to president and chief operating officer. And at a conference in Berlin last week, he was predicting a bright future for the big players in the stricken hotel industry.
“Within 10 years, one of us will have more than 1m rooms in our system,” Mr Sorenson said, sitting alongside the chief executives of Marriott’s biggest rivals: Hilton, Intercontinental Hotels Group, Starwood and Accor. They did not demur.
The immediate outlook is nothing like as rosy. Revenues are plummeting; hotel occupancy is spiralling downwards. Research by Smith Travel, the hotels consultancy, shows occupancy levels on the slide in Asia, like-for-like average daily rates more than 20 per cent down in January in Europe, and revenues per available room for that month dropping 16 per cent in the Americas and 30 per cent in Europe.
“It is uniformly bad around the world,” said Chris Nassetta, Hilton’s chief executive.
Desperate hoteliers are slashing room rates, ignoring the lesson of the last bout of heavy discounting, which came in the aftermath of the September 11 terrorist attacks. It took years for hoteliers to restore their pre-2001 prices.
Average room rates in London are down to about £100 ($140) a night. Andrew Cosslett, IHG chief executive, said New York’s luxury and upscale hotels were in a “frenzy” of price-cutting. “The business just isn’t there,” he said.
Worse, the hotel industry is confronted by a climate of public distaste at business executives’ conspicuous consumption, such as their travel budgets. The industry’s top brass flew straight from Berlin to Washington to plead with US politicians to tone down their anti-travel rhetoric.
Two years ago, everybody wanted to be in hotels. Blackstone, the private equity group, pulled off a stand-out deal with its leveraged buy-out of Hilton for $26bn.
Global hotel transactions were about $120bn in 2007. According to Arthur de Haast of Jones Lang LaSalle Hotels, “we are going to do well to get over $10bn” in 2009.
The big groups merrily sold their hotels in return for long-term franchise and management deals, which gave them multi-year annual fees and a cut of revenues.
They became brand managers, rolling out new lifestyle concept hotels. All they needed for growth was a pipeline of new developments.
But credit-starved developers have all but shut off the pipelines. IHG’s big push into China is stalled.
Now, hotel owners are feeling the pressure, particularly the highly leveraged ones, and are looking to the big operators to “share the pain”. Some hotel advisers predict a bloody year, as hotel owners miss interest payments, while operators lose money on unwanted rooms. The talk in Berlin was of five hotel chains going bankrupt this year.
So why do executives of the big chains, like Mr Sorenson, sound so relaxed? Precisely because they are so big and that however hard the downturn hits the industry as a whole, the big guys are set to get bigger.
But none of them likes seeing their development pipelines shutting down.
Frits van Paasschen, Starwood’s chief executive, said it would this year open 80 to 100 hotels, projects that were well advanced by the time the credit markets closed. “Beyond that, it’s in our governments’ and bankers’ hands,” he said.
But what they lose in development deals, the big groups expect to make up in independent hotels and smaller chains converting to their powerful brands to stay in business.
“One of the advantages we have is a massive infrastructure,” said Mr Nassetta.
Loyalty programmes and big marketing budgets give the big branded chains an edge the smaller players cannot begin to afford.
“Independent hotels are looking for a safe harbour,” Mr Nassetta added. “It’s foolhardy to assume we would make up 100 per cent of what we lose on new builds with conversion, but we are starting to see a significant impact with conversions.”
As for their owners’ problems, the big groups mix soothing words and understanding with a cold blast of reality. Mr Sorenson made clear there would be no compromise. Underpinning the robust stance of the big groups is the firm belief that the laws of supply and demand are in their favour.
However difficult it may prove this year to find customers, and however low prices may fall in the short term, travel forecasters say the medium-term and long-term scenarios are of globalisation creating a new and substantial wave of travellers, particularly in emerging markets such as India and China.
“There will be 1bn entering the middle classes in the global economy,” said Mr van Paasschen. “Our least worry is selling these rooms.”
Copyright The Financial Times Limited 2009
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