U.S. Timeshare, Hotel Industry Gird for Worst Days Ahead

The rest of 2008 and the coming year 2009 will have industry stakeholders anticipate a tumultuous period in the history of vacation ownership and the entire hospitality industry.

At the 10th Annual Vacation Ownership Investment Conference, experts presented an in-depth outlook on the market performance, giving an unnerving picture (as we already know) of the state of the industry.

Expect demand to go flat, supply to go up and occupancy go down, across the board, said Jan Freitag, vice president of Smith Travel Research (STR). “Average daily rate posts the $110 B question. Resorts are going to face tougher headwinds down the road,” he said.

Up until 2007, the industry has seen continuous profitable cycles with total revenues reported at $139.4 billion and income at $28 billion. However, as of August 2008, the market showed negative growth for room demand at -0.3 percent (700 million) and occupancy of -2.6 percent (63.2 percent) all across America’s room supply of 1.1 billion which grew by 2.4 percent year to date.

Average daily rate was reported at $107 growing at 3.8 percent, RevPAR at $68 still growing at 1.0 percent and room revenue of $75 billion which went up by 3.5 percent YTD.

Due to prevailing trends in the market, all U.S. hotels who reported increasing occupancy by 14 percent had a 24 percent average daily rate growth; while those who suffered -17 percent growth in occupancy had kept 45 percent growth in daily rate.

In resort locations, the demand cyclicality is more pronounced with the demand vertex ending negative while the supply endpoint just slightly above zero. They just don’t intersect. Never. Total U.S. demand versus resort demand shows both curves dropping further, with resort demand dropping faster and more steeply than overall U.S. demand rates.

According to Freitag, the demand in three major/ select markets of Phoenix, Orlando and Hawaii has fallen dramatically. STR sees further declines in the business and leisure business for all weekday and weekend travels. Revenue percent change for August 2008 measured at an inflation rate of 3.5 percent showed revenue growth slowing rapidly.

Due to increased fuel prices, these select vacation ownership markets are losing out big time from air traffic. Decrease in airlift in Hawaii has already taken a severe toll in September 2008 with -15 percent to -20 percent demand drop for the islands. Orlando is following in close second with demand dips of -20 percent in the middle of September to -10 percent end of September.

“The remainder of the year looks very choppy. The coast markets both east and west have stabilized given the influence of demand from Europe and Asia. As the global economy weakens, that’s going to jeopardize where the sector is going from there,” said Scott Berman, principal and US leader, Hospitality & Leisure consulting practice, PricewaterhouseCoopers LLP.

All indicators for the three basic market segments: commercial, group and leisure demand, clearly show a downward trend. “Obviously with what’s happening in Wall Street and all cutbacks of the investment banks and other institutions who are big users of hotel rooms, meeting space and catering services, this business has vaporized,” added Berman.

With respect to the group market, cancellations in 2009 are now down at 30 percent. The leisure consumer, dependent on disposable income, cannot adapt positively and has absorbed all the shock waves from a weak economy, said Berman, adding this has been true across all sectors including traditional lodging, vacation ownership and the passenger cruise sector.

Occupancy will dip by -2.3 percent in 2009 after 2008’s -2.7 percent rate change, translating an average of 61.4 percent occupancy in 2008 and 60 percent occupancy in 2009 for all US hotels.

According to Freitag, ADR’s will drop to 3.5 percent in 2009 from 3.8 percent in 2008 but RevPAR’s will slightly go up from 1.0 percent change in 2008 to 1.1 percent in 2009. Definitely, it won’t be smooth-sailing for the hotels and timeshare business in the next 12 to 18 months. Resorts will surely see tougher headwinds.