Lodging Industry Demand Is Reset at a Lower Base - PricewaterhouseCoopers Predicts Permanent Structural Resetting Of Demand That Has Not Occurred Since The Great Depression

Beginning in the Fall of 2001, ongoing security alerts, travel concerns involving safety and convenience, and lower consumer confidence and personal wealth due to stock market declines and volatility have caused lodging demand to trail the long-run trend line by approximately five percent, or 130,000 occupied room nights per night in 2002. PricewaterhouseCoopers believes that the combination of the many factors, some of which will continue well into the future, will result in a permanent structural resetting of demand that has not occurred since the Great Depression.

Although all of the factors are important and the economy is the largest factor, traveler concerns about safety and inconvenience are the primary long-term negative influences on lodging demand. With the escalation of security alerts in the second half of 2002 and the potential of an Iraq War, the average daily loss in occupied room nights due to traveller concerns increased from the first quarter of 2002. Average daily loss in room nights due to traveller concerns was approximately 79,000 in the last three quarters, compared to 52,000 in the first quarter of 2002.

PricewaterhouseCoopers' analysis of occupancies reported by Smith Travel Research against the timeline of security alerts reveals that U.S. hotel occupancies declined an average of 3.5 percent in the week following each of seven federal alerts that occurred between October 2001 and November 2002. With the creation of the Department of Homeland Security and a more systematic procedure for determining and disseminating federal alerts it is likely there will be an even greater effect on lodging occupancy in 2003.

Sources: PricewaterhouseCoopers, Smith Travel Research (daily occupancies).

Lodging demand has been re-set at a lower base from which it will expand in the future. Lodging demand only improved by 0.7 percent in 2002, when real GDP increased by 2.4 percent. The weakness in lodging demand is greater than what would be consistent with observed levels of U.S. economic activity.

The following factors have been particularly depressing for lodging demand:

1. Traveller concerns about the safety and convenience of air travel and a general reluctance to be away from home have deterred leisure travellers from responding more positively to prevalent rate discounting.
2. Federal security alerts have had immediate short-term demand effects. There were seven such alerts between October 2001 and November 2002, and four of those have had a statistically significant negative effect on lodging demand.
3. The negative wealth effect from declines in investments and the volatility of the stock market have affected consumer spending.
4. Uncertainties about an Iraq War have impeded a rebound in consumer and investor confidence and spending.
5. The downturn in corporate profits, investments, and transactions has led to aggressive business travel reductions. The reductions reflect the longest sustained environment for both stricter policies and more rigorous enforcement, which is likely to continue or has become institutionalised.
6. Both international and domestic travel demand have slowed down during the first synchronous global recession in 18 years.

Sources: PricewaterhouseCoopers (forecasts from 2002 Q4 to 2004 Q4; long-run demand trend line), Smith Travel Research (historical demand data).

Given the expected steady acceleration in economic growth from 2.6 percent in the first quarter of 2003 to 3.7 percent in the fourth quarter of 2003, PricewaterhouseCoopers forecasts a 2.5 percent increase in lodging demand in 2003. Room nights sold will not approach its previous peak level of 2,629,000 until the fourth quarter of 2003.

Even at that point, however, the deficit from the long-run trend line will be 4.5 percent even as the economy continues to recover and traveller concerns become an even more significant drag on lodging demand. In 2003, the average daily loss in room nights due to traveller concerns is forecast to be approximately two occupancy points, up from the average 1.5 occupancy-point loss in 2002 due to traveller concerns.

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