So Far, So Good by: Karen Johnson
With the national unemployment rate falling to 8.3 percent in January, hoteliers have reason for cautious optimism. The year-to-date trends suggest that last year’s 8.2 percent RevPAR change may well continue. Even with an aberrant first week, the average RevPAR performance for the first five weeks of 2012 was 7.6 percent – within striking distance of last year’s average.
The Oil Threat Slumbers
Jack Corgel of PKF Hospitality Research has theorized that a rapid run-up in oil prices could slow RevPAR growth to inflationary levels. Recent geopolitical events suggest we may dodge that bullet this year. On January 23, 2012 the European Unions voted to embargo oil from Iran to member nations. Perhaps because this will not take effect until July 2012, the US Department of Energy forecasted on February 7 that the average price per barrel for crude would increase by only $0.15 to $100.40, well within Corgel’s baseline scenario. That being said, oil futures jumped 1.0 percent on February 14 when a rumor circulated that Iran had cut off six European nations prematurely. A rapid run up on oil prices is a bigger threat than the Euro’s dissolution. Assuming no problems in oil supplies, Summer gasoline prices are forecast to peak in May and August at $3.65 per gallon, pricing that the US consumer has seen before.
The Euro Muddles Along
Fears of a European double dip triggering a double dip on our side of the pond seems to be ebbing. In January, the IMF downgraded estimates for the world economies, but still forecast a 1.8 percent growth for the US. It forecast a mild recession for the Euro zone, with a 0.5 percent decrease in GDP. However, this pain is not spread evenly, with our major tourism markets still showing positive growth. The UK, Germany, and France (the top three source markets among the 17 member countries) are all forecast to achieve positive growth. Meanwhile, Mexico, which sends as many visitors as the three European countries combined, is expected to show robust growth. While Europe’s preferred destinations of New York, Miami and Orlando may see a fall off this year due to Euro woes, the rest of the country is less likely to be affected.
Costa Concordia Fallout
While no one wants to profit from a tragedy in which 32 lives were lost, spring season resort destinations may get a lift from travelers making alternate vacation plans. Images of the partially submerged ship that were broadcast worldwide caused a downturn of 20 percent in cruise ship bookings for rival Royal Caribbean in the first two weeks after the disaster. The rate of decline has abated to something in the low teens, but in the most affected periods (spring and summer), vacationers may be locking in to resort vacations. Smart resort operators will practice rate discipline early. With 225,000 cabins available globally, even a 5.0 percent “relocation” has the same effect of taking 11,250 rooms out of order.
More Labor Cost Pressure on the Horizon
The biggest threat to hotel profits in 2012 does not appear to be a top line problem, but a bottom line issue. Though the Senate was not technically in recess between Christmas and New Year’s , President Obama declared it in recess and seized the opportunity to name two pro-union individuals to the National Labor Relations Board. While it is being challenged on procedural grounds by Senate Republicans, the appointments of Richard Cordray and Richard Griffin are an attempt at an end-run around the stalemate on card check legislation. Labor is the most significant expense in hotel operations, averaging 44.0 percent of all expenses since the 1960’s. Increasing the ratio of employees governed by more rigid job classifications, work rules could have a profound effect on hotel bottom lines in the non-unionized markets, but this is not likely to hit profit and losses until 2013.
Drive Rate, Drive Rate, Drive Rate
Having caught a few key breaks in 2012, and to fortify itself against the increased costs of unionization, the US hotel industry should practice more rate discipline. Having finished 2011 at 60.1 percent, future occupancy gains will become harder to pattern to reach the pre-recessionary 63.1 percent occupancy logged in 2007. New supply is at its lowest levels in decades and the time is right to push rates. It’s not just where the opportunity is, but where the most profit is.
Karen Johnson MAI, ISHC is Principal of Pinnacle Advisory Group West located in Newport Beach, California. Ms Johnson has been active as a hospitality consultant since 1981. Ms Johnson has prepared valuations and analyses for urban hotels, suburban hotels, resort hotels, casino hotels, conference centers, economy lodging, convention hotels, branded residences, condo-hotels, fractionals and entire resort communities. She has testified or provided expert witness reports throughout the US as well as arbitration proceedings in the UK.
Ms. Johnson is an MAI and a member of the Urban Land Institute, sitting on the Entertainment Council. She was also admitted to the International Society of Hospitality Consultants (ISHC.)