While much has been made over the past year about the disastrous effect the worst economic downturn in over 30 years has had on luxury hotel performance, recent data indicate that, from a room-night demand perspective, the worst may indeed be over.
During the past year many factors have contributed to focusing the majority of attention directed at the hotel industry squarely on the luxury segment. These factors ranged from the collapse of travel that was generated by the financial crisis to the attention placed on corporate greed and excess that was crystallized by the now infamous AIG outing to the loss of wealth suffered by the high-end traveler and the perceived new frugality on the part of American consumers.
As if all the problems that conspired together to create a drag on room-night demand for luxury hotels was not enough, it all happened at a time when the industry was experiencing very dramatic supply growth. Taken together, these factors resulted in some of the worst performance results that any lodging segment has seen in quite some time.
Interestingly, the demand falloff reported by luxury hotels so far in 2009 is not all that bad relative to the other chain scale segments. In fact, on the weekends— defined as Friday and Saturday nights—luxury hotel demand is actually better than most of the other segments and is, in fact, only slightly negative so far this year. What has really negatively affected luxury hotels’ performance is their weekday demand, which is mostly comprised of group and transient business travel.
In most cycles, typical measures of demand change, such as year-to-date, rolling three-month or rolling 12-month data, can give you a pretty good indication of recent trends and, more importantly, changes in the cycle. However, with everyone scrutinizing the data to look for signs of improvement we have begun to use 28-day rolling average numbers to look for such trends. One major advantage this type of analysis has over the others is that it stabilizes the weekday/weekend mix, which is not possible when using any type of monthly aggregations.
Using this measure to analyze luxury demand and ADR changes so far in 2009 reveals that, at least from the demand side, that not only had the bottom been reached, but indeed the level of declines has subsided substantially from earlier in the year. In fact, in February 28-day moving average demand declines were consistently in the 10% range as compared to the 4% range in late May. While most of this improvement has occurred on the weekends, it is still an encouraging sign that at least a portion of luxury hotels’ demand base has begun to return to historical levels.
The decline in room rates, however, has not subsided and continues on a downward trajectory. One interesting result of the analysis is that while ADR declines during the weekdays and weekends are about the same, the resulting occupancy performance is substantially different. That implies that rate movement has potentially had some effect on the weekend transient business but virtually no impact during the week. If this is indeed the case then it is time to begin modifying this practice to recognize the realities of today’s marketplace.
Mark Lomanno is the president of Smith Travel Research.