The future appeared bright. Analysts and investors identified the hotel industry as poised for growth due to the expansion of low cost airlines, growing economies, improved infrastructure links, the emerging middle-classes of China and India, and record levels of disposable income.
With easy credit available and good returns promised, there was a boom in hotel development. Numerous regional brands sprouted up looking to capture a newly found niche in the market. More and more countries, cities, and communities embraced hotel development and wider tourism as a route to economic growth. The future appeared bright for the worldwide hotel industry.
This pervasive optimism changed abruptly in 2008 and the duration and depth of the current economic crisis in the major question on everyone's mind.
The Downturn
Unfortunately for its stakeholders, the performance of the hotel industry is inexorably intertwined with the overall economy. Quite simply, when the economy is suffering, one of the first expenditures cut is travel. This includes families skipping holidays and corporations cutting-back on travel costs. Moreover, the growth of low cost communication and improved technology, such as teleconferencing, has given companies alternatives to costly business trips.
In the past, hoteliers have responded to diminished demand with a strategy similar to other industries in distress: dropping prices. These recession-induced price wars result in decreased rates although, arguably, fail to improve occupancy significantly. Today, with modern yield management techniques, hoteliers are better prepared to devise rate strategies, yet the statistics show that deep rate cuts have occurred across many markets.
In 2008, a year that most consider to have been only partially affected by the global economic downturn, RevPAR development for the full-year, as reported by the independent researcher STR Global, declined or barely increased across all markets. Only the Middle East showed positive growth (albeit the region was hit hard at the end of 2008 and the beginning of 2009, demonstrating that no hotel market is immune from the downturn).
The data clearly indicated a strong first half year of 2008, but the slowdown in demand in the third and fourth quarters resulted in poor full-year RevPAR growth. RevPAR in Europe for the first class segment was down 5.1% during 2008, impacted by heavy fall in occupancy, well below the 1.6% growth reported in the first six months of 2008.
In brands we trust
As in any industry, during a downturn, it is survival of the fittest. For the hotel industry, that means unbranded, poorly maintained hotels suffer the most. Good-quality properties with the backing of strong international brands are better positioned to whether the storm.
According to STR, the hotel performance data demonstrate that markets with a greater proportion of internationally branded hotels have managed to hold their rates better than others. A hotel brand provides a level of recognition through consistent service and product standards that provide guests with a level of familiarity, particularly in markets unknown to the traveler.
However, recent news demonstrates the fallibility of brands. Recent bankruptcies include Golden Tulip, Trump Casino Hotels and numerous small regional brands. Analysts expect further bankruptcies with highly-leveraged companies the most closely watched. In addition, many companies' ambitious development pipelines have proven to be pipedreams as the credit crunch makes hotel financing more difficult.
Different regions, similar stories
The Nordics
The Nordic Region is characterised by a large proportion of mid-market hotels and a high ratio of domestic demand. In comparison with Western Europe, a high proportion of the hotels are branded, often by one of the regional brands which are well-known within the region and virtually absent in other parts of Europe.
In the first half of 2008, the Nordic Region demonstrated significant average room rate growth in both first-class and mid-market hotels and reported a strong RevPAR growth of 7.1% and 6.2% respectively. For the full-year, the region reported a modest RevPAR increase of 1.5% for first class segment and an almost flat development for the mid-market segment. Euro denominated RevPAR was negatively affected due to the weakening of the Swedish and Norwegian currencies against the Euro by circa 4% and 2% respectively, which escalated during the fourth quarter of 2008.
Rest of Western Europe
Western Europe is home to five of the world's 10 most-visited countries, and, along with North America, is the most diversified in terms of hotel product. The hotel markets of Western Europe are mature with a considerable number of international and domestic hotel operators competing for market share. All major international brands are represented in Western Europe, although there remains a higher proportion of unbranded hotels than in North America.
The financial crisis hit the region early: in the first six months of 2008, Western Europe reported a negative RevPAR development. The first class segment decreased with 2.0% and the mid-market segment with 0.9%. After the abrupt shift in trend in the third and fourth quarter together with the heavy depreciation of the British pound against the Euro (circa 14%), RevPAR growth for the full-year ended with a decrease of 6.6% for the first class segment and 5.1% for the mid-market segment.
Eastern Europe, Russia and CIS
The Eastern Europe, Russia and CIS hotel market has in recent years been buoyed by impressive economic growth, particularly in Russia. In many markets, capacity was unable to meet demand. International brand penetration has been largely limited to the capital cities and numerous provincial markets are lacking in international brands. Supply growth is coming, but high barriers to entry and long construction timelines ensure delays in development.
For the first six months of 2009, RevPAR for the first-class segment and mid-market segment in Eastern Europe recorded increases of 5.6% and 3.0% respectively, due to strong growth in average room rates. The growth did not last: in the second half, a heavy drop in occupancy and RevPAR growth resulted in full-year performance only slightly positive for the first-class segment and negative, -4.5%, for the midmarket segment. RevPAR in Russia and CIS for the first class segment grew by 11.1% in the first half of the year and by 7.5% for the full-year.
The Middle East and Africa
Described as the fastest growing tourist area in the world, the Middle East has seen impressive hotel performance since 2004, fuelled by high oil prices and the growing stature of regional powerhouse, Dubai. Africa, long overlooked by tourists and developers also saw steady growth.
Average levels of occupancy and average room rates in the Middle East have largely
been on the increase in most markets since 2004, due to recovery in demand following a decline in the level of political instability in the region. With local economies surging and high accommodation demand, occupancy and RevPAR have risen strongly in the last few years.
Euro denominated RevPAR in the Middle East was negatively affected due to weakening of the US Dollar (circa 5%). Despite the currency effects, RevPAR for the first class segment grew by 13.4%, while the midmarket segment increased by 14.4%. Rand denominated RevPAR in South Africa saw increases of 14.5% and 16.9% in the first class and the mid-market segments, respectively.
Looking Forward
It is hard to swim against the tide. Although strong, experienced hotel operators are the best prepared to weather the storm, virtually no one in the hotel industry has been left unscathed.
The health of the hotel industry depends on the stabilisation of the macro-economic situation. In other words, it will only rebound once people start travelling, banks resume lending, and the overall world economy stabilizes. It is the hope of every hotelier that twilight will soon pass and the dawn of a new and more prosperous day will soon break.