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The Impact of an Economic Slump and Tightening of Credit Markets on the Hotel Industry.
By John Koys
Monday, 10th November 2008
 
The impact on the hotel industry of an economic slump exacerbated by a worldwide tightening of credit markets was very much on the minds of panelists during a discussion at International Hotel Conference in Rome, Italy.

Morris Lasky, conference chairman and chief executive officer of Lodging Unlimited Inc., opened the three day gathering at the Hilton Cavalieri by noting he has been in the hotel industry for more than 50 years and has been through at least seven down cycles. The current one may be the most severe.

"We're into something now that none of us have before, essentially a world crisis within the hotel industry," Lasky said. "I can tell you from past experience we will come out, we will turn around."

"What I think this does, it will present huge opportunities for those that are, No. 1, knowledgeable and No. 2, have the financial capability and the staying power to take a deal and make it work," he said.

In an opening session titled "Demand and Supply Trends in Europe" James Chappell, managing director, STR Global, emphasized that the hotel industry is cyclical. He noted that in Europe "absolutely the market is dropping" while business in Asian Pacific, the Middle East, Africa and China is doing much better.

"The news is not good, but the U.S. and European markets are in the correct place for the current cycle,"Chappell said.

He added corporate travel will slow down during the end of 2008 and first part of 2009 and "financial market uncertainty will cause ‘09 to be worse than previously thought, which will probably mean the downturn will last longer and be worse than we thought."

Bruce Ford, senior vice president, director of business development, Lodging Econometrics, said the number of hotel developments in Europe is far below that in the United States.

"Currently in London, Moscow and Barcelona you have seen supply fairly flat in terms of number of new hotel rooms that have opened," he said.

"In 2006 and ‘07 you had very good times in the lodging industry, and we had not had a hotel problem," Ford said. "Currently, the hotel cycle has been cut short by roughly 18 months as a result of the housing problem that turned into an economy problem. It has now turned into a hotel industry problem."

Times for hotel development were good until very recently, Ford said.

"We were increasing, we were still seeing room rates very good. We were still seeing demand very good, but that has recently subsided," Ford said.

With that overview, panel discussion moderator Martin Armitstead, director and head of hospitality EMEA DTZ International, questioned four industry veterans about issues facing the hospitality business in difficult times.

The panelists were Paul Brown, president, Expedia North America and president of Partner Services Group, Expedia Inc.; Andrew Katz, managing director Axios Hospitality Real Estate/The Blackstone Group; Wolfgang Neumann, area president - Europe, Hilton Hotels; and Georg Rafael, managing director, Rafael Group S.A.M.

Armitstead asked the panelists to respond to a series of two-alternative propositions. Asked whether to invest or consolidate, one said both, two said consolidate and one said invest. Asked emerging markets or traditional cities, two said emerging markets, one said traditional cities and one said both. Asked whether it was time to hold room rates steady or go for higher occupancy by lowering rates, all said hold rates.

Seeing what he called "huge fluctuations" in hotel occupancy and rates, Armitstead asked what panelists thought about hotel values.

"I have to refer to my most recent experience with ... express hotels," Rafael said. "If I look at what has happened on the stock market there's no correlation whatsoever to the value of our properties. We own our hotels. We have trophy assets. We have icons. So these values will remain."

"It's really hard to determine what value is," Katz said. "But I agree with George (Rafael) and I think that good assets in good markets are going to continue to hold their value."

When considering the economy, Brown said one of the elements he looks at is oil prices, which he said have a big impact of the hotel industry.

"Regardless of what oil prices do in the next several years, it has had a profound impact on the airline industry and therefore will have an impact on the hotel sector," Brown said. "We are now seeing an impact on the hotel sector."

Brown said it was "very important" for people in the hotel industry to pay attention to the price of oil since it figures into the total cost of travel that affects the hotel industry.

In the face of a slow economy, Armitstead asked how long the hotel industry can hold out on not cutting room rates to attract more customers.

"I think the hotel industry has learned a lot out of the previous cycles and recessions," Neumann said. It is easy to drop rates, he said, but it "takes years to come back out." He said it is "very important" for hotels to maintain their rates and maintain the "value proposition" to the customer in accordance with the hotel brand.

Neumann added that contrary to a prevailing view, there are funds to be acquired for hotel development projects.

"The conception is that there isn't money out there," he said. "Money's still out there. There's lots of cash. ... Pension funds have to continue to invest. Development projects will take, are taking longer to come on stream. Our pipeline is bigger this year than last year despite the credit crisis that started a year ago."

Armitstead asked what panelists were going to do in the next 12 to 24 months, faced with a worsening financial situation.

"We are going, most probably, through a year or two years of difficult times," Rafael said, "and I think we have to be careful, we have to be very careful. But these are also times for opportunities. There is so much we can do in terms of improving our properties on a small scale or on a bigger scale."

"In a very cyclical industry,"said Brown, "success across the cycle is written more by what we do during the down cycle than what you do during any other point in the cycle. I would say the advice is to maintain a tremendous amount of flexibility in your decision making process and business model, flexibility in your cost structure ... flexibility in your revenue management and pricing structure."

Nuemann said "I think at the moment, we shouldn't panic. ... I think the most important thing is focus on revenue generation. We need to be passionate about driving revenues at every opportunity. We need to drive quality and be close to the customer. I think the good companies will have built up relationships with the customer which the can now reap the benefits of that. We need to bring our team members aboard. We need to look at driving efficiencies to drive productivity."

"Speaking purely as an asset manager and an owner," Katz said, "you need to work with your operators. You need to push them to get out of them what you're paying them to deliver, Make sure you keep good teams in place, not allow a lot of turnover in your managers."

Katz added that the hotel industry has been through down cycles before.

"We'll get through it," he said, adding, "We've got a tough year ahead of us."

John Koys is a free-lance writer living in a Chicago suburb. He has more than 20 years experience writing for newspapers.
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