STR Article - At Last Some Good News - 2nd Quarter Hospitality Industry Review
Room demand, also defined as the number of rooms sold, increased nearly 6 percent in May and June 2000 compared with the same months in 1999. During the second quarter of this year the lodging industry had the highest occupancy since the same months in 1997, and the best RevPAR we have ever reported for that period. While this is good news, it raises the question of whether it was just an anomaly or a sign that the decline in room occupancy is...
Estimating Demand is Key
We decided early in the analysis that estimating the number of rooms sold (demand) was the key to projecting performance over the next six months. The expected additions to the number of available rooms (supply) are fairly well documented and increases in the average room rate have been consistently around 4-5 percent. However, changes in room demand have been inconsistent and vary considerably between the first and second halves of the year as we show in Chart 1. The most interesting feature of the comparison is that the change in demand in both six-month periods has been rising while the rate of increase in supply has dropped, particularly in the second 6 months of the year.
Methodology
There are several techniques for making estimates of possible U.S. Lodging Industry future results. Most rely on the concept that past trends can form the basis for future events. There are two types of trends of industry performance available to us: 1) the standard historical trend and (2) the moving average trend. The standard trend can be broken down into months, quarters or six-month periods, as we have shown in Chart 1. In the moving average trend, each figure is the average of the past twelve months so it is useful mostly in predicting the expected result for a full year. We used regression analysis and seasonal adjustment programs to determine relationships of the results by month, quarter and six-month periods and a forecast program to project the results of our analysis to next year. Following are the highlights of the analysis:
- Room demand in the second quarter of each year has shown a consistent relationship to the other quarters in the past five years. (Please see Chart 2.) The second quarter of this year forms a good basis for projecting demand in the third and fourth quarters. We used regression analysis of the performance since 1993 to estimate the demand for the balance of the year. The result showed a change in demand in excess of the probable increase in supply.
- The standard historical trend for the past five years was used in a forecast program to estimate the supply and demand for the months of July to December 2000. In order to show the trends, those estimates were combined with the monthly figures since December 1998. All were then seasonally adjusted to remove the erratic peaks and valleys caused by fluctuations in the monthly data. The comparison is shown in Chart 3. Once again, although the supply trend is upward, it begins to decline toward the end of this year while the trend in demand continues to increase.
- The standard historical trend for each Chain Scale segment was next used to forecast the monthly performance ratios of Chain-Affiliated and Independent Hotels for the remaining six months of the year 2000. The portions of each change were weighted by the ratio of the guestrooms in the category and applied to the estimated changes in performance ratios of the total industry. The results are shown in Chart 4.
By Mark Lomanno, President, Smith Travel Research