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Hotels world-wide wait for the calm after the perfect storm

The UK hotel industry is front-page news – but not for the best of reasons. Daily news on the troubles at Meridien, the attempt to take…

The UK hotel industry is front-page news – but not for the best of reasons. Daily news on the troubles at Meridien, the attempt to take Macdonald Hotels private, and aggressive shareholder-driven changes at Thistle and Hanover are all are symptoms of the very difficult trading times hoteliers find themselves in. Bill Marriott recently said that he had not faced such challenges in all his 47 years in the industry and that other industry heavy weight – Starwood`s Barry Sternlicht – described the convergence of recent events as the, `perfect storm`. The future is certainly far from clear.

The UK is not alone

It is perhaps little comfort to know that the rest of the world`s hoteliers are suffering along with the UK. In comparison to the Asia Pacific region and the Middle East (affected predominantly by SARS and the Iraq war respectively), European markets have fared better, even though performance is still significantly behind historic levels. Occupancy, particularly in Europe`s gateways, has fallen, as the level of international visitation has declined. With the US, Japanese and German economies still spluttering and the fall-out from corporate scandals and the technology, media and telecommunications (TMT) crash still fresh in everyone`s memory, many European markets have seen their highest-spending market segments seriously eroded.

Following a period of gradual recovery, the outbreak of SARS and then prospect of, and start of conflict in Iraq has seen particularly poor revPAR performances (the product of occupancy and average room rate) across many European markets in April and May 2003 as demonstrated in chart A.

Chart A – Where is Europe? – % change in revPAR (2000- May 2003)

Outside London

The UK regional hotel market has historically been less exposed to international influences than London, although cities such as York, Edinburgh and Chester (which are all on the tourist circuit) have been hit by reduced international visitation. UK hotels also enjoy relatively high levels of occupancy compared to many of their European neighbours, driven by historically strong economic growth and a mature weekend leisure market. Even with a significant growth in budget hotel rooms over the past 10 years, demand for full-service hotels has remained strong allowing average room rates to increase ahead of inflation.

As in much of Europe, the downturn in performance began prior to 9/11, and in many markets as early as Spring 2001. In particular, the M4 corridor and Home Counties (such as Hertfordshire and Essex and Berkshire) have continued to suffer from the difficulties in the TMT sector and the decline of corporate and meetings-related demand from this so-called Golden Triangle and within the M4/M3/M25 motorways.

In 2002 these areas were again the worst affected, with year-on-year revPAR declines of 8 to 10%. Gatwick hotels were particularly affected by the decline in flights as BA cancelled or moved flights to Heathrow. By comparison, other provincial areas held up well, and revPAR for regional UK was stable in at 2002.

Several events helped to maintain performance levels in the regions during 2002. These included the Ryder Cup in September (Birmingham revPAR rose by 8%) and the Commonwealth Games in July and August in Manchester (3% growth in average rate). The closure of Wembley and the move of many major sporting events to the Millennium Stadium in Cardiff, led to an 8% revPAR improvement in the city.

The budget sector continues to demonstrate resilience. To ensure direct comparability of year-on-year data, Deloitte & Touche analysed the performance of a consistent sample of hotels. The analysis focuses on moving annual totals (also known as rolling 12`s), a statistical technique that illustrates trends over a set period of time and removes seasonal bias from the equation. Chart B demonstrates the budget sector`s relative immunity from the aftermath of 9/11, the weakened economy and Iraq crisis, with occupancy improving by three points between January 2000 and May 2003. Average rate has moved ahead 2.5% during the same period resulting in a revPAR increase of 5.5%. Luxury hotels have not fared well, with both occupancy and revPAR levels falling to their lowest point for three years.

Chart B – UK rolling 12-month revPAR analysis by grade of hotel

2003 has again seen great variation in performance across the country. Although overall regional performance has declined by 3% to May 2003 this hides improved performance in Cardiff , Manchester and Swindon for instance, and further declines in the South East and Golden Triangle.

When will it all be over?

The difficulties for London hoteliers over the past two years have been well reported. Chart C illustrates the rolling – 12 revPAR performances of London and the regional UK.

Chart C – Rolling 12-month revPAR – London and Regional UK

The continued decline in London hotel performance (to May 2003), particularly when compared the hotels outside London, can clearly be seen. Although there have been several false dawns there are currently several indicators that suggest a more positive note may be struck.

Uppermost in the minds of (potential?) travellers, and in particular those from North America is security and safety – is it safe to travel? Is it safe to stay? Although not a direct reflection of such concerns, consumer confidence provides some measure of likely demand for accommodation in the future.

Perhaps not unsurprisingly US and UK confidence indicators (Chart D) have followed a similar trend. In decline prior to the events of 9/11, during the latter half of 2002 (US only) and prior to and during the Iraq crisis, confidence has shown a strong upturn in April 2003 (following the apparent end of the conflict in Iraq). Although not yet in positive territory the trend is directionally moving towards positive territory.

Chart D – confidence indicator graphs (1999-2003)

British Inbound Tour Operators Association (BITOA) forward bookings data shows a strong correlation to London revPAR. The May BITOA survey reports that forward bookings are looking much better for tour operators and ground handlers but hotels are still well down, particularly for higher rated segments such as FIT. Enquiry levels remain high and the important North American market, although still sluggish, is showing signs of improvement. BITOA suggests that the softening of sterling against the Euro continues to make the UK more affordable to European consumers.

Chart E – UK forward booking trends (2001-2003)

London`s airports are also getting busier again as the number of passengers using the three main hubs returned to pre-9/11 levels in June 2003 (compared to June 2001). Across BAA`s UK airports the rise in passengers was 2.9%. Much of the increase was at Stansted (catering primarily to charter and budget airline passengers) and much is leisure – orientated, however. The real return of the business traveller remaining keenly awaited.

And in the longer term?

The current performance equilibrium in many UK markets represents a potential brake on further supply growth, at least until some consistent improvement is seen. At the same time, growth in the limited service/budget sector has continued. As budget hotels migrate towards city centre locations and increasingly locate alongside full-service hotels, certain markets are seeing a real impact on full-service hotel performance. Significant growth in full service hotels appears unlikely to be seen in the UK until the latter part of this decade, perhaps fuelled by a successful Olympic bid for 2012?

Transport and infrastructure improvements may also help fuel demand in the latter part of the decade; St Pancras Station is being refurbished and extended for 2007 to transform it into one of the largest passenger interchanges in Europe and the principal gateway in London (together with Stratford in East London) for Eurostar services, the Midlands and the North, Kent and potentially for a direct rail connection to Heathrow Airport. Terminal 5 at Heathrow opens in 2008, although a potential new runway appears unlikely to happen for at least a decade. In July 2003, the Crossrail project to link east and west London was given the go-ahead. Although again not expected for a decade, the project will create a massive job boost during construction and significantly enhance east-west commuting.

And a final footnote

The UK has recently adopted the EU directive on anti-competitive behaviour. The directive seeks to ensure that anti-competitive behaviour (such as price fixing) is not detrimental to consumer choice. The applicability of this legislation for the hotel industry is that it appears likely that the sharing of data in the form of the daily and monthly ring round is likely to fall foul of this law. Unlike the US where the informal sharing of data has been prohibited for a number of years under SEC rules, within Europe the sharing of data is commonplace within the industry – and is the daily bible by which many hotels run their operations. Given the severe penalties – up to 10% of revenues and criminal prosecution – a number of companies are now relying on the services of a third party to aggregate data on their behalf and so mitigate the impact of any this legislation.

This article was written by Deborah Griffin and Sue McKenney, Travel, Tourism & Leisure team, Deloitte & Touche

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