Hospitality Gets Clipped

Supply and demand will create a roller-coaster ride of sorts for Georgia’s hospitality industry. Although the percentage of rooms rented will decrease in 2009, room rates are likely to be steady or slightly higher during peak periods. Peak room rates in many areas will remain at record highs, but off-peak rates will be sharply lower.

Lower demand for rooms plus the delivery of new hotel rooms already in the development pipeline will combine to drive down occupancy rates. The industry’s impressive performance over the last several years caused supply growth to accelerate, and it began to outpace demand growth in 2008. Unfortunately, in early 2009 the hospitality industry will be only one-third of the way through its down cycle, which will extend through 2010.

Less utilization of many hotel services will lead to decreases in revenue per available room. Holding down operating expenses will become increasingly important. However, a higher minimum wage, along with other cost pressures, will stymie the industry’s efforts to contain operating costs.

As the economic slowdown morphs into full-fledged recession, spending for high-end lodging will drop. The luxury segment will be slammed by recent decreases in individual wealth as well as the steep downturn in corporate profits. Upscale properties will be hit hard by decreases in the state’s convention activity, and the drop in occupancy on the shoulders of major events will be especially sharp. Fewer family members or friends will accompany attendees to trade shows and conventions, reducing revenues generated from food, beverages and spas.

Although the recession will not spare any major lodging category, the prospects are best for mid-priced properties without food and beverage operations. Corporate travel policies will favor such properties as greater emphasis is placed on cost control. Even people with job security and retirees will be likely to trade down from high-end properties to mid-priced hotels and motels.

Headwinds and downside risks for 2009 include gasoline and jet-fuel prices, which will still be relatively high. Interest rates, utility costs and security costs all will rise; the greatest impact of these cost increases will be on luxury and upscale properties. The third of three ill-timed 70-cent increases in the federal minimum wage will put pressure on margins. The industry should make some headway toward reining in the costs associated with providing complimentary services and amenities to valued guests, however. The recent “bedding” wars also will cease, helping to moderate escalating costs. To some degree process improvements – especially greater emphasis on online booking – will help to offset cost pressures. Nonetheless, the end result is that total expenses will rise even as total revenues decline, and the combination will cause overall profits to drop sharply in 2009.

Factors that drive business travel will be less intense in 2009: Corporate profits will decline; markets for many goods and services will recede; fewer new businesses will form; corporate staffing levels will decrease; many state and local governments will severely prune their travel budgets; and although the imperative to invest more in training will intensify, funding allocated to pay for such efforts will decline substantially.

Atlanta’s hospitality industry is sensitive to changes in corporate profits and sales. Profits will decline in 2009. A broad range of industries will see declining sales, while others experience anemic growth at best. Additional factors that will restrain businesses travel include the increasing use of technology to replace travel, more efficient purchasing of corporate travel products, more mandates for pre-trip approval and online booking, significantly longer amounts of time that it takes to travel by air and airlines’ reduced flight schedules.

Leisure travel will be pummeled by job losses, declining discretionary personal income, high gas prices and high room rates. Demographic shifts in the population’s age composition, growth and the fast-paced growth of the African-American travel market will only partially offset the drag from these adverse cyclical developments.

The prospects for in-bound international travel are still relatively good. The weak dollar and a growing (albeit slowing) global economy will drive the growth of international tourist arrivals. International visitation to Atlanta is no longer growing faster than international visitation to the nation as a whole. We need more direct flights to India and China if we are to substantially improve our performance.