Into the Great Unknown

Preparing a budget for 2002 may be more art than science. Still, hoteliers look ahead at what promises to be a tough year with both realism and optimism, offering their predictions for when and how a turnaround will materialize.

By Joan Marsan -- HOTELS Magazine, 1/1/2002

The Gist

North America was hardest hit by economic pressures and the effects of the terrorist attacks on New York City and Washington, D.C. But steadily improving consumer sentiment in the months following the attacks suggests the industry could return to 1999 levels by the year’s end.

While gateway cities in Europe suffered severe RevPAR declines, the surprising resiliency of domestic markets makes Europe the front runner in terms of investor appeal.

Latin America and the Caribbean, dependent upon their neighbors in the United States for economic stimulus, have seen resort destinations emptied. Active promotions and partnerships are key to recapturing this business.

The flagging economy and the terrorist attacks in the United States conspired to derail Asia’s tenuous progress since the 1997 to 1998 Asian meltdown; a rebound is tied to the economic recoveries of the United States and Japan.

While international perception of the Middle East may have been damaged in 2001, intra-regional travel has helped several markets maintain their buoyancy.

Traditionally, HOTELS’ January issue forecasts trading performance for the year to come, even assigning numeric projections for occupancies, ADRs and RevPARs around the globe. But this year, few analysts would feel comfortable venturing more than a guess as to what the year will look like. After all, travelers themselves have been refusing to plan in advance, making it difficult for hoteliers to determine precisely how their business will look in a few weeks’ time. And so we are following suit, detailing for you instead how the industry is emerging from unforeseen tragedy, and giving you a look at how hoteliers around the world are preparing for a year with an uncertain outlook.

Setting The Stage
HOTELS’ 2001 forecast for the lodging industry suggested precariousness. The U.S. economy, previously courting inflation, was now flirting with recession. Investors were expressing unusual optimism about Latin America, while casting sidelong glances at Argentina, with its economy threatening to destabilize the entire region. Asia, after languishing for years and finally seeing gains, was poised at either the brink of recovery or another deleterious slide. A fresh spate of violence in the Middle East after what seemed great progress in the peace process had sent occupancies and RevPARs plummeting once again. Europe, coming off of a year of record-breaking performance, was hoping against hope to hold on to its gains.

With the economy cooling worldwide, it was clear to everyone at the beginning of 2001 that the successes of the banner year 2000 were about to be tested. No one, though, anticipated the severity of the trial. The terrorist attacks on New York City and Washington, D.C., on September 11 did unprecedented damage to the hospitality industry. Travel around the globe was disrupted, if not halted, for days, resulting in losses totaling in the billions of U.S. dollars. Stock prices plummeted. And the year’s carefully prepared hotel budgets became mere piles of paper, devoid of meaning in the remaining circumstances.

With U.S. travelers, who provide more than their fair share of some of the most lucrative business to hoteliers around the globe, suddenly virtually evaporating from the marketplace, hotel owners and operators began to face questions about how to shore up occupancies and rebuild RevPAR, with or without their traditional customer base. These questions are reiterated from region to region, and hoteliers’ abilities to find answers will determine their success in 2002.

Analysts look to history for a template for possible recovery scenarios. Comparisons with the Gulf War are frequent, though many note the greatly improved efficiencies and more sophisticated financial structures hoteliers have instituted since 1991 will reduce threats to existing supply, even though the rate of RevPAR decline could well double that suffered at the height of the Gulf War. The industry, so much stronger now, they say, can withstand the pressures of political and economic uncertainty like never before.

On the whole, analysts predict a return to positive RevPAR growth in 2002, fed by an increase from year-ago levels in the third or fourth quarter of the year. But every analyst closes forecasts with the caveat, “barring unforeseen events.” In New York, on September 11, the reality of unforeseen events was emboldened, and forecasts now seem to be so many words with so little substance. Knowing full well the mercurial nature of the world we inhabit may have tested the veracity of the forecast we present by the time it reaches your hands, here begins HOTELS’ take on the outlook for 2002.

Broken Bonds
The PricewaterhouseCoopers (PwC) Lodging Industry Briefing released in December 2001 forecasted average occupancy levels in the United States should reach 59.9% in 2002 and 60.8% in 2003. While U.S. RevPAR would decline .2% in 2002, by 2003 it should rise 5.1%, fed in part by a 3.1% increase in ADR, according to PwC. Nominal U.S. RevPAR levels should approach 2nd-quarter 2000 levels by the 4th quarter of 2003. Real U.S. RevPAR levels would reach early-1996 levels by the 4th quarter of 2003. PwC anticipates for the United States in 2002 the weakest occupancy levels since 1971. The upper-upscale segment will suffer most severely. The industry will experience its first profit decline since 1991. Gains, however, should resume in 2003 for all segments.

PwC’s forecast is predicated, at least in part, upon historical data suggesting the U.S. economy typically rebounds within a 24-month period after major crises (past examples include the Korean War and the Gulf War), and that real gross domestic product (GDP) growth in the United States will resume in the 1st quarter 2002.

“Lodging demand is highly correlated to GDP,” says Arne Sorenson, executive vice president and chief financial officer, Marriott International, Washington, D.C. “The terrorist attack of September 11 should be viewed as an event that has dislocated the joint between lodging demand and GDP. We believe the dislocation is temporary, but obviously, none of us knows how long it will take for the connection between lodging demand and GDP to resume.”

The dislocation Sorenson described was, indeed, severe in North America. According to the Smith Travel Research January 2001 report, room demand in the United States was down 1.3% from last year until September 11; after the 11th that demand dropped 20%. For the first nine months of 2001, the average room rate was just slightly (.3%) ahead of last year. Prior to September 11, in fact, the average September room rate was up 2.3% over last year for the same period, better, perhaps, than expected given the retraction of the U.S. economy. Post September 11, however, ADR for the month dropped 12%.

The losses were felt most poignantly by first-class and luxury hotels and those relying on transcontinental travelers. London-based Millennium & Copthorne Hotels (M&C) saw revenues from its 22 U.S. properties drop 61% in the latter half of September. Those losses were tempered in the early weeks of October when M&C saw 39% losses compared to the same period last year, an improvement over September, but still sobering results for a company that derives one-third of its North American profits from its four New York City hotels.

But Paul McManus, president and CEO, Leading Hotels of the World, New York, says that while they were hit hard in late 2001, first-class and luxury hotels may have an advantage in 2002. “People who stay in luxury hotels have a certain lifestyle, and the attitude is they live their lives the way they choose. They are not as intimidated by mass-market travel concerns.” While there won’t be a turn-around until the 4th quarter of 2002, McManus says, this attitude will help the luxury segment rebound more quickly than the mid-market segment.

Paris-based Accor, however, asserts that it is the economy segment that will retain the most buoyancy. While Accor experienced a 33% drop in October of its U.S. RevPAR and anticipated similar results through year end, its economy hotels, saw a comparatively small 8.2% RevPAR decline in the United States. Continued strength in the economy and mid-market segments, says CFO Benjamin Cohen, would help Accor to achieve its anticipated pre-tax profits for 2001 of e700 to e750 million (US$625-675 million) and would bolster the company throughout the 2002 recovery period.. Six Continents, London, similarly discovered that its Holiday Inn brand in the United States was sheltered from the worst of the faltering demand and would help moderate what was estimated to be a US$25 million loss in potential profits.

Starwood Hotels & Resorts Worldwide, White Plains, New York, anticipates finalizing 4th quarter 2001 results with RevPARs 25% to 35% below last year’s levels, though occupancies have been creeping up throughout the company’s North American properties. “We thought we might not even see 60% occupancies in the near term,” says Dan Gibson, senior vice president, corporate affairs. “But we’ve been seeing 70% and up for the near term, and that’s encouraging.”

The picture of uncertainty laid out before Starwood and the industry at large has led the company to issue forecasts and budgets that offer an unusual mix of mathematics and hypothesis. “From an overall forecasting perspective, we’ve backed it up as much as possible,” Gibson says. “We’ve said, ‘Let’s wait until the last possible moment to do budgeting.’ Having said that, we have an investment community. So what we’ve done is not so much a forecast. We’ve said if 2002 is similar to 2001, with an aggregate RevPAR 15% below 2000, which was a banner year, this is what earnings might look like. We’re laying out the facts, and then we’re saying to the investment community, ‘You decide what the event and economic environment will be, and then you decide what the forecast should be below that.’”

Marriott’s Sorenson is equally hesitant to offer more than cautious estimates for 2002. “[We] have assumed a 3% to 5% RevPAR reduction versus 2000 levels, or, stated differently, an annual average in the range of years 1997 to 1998,” he says. “As best we can predict, we assume that business ultimately will return to higher levels, perhaps in the range of years 1998 to 1999. But a slower start to 2002 may make next year’s average look a bit more modest.”

Some analysts, however, such as PKF Consulting’s Hospitality Research Group, set forth a more certain, though grim, forecast for the year ahead, one that hints at increased numbers of foreclosures. PKF issued a report on hotel debt-service coverage suggesting the average U.S. hotel will suffer an 8.9% reduction in RevPAR from 2000 to 2001, a 9.1% loss in 2002 and a 10% decline on a year over year, same store sales basis. For some, the RevPAR losses will translate into an inability to cover interest payments. Of the 3,300 hotel financial statements the group analyzed, 16.4% in 2000 could not generate enough cash from operations to meet interest obligations; in 2002 PKF estimates that number will increase to 36.5%. The upside to this equation, though, is that with lenders far less likely to fund new development projects in the face of escalating foreclosures, when recovery comes, the supply-demand balance will be firmly in hoteliers’ favor, and ADRs and RevPARS will rise.

EUROPE: Four Seasons Hotel Prague

Across The Atlantic
Europe’s heavily U.S.-fed markets have seen the greatest fall in RevPAR on the continent since September 11, with London and Paris leading the way with losses of 21% and 20% respectively. The central London hotels with average rates in excess of £110 (US$160), which also tend to be most dependent on high-end U.S. travelers, experienced RevPAR declines in excess of 25% in September, according to Andersen’s Benchmark Survey. But the numbers in markets ranging from Athens, where occupancy in September averaged 69%, to Amsterdam, where September occupancies reached 83%, suggest that Europe’s position of strength has not been so greatly diminished. Region-wide, industry executives express cautious optimism about the outlook for 2002.

In terms of performance, “The decline has declined,” says Trevor Ward, joint managing partner, TRI Hospitality Consulting, London, suggesting that the worst of the crisis is over. Gateway markets have taken a hit, but domestic markets are relatively unaffected. Southern European regional cities appear most resilient looking forward. The budget sector looks particularly strong, especially given the compulsion among European travelers to stay on the continent. And, Ward says, “In Europe, they’re learning what they should’ve long ago—not to focus solely on the U.S. market. This is particularly a London problem.”

Indeed, operators are refocusing their sales and marketing efforts in order to attract intra-regional travelers, a trend being seen around the globe. “Our occupancies in Europe have held up pretty well,” says Starwood’s Gibson, citing primarily the company’s Southern European properties that traditionally boast a base of largely North American leisure travelers. Properties in Venice, including the Hotel Gritti Palace and the Danieli, have replaced North American guests with customers from the continent. “If North American guests don’t come, this opens the hotels up to Europeans who have been shut out of the hotels,” Gibson says. And elsewhere, Starwood is creating incentives for locals to enjoy weekend getaways at drive-to destinations, with a success rate that has boosted weekend occupancies above those seen mid-week.

The relative strength of the European market, which is better positioned than North America to ward off recession and inflation, paired with low interest rates, has kept the region attractive to global capital investors. Nick Marsh, executive vice president, Jones Lang LaSalle Hotels, London, suggests more “off-market” deals and opportunities for developers with operator partners targeting institutional capital. Both Marsh and Nick van Marken, partner, hospitality and leisure consulting, Europe, Middle East and Africa, Andersen, London, suggest 2002 will bring further mergers and acquisitions activity in Europe.

“Hotel investors across Europe are adopting a ‘proceed with caution’ approach at present as they wait for the response of the operating markets to become clearer,” says Christoph Härle, senior vice president, Jones Lang LaSalle Hotels, Munich. “While investors may find it difficult to price assets at the moment, there are likely to be attractive opportunities for astute investors.”

LATIN AMERICA: Paradisus Cozumel

For Better Or For Worse
The year 2001 was off to a rough start in Latin America. Argentina’s financial woes had created a herd effect so strong that economies as far removed as Turkey’s were suffering instability as a result. Chile seemed the least likely of its neighbors to enter a recession, says Thomas O’Neill, president, Hotel Consulting International, Miami, but even Santiago has been caught up in the operational challenges presented by its weakened neighbors.

And farther north, in Central America and Mexico, occupancies were losing ground in the face of reduced travel by U.S. customers reacting to the slowing U.S. economy. “When North America gets a sniffle, Latin America gets the flu,” says Starwood’s Gibson.

“We’re having a fight for our lives,” says John Wallace, senior vice president, sales and marketing, Hyatt International, Chicago. “Cancun was like a ghost town, and it normally has 85% occupancies.” To fill the void, hoteliers throughout Mexico’s resort destinations are looking to the domestic market, which should help rebuild occupancies, though at a loss in ADR and RevPAR. “We see the market coming back, but not until spring break [March] when people realize they are secure in their jobs and have more awareness of the security of the political situation.”

While Mexico’s resorts focus on intra-regional travel, Caribbean destinations have seemingly nowhere to turn. Many of the islands rely on the travel industry to generate more than 25% of gross domestic product and, in the case of the Bahamas, depend on visitors to provide almost 50% of the country’s income. Those visitors must arrive by air. With American Airlines, the region’s primary carrier from North America, reducing flights and seats by 13% and 10% respectively, full recovery looks to be a longer time coming. And because the lead time between booking and travel in the region has shrunk from an average of two months to an average of less than three weeks, hoteliers are having a hard time foreseeing when that recovery may arrive.

Still, Sol Meliá’s Miami-based Vice President of Sales and Marketing, The Americas, Emanuel Schreibmaier, holds out hope that reservations activity will resume in January or February, if not sooner. Promotions, he says, will help. “After the Gulf War, 1992 and 1993 were banner years because we were doing lots of promotions,” Schreibmaier says.

Many of those promotional efforts are aimed at touting the destination at least as much as a specific hotel. Casimiro Ramirez, director of sales, Meliá Cabo Real, Los Cabos, Mexico, funneled a significant portion of his advertising budget into campaigns promoting Mexico as a whole and Los Cabos as a destination. Those promotions should pay off, Ramirez says, when U.S. vacationers resume travel. “If the economy up there is healthy, ours down south is healthy. We know it’s going to be a tough year, but we know it will come back.”

ASIA: The Peninsula, Hong Kong

Asia Interrupted
One aspect of the industry that will see scant change as a result of the events of September 11, 2001, is development in Asia. “There was so little new development that was viable that was planned in Asia,” says Rob Stiles, principal and managing director, Sonnenblick-Goldman, San Francisco. “It was trying to pull itself up from a very difficult three-year or four-year period. Banks remained very reticent to fund projects. There might have been ill-conceived projects that won’t go forward. The very limited projects that were well-conceived and well-funded will still happen.”

On the operations side, however, the damage inflicted by the terrorist attacks compounded the difficulties of a year beset by economic woes and halted the faltering progress that some of Asia’s markets had made in recouping the losses of the late 90s Asian meltdown. “[The years] 1999 and 2000 showed pretty significant growth, and room rate growth had started to kick in in some markets in the first half of 2001,” Stiles says. “Now this has derailed.”

Investors in the region share a general consensus that operating levels are likely to return to 2000 levels within 12 to 18 months. And the 1st quarter of 2002 promises to show improvement relative to the 4th quarter of 2001. But for the time being, says Patrick Hardy, area director, South Asia, Hyatt International, New Delhi, count out leisure travel to the region. “We are starting to see an increase in business travel, but leisure is unlikely to improve, at least through March and the end of the next season,” Hardy says. “We do not at this stage foresee any noticeable upswing in the coming 12 months, and predict a difficult year.”

Similarly, cancellations from U.S. and European travelers to Hong Kong were rife in the weeks following September 11, necessitating a careful review of the 2002 budgets. Looking forward, “We’re anticipating the same budget for 2002 as for 2001,” says Peter Borer, regional general manager, Peninsula Group, Hong Kong. “We believe it will be difficult to raise occupancy and average rate in the present climate.”

But concentrating on adding value to the existing product, developing regional markets (China, specifically, has great potential), and maintaining and increasing the local market should help to keep performance on par with 2001, Borer says. And opportunities just over the horizon give hoteliers in the region hope that there are better times ahead. China’s entry into the World Trade Organization in December should spur new business throughout Asia. The Orient-Express luxury train service from Hong Kong into China will create a new and tantalizing experience, drawing upscale travelers to the region. The opening of Disneyland in 2005 in Hong Kong could boost intra-regional travel. And the 2008 Olympics in Beijing promise to bring trans-continental travelers into Asia.

Promising Progress
Despite the crashing halt of the peace process and the dim view of the Middle East that often accompanies troubled times in the region, some Middle Eastern markets, such as Kuwait, were experiencing double-digit growth in early 2001. But the events of September 11 caused U.S. travelers to abandon the region, and European FITs declined some 60% to 80%. “I think we’re probably safer here,” says Guy Standish-Wilkinson, managing consultant, TRI Hospitality Consulting, Dubai. “However, that’s not the perception of our region elsewhere, and some hotels have been badly hit.”

So badly hit that hotels in most Middle Eastern markets have reported double-digit occupancy declines. Some of those declines however, haven’t been as indelible as those in North America. “We have recovered 75% of the reservations that were lost for the four months, September to December,” says Gerald Lawless, managing director, Jumeirah International, Dubai. And the Jumeirah Beach Resort is forecast to run at 100% occupancy through January. RevPAR, Lawless admits, will fall, but the hotels should be filling up with business that has come from persistent regional travel and through efforts to increase local business.

Precedents set by the Gulf War in 1990-1991 and the massacre of tourists in Luxor in 1997 suggest that the international travel market for the region could take two years to recover. The general consensus is that corporate and business demand will return full-force by spring or, failing that, by September 2002. Intra-regional travel, however, remains buoyant.

“We are optimistic that the business levels will continue to be healthy,” Lawless says. “Most of the conventions and conferences were postponed rather than cancelled, and many of the organizers are now talking to us with a view to reinstating these conventions over the coming months. We also launched a major advertising campaign within the Middle East region, as many of the people from this part of the world were not traveling overseas. We found that they were very pleased to come to Dubai.”

Developers, too, have retained their taste for the Middle East. “On the development end, we’re as busy as we’ve ever been in our six-year history,” says Standish-Wilkinson. Juergen Bartels, CEO, Le Méridien Hotel Group, London, slated the development of several rooms in the style of his new boutique concept, Art + Tech, in Le Méridien’s Gulf properties and suggested that the current slump is a prime time for refurbishment.

And Toronto-based Fairmont Hotels & Resorts, which opened its first Middle Eastern property in Dubai shortly after the terrorist attacks, is rumored to be in talks with Saudi Prince Alwaleed to develop more properties in the region. Emma Thompson, director of investor relations, Fairmont, says, “If we are to expand overseas we want to do it with a partner who has a penchant for investing in hotel real estate and who has influence in the region and understands the marketplace. It’s always been expected that [the Prince] would be a potential overseas partner.”

Overall, insists Yossi Fischer, managing director, Marketing Vision Ltd/TRI Hospitality Consulting, Israel, and director of development, Maritim Hotels, Bad Salzuflen, Germany, the year 2002 could surpass expectations. “I’m certain from my past experience in crisis regions that things are going to look much better than they look right now because the amount of uncertainty will be much less,” Fischer says. “Recovery is going to happen faster than people think. It’s been proven after the Gulf War; it’s been proven after Luxor. Peoples’ memories are rather short.”