International Hotel Conference Rome tried to find answers
Rome (October 24, 2008). Concerns over the current state of the world`s economies and stock markets in general and the lack of liquidity or availability of debt finance in particular were never far from anyone`s thoughts at the 6th International Hotel Conference in Rome last week. There was also a palpable air of resignation that things are bad, will undoubtedly get worse and that at least the next two years are going to be tough, very tough. A sentiment of "we`ve seen it all before" and we`ll get through it. Nevertheless, mingled in amongst this was a feeling of cautious optimism that opportunities are presenting themselves.
The plenary sessions that topped and tailed this conference covered similar ground with the credit crises taking centre stage. Setting the scene Jamie Chappell, Managing Director of STR Global, the hotel benchmarking suppliers reminded the audience that the current situation is not "new" news. "This recession has been forecast for 18 months and is to be expected in the context of a 7 to 10 year economic cycle," he explained.
Looking at the demand side of the business using STR Global`s data analysis Chappell illustrated that in the hotel industry at least it is not a global problem when it comes to year-to-year revPAR growth. RevPAR growth may be dropping in the US, UK and Europe but the Middle East, Africa and Asia were seeing a much more healthy picture. There are also regional and national differences. Europe is already experiencing negative revPAR growth of 1.5% but within this gloom Germany is a pocket of brightness with 9.4% year-to-year growth in revPAR to August 08.
Andrew Katz, Managing Director of Axios Hospitality Real Estate/The Blackstone Group conferred: "We continue to have a lot of confidence in the German economy coming out (of the recession) sooner that everyone else," he added. However drilling down further into the German market, whilst he was particularly pleased with the 90% occupancy experienced at the Park Plaza Alexanderplatz in Berlin, he expressed concern over the performance of Dresden and Frankfurt in particular. Chappell saw similar differences in Italy with concerted destination marketing allowing Turin to buck the national trend of declining revPAR growth of -7.4%.
Nevertheless, within Europe the pace of demand, i.e. advanced bookings, as measured by Rubicon has fallen a massive 32% year-to-year. Steve Swope, President & CEO of The Rubicon Group predicted that the real challenge will only be realised in the third and fourth quarter of 2009 when group and corporate business signed in 4Q08 comes to fruition.
Supply: Europe in a better shape than US
On the supply side, Bruce Ford, Senior Vice President Director of Business Development at Lodging Econometrics used their pipeline forecast of the future supply of guest rooms to show Europe, with significantly lower construction, in better shape than the US to weather the upcoming recession. Wolfgang Neumann, Area President Europe, Hilton Hotels did point out however that Hilton`s pipeline was "bigger than last year" confirming Ford`s acknowledgement that "development is a lagging indicator of demand in the hotel industry." Again, there were significant regional differences with Spain seriously oversupplied, particularly on the islands, whilst Moscow is expecting its first new rooms for some years.
Whilst expectations of the duration of the recession varied from 6 months to 3 years, the consensus is that 2009 and 2010 will be difficult years. Frank Fiskers, President & CEO of Scandic Hotels, expected them to be "relatively tough" on the back of a record breaking 2007. This in spite of the fact that he also acknowledges that his mid-market product expected to benefit from "buy down" decisions delivering more business. Andy Dolce, Chairman and Managing Director of Dolce International Inc, is budgeting European EBITDA to be flat for 2009 for this MICE oriented group although they are currently 8.5% ahead of 2007.
Georg Rafael, Managing Director, Rafael Group S.A.M., who earlier received the event`s "Hoteliers Global Citizen" Award, advised "in the battle to protect our offer to customers cut backs are inevitable (but) the last thing to cut is service." Paul Brown, President, Expedia North America confirmed this, stating that Expedia`s User Reviews illustrated that "service is the most important aspect". Neumann agreed with the need to be a "lean as possible at the back (of house)" to which Rafael added, with a gentle dig at his bigger rivals, "and at the corporate level". A point recognised by many of the corporates already with cuts in non-essential travel and attempts to simplify their cost structures by reducing the number of preferred suppliers. On the issue of scale, Brown also saw those more flexible and quicker to react being more successful.
Stay in business though it might be more competitive
There was much talk of the need within the industry to avoid kneejerk rate discounting in the face of the difficult times ahead. "Discounting will not release that pent up demand into the market," warned Chappell. Fiskers agreed stating that "we are wiser than we were last time (we had a recession) and business will not be stimulated by rate." If this sounds like something of a rallying call to the industry it`s because it is.
"We need to maintain our value proposition," explained Neumann, "and therefore cannot cut rates as it will take years to get back." Robert Riley, CEO of The Riley Group, took issue with this reminding the audience that "the rate decline we saw in 2000 to 2003 was back by 2006. It will be more competitive but we have to stay in business." There was general acknowledgment that revenue management is becoming more sophisticated and important and this "works in the good and bad times", Riley continued. A drop in rate of 2-3 Euro would give a hotel preferential display in the various distribution channels but would not drop the whole market. Dolce voiced concerns over the large independent sector in Europe that may not have the revenue management skills to avoid rate discounting.
Watch airline consolidation and cost of trips
Where Chappell saw the recent fall in the price of oil (& commodities) as a "bonus", Brown focussed on the inevitable rise in the cost of oil as significant with its profound impact on the airline industry and consequently hotels. The US has seen a 15% fall in airline capacity in recent months and Europe 6%; certain planes once withdrawn from particular routes will probably never be reintroduced. Consolidation in the airline industry will continue and further reduce capacity and increase the cost of travel. Brown advised that revenue managers need to look at the total cost of trip rather than just rate.
Rafael sees "great opportunities to invest in our products" (assuming funds are available) to ensure better positioning when the upturn comes. Riley similarly saw opportunities to "acquire, reposition and refurbish" coming along. It was generally agreed that whilst there is plenty of equity finance still available, the debt finance element is still a huge problem as banks continue to refuse to offer credit.
Nevertheless the next buyers are expected to come from the traditional sources such as private equity funds, with India, Russia and the Gulf being the first target areas. Much more investment is seen coming from China and Japan.
"As asset values fall," explained Fiskers, "former hotel owners will once again be able to compete with the private equity funds and sovereign wealth funds". Such hotel owners would be able to concentrate on the profitability of operations and not assets values. Opportunities for brand penetration into the long under-exploited European independent and family owned hotels were suggested but tempered by the fact that structurally these hotels are often too small for successful branding. Brands were therefore left to look to new build as their preferred solution.
Tactics to overcome the crisis
"No need for panic," was the message from Neumann whilst stressing the need "to focus on revenue generation at every opportunity." Katz, meanwhile, wearing his asset manager`s hat, saw his focus on "working with brands and operators to get them to deliver.....to make sure you are getting value." Brown saw success being driven "more by what you do in the downturn than at other times" whilst Dolce stated that "by paying attention to our target markets and focussing on our customers we will aim to avoid discounting and rather add value". / Guy Dittrich
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