Hotel industry bullish on long-term outlook

Jan 31, 07 | 8:58 am

(Reuters) - The U.S. hotel industry, four years into a recovery from the travel slump that followed the attacks of September 11, 2001, is likely to continue reaping higher profits for at least a few more years, industry leaders say.

"I see nothing on the horizon that would slow it down," Bill Marriott, chairman and chief executive of Marriott International Inc., said at a lodging industry conference held here this week.

He cited low U.S. unemployment, a strong global economy and tamer oil prices as factors underlying his estimate that the sector in is the "early to middle stages" of its typical economic cycle.

PricewaterhouseCoopers LLP and Smith Travel Research have both projected that 2007 revenue per available room, a key measure of hotel financial performance known as revpar, will rise by 5.8 percent this year, compared with 7.4 percent last year and 8.5 percent in 2005.

The growth has been driven mainly by higher room rates, rather than occupancy gains.

"We know the economy is OK through 2008. If the Republicans want to get re-elected, they'll find a way to keep the economy up," said Joe McInerney, president and chief executive of the American Hotel and Lodging Association.

Given the underpinning of a strong macroeconomic outlook, some say a more important indicator for the long-term health of the lodging market is likely to be the supply of new hotel rooms

"What hurts our industry is when we build more rooms than we can rent," said Mark Elliott, senior managing director at Hodges Ward Elliott Inc., a brokerage and investment firm specializing in lodging properties.

But the supply of hotel rooms -- constrained by conversions to condominiums, closures and high costs for land and construction -- is only now beginning to creep above growth in demand, according to forecasts.

Smith Travel estimated demand for U.S. hotels will increase 0.8 percent this year, while supply will rise 1.6 percent. PricewaterhouseCoopers expects both supply and demand for hotel rooms to increase 1.6 percent this year.

Barring the risk of another major terror attack, "we won't see negative revpar until 2011 at the earliest, more like 2013," Elliott said.

But Bjorn Hanson, an analyst with PricewaterhouseCoopers LLP, said the biggest risk remains on the demand side, since caution on the part of lenders is likely "to temper any oversupply" of hotel projects.

"To me the biggest threat is margins ... there is always something that pops up," said Matthew Hart, president and chief operating officer at Hilton Hotels Corp. , referring to trends such as rising health-care costs and property taxes that have kept hotel profit margins from returning to peak levels.

The trick, he said, is to add enough new programs and amenities to justify higher room rates.

Given that the U.S. and world population continues to grow and more people are traveling, lodging is "a great industry to be in," said Charles Ledsinger, CEO of Choice Hotels International Inc..

Barry Sternlicht, chairman and CEO of real estate investment firm Starwood Capital Group, cautioned that factors such as higher prices for airline tickets could become an issue for hotel operators.

"I'm troubled by the year-over-year decline in occupancy ...that does not bode well for pricing power of the majors," he said.

Smith Travel projects that occupancy at U.S. hotels will fall to 62.9 percent of capacity this year from 63.3 percent in 2006, while Pricewaterhouse Coopers expects a smaller drop to 63.2 percent.

Source:  REUTERS