Lomanno: Demand is key indicator for upturn
Just beyond the distracting lights of the Las Vegas Strip, Smith Travel Research’s Mark Lomanno told hoteliers to keep their eyes focused on demand. That metric, more so than any other, will serve as a bellwether for the inevitable rebound of the U.S. hotel industry.
For now, things are hovering right along the bottom.
“(Hotel) demand has troughed,” said Lomanno, president of the Hendersonville, Tennessee-based hotel performance research firm. “It’s not getting any worse, but it’s not getting any better.”
Demand, which was down 1.8 percent in 2008, fell 8.0 percent through March 2009, according to data from STR. Supply, on the other hand, grew 2.6 percent in 2008 and was up 3.2 percent through March 2009.
“Supply growth has kind of plateaued and is starting to decline,” Lomanno said, adding that there won’t be nearly as much new supply coming online 12 months to 18 months from now.
“You can make a pretty good case that it’s as bad now as it’s going to get,” he said.
Demand and discounting
While demand is bumping consistently along the bottom, average daily rate has yet to pull up from its nose dive. The measure was down 7.7 percent through March 2009, posting similar declines in weekday and weekend comparisons. When framed within the context of varying occupancy declines throughout the week, those consistent ADR declines suggest widespread use of ineffective discounting, Lomanno said.
Through 25 April year to date, occupancy was down 14.4 percent from Monday through Thursday. During Friday and Saturday, it declined only 8.0 percent. That difference suggests the weekday business segment has been affected more strongly than the weekend leisure segment.
However, hoteliers have been discounting rate consistently for both segments of travelers. Through the same time period, ADR declined similarly during weekdays and weekends, falling 7.8 percent and 7.7 percent, respectively.
Had such discounting truly spurred new demand, the occupancy changes wouldn’t have varied so drastically throughout the week, thus reflecting the consistency of the ADR declines, Lomanno explained. He then showed a similar example using chain-scale data.
Through March 2009, the luxury segment, which has been hit hardest of the six chain-scale segments, posted a 16.3-percent occupancy drop—the largest such decline. However, the luxury segment also posted the largest decrease in ADR at 13.2 percent.
If discounts were to truly generate new demand, Lomanno explained, the largest rate cuts would logically yield the smallest drops in occupancy. But that’s simply not the case.
“Modifying your prices doesn’t generate incremental demand,” he said. “It rarely creates lodging demand where it didn’t exist before.”
Lowering rate, however, lowers consumers’ tolerance for a certain price point.
“Once you train your customer that your product isn’t worth what it was, it takes a long time to get that back,” Lomanno said, adding that it took the U.S. hotel industry six years to recover rates after heavily discounting rate in the wake of the 9/11 terrorist attacks.
And while STR projects ADR to decline by 3.6 percent in 2009, a more telling indicator can be found in demand, according to Lomanno.
“As soon as lodging demand gets flat or slightly positive, the rates will come back,” he said.