The U.S. hotel industry is likely to report fresh cost cuts this earnings season as sluggish business demand and lower room rates eat into companies’ revenues.
Analysts expect hotels’ key sales metric, revenue per available room (RevPAR), to be sharply lower in the quarter as the continued drop in business travel forces hotels to rely more on price-sensitive consumers, who demand lower rates.
“In any sector, if your revenue is down the only thing you have is cost cuts,” said Chris Woronka, analyst with Deutsche Bank. “I would caution those are getting incrementally tougher as we go through the year.”
RevPAR, a measure of room rates and occupancy, could fall as much as 20 percent this quarter, wrote Barclays Capital analyst Felicia Hendrix in a note this week.
Trimming costs helped hotel operators like Marriott International and Wyndham Worldwide trounce consensus Wall Street estimates last earnings season. Marriott said it closed restaurants and floors at some hotels, while Wyndham cut marketing and sales employees.
Better-than-expected results helped the Dow Jones U.S. Hotels index .DJUSLG leap more than 50 percent in the period ended June 30.
The latest quarter’s cost-cutting could include everything from laying off staff to paring back newspaper delivery, said Susquehanna analyst Robert LaFleur. But with less to cut this time, he and other analysts question how deep the cutbacks can go before wounding hotels’ core product: service.
“At the end of the day, it’s impossible to cut this level of expenses without to some degree affecting guest service levels,” LaFleur said.
Marriott will kick off earnings season on Thursday, while next week bring more detail on the luxury and high-end sector with results from Starwood Hotels & Resorts.
Both companies, as well as Wyndham Worldwide (WYN.N) and Choice Hotels International, are expected to post lower profits for the just-ended quarter.
THE ‘AIG EFFECT’
Business travel typically contributes heavily to second- quarter profits and Corporate America’s hesitance to travel bodes badly for industry earnings over the next few weeks.
Companies’ reluctance to spend on hotels is known in the travel industry as the “AIG effect.” Insurer American International Group’s was widely criticized after flying top brokers and executives to a resort shortly after receiving an $85 billion government bailout last year.
“No amount of discounting or good deals or giveaways or promotions is going to incentivize corporate people to travel,” LaFleur said. “That’s a business decision that they make: whether or not this trip is critical.”
Upscale and luxury hotels, like Starwood’s W or Marriott’s Ritz-Carlton, derive a larger share of their revenue from business travel. Luxury hotels’ RevPAR could fall more than 30 percent in the second quarter, FBR Capital Markets analyst Patrick Scholes wrote in a note on Wednesday.
Investors will be placing a heavy focus on hotel companies’ outlook for the second half of 2009 and early 2010, analysts said. Smith Travel Research, which tracks lodging trends, projects a 17.1 drop in RevPAR for the industry in 2009.
Analysts are mixed about the hotel industry’s prospects. In recent weeks, FBR upgraded the lodging sector while Barclays and R.W. Baird & Co downgraded the industry.
“The companies will acknowledge things are weak right now,” Scholes said. “My view is things are slowly getting less worse.”