The TravelClick Perspective - February 2013

Current Outlook
The hotel industry outlook for the top 25 North America markets is showing an increase of 2.1% in committed occupancy for February 2013 - January 2014 based on group commitments and individual reservations on the books as of February 3, 2013 compared to the same time last year. The group segment shows an increase of 1.8% room nights committed. New group business added over the last month (pace) has slowed considerably over the last month, and is down -4.2% over the comparable period last year. Transient room nights booked is slightly up 2.8% compared to the same time last year. Although the demand outlook has softened slightly, average daily rate (ADR) is still showing relatively strong gains, up 3.4% based on reservations currently on the books for 2013.

For the first quarter of 2013 (January - March), overall committed occupancy is up 1.8% year-over-year for the top 25 markets. Committed occupancy for the group segment is down -1.0% and the transient segment demand is up 3.8 % compared to a year ago. ADR for the first quarter shows growth up 3.7% compared to the same time last year. Business segment ADR, which includes weekday transient negotiated and transient retail segments, is up 5.0%. Leisure segment ADR, which now includes transient discount, transient qualified and transient wholesale segments, is up 5.7%.The Laws of Nature (And Economics) At Work

Few laments were as common over the last few years as the depth of the fall in ADR during the downturn and the slow pace of ADR recovery in its aftermath. But the 'market' always goes about its business, though sometimes taking its time. But as surely as prices/ADR will fall when demand/occupancy shrinks, so will they rise as demand growth returns. We can wish that this 'market' would obey our desires, and somehow limit the downside and accelerate the upside, but we could also wish that we could defy gravity and fly like a bird. No, the best we can do is make smart decisions on a daily basis, based on the best, forward looking understanding of this 'market'. As market participants individually do that, the rest takes care of itself.

The good news is that pricing and therefore ADR has been steadily growing over the past two years. The persistent positive growth in demand (and limited supply growth) has supported consistent growth in ADR over that same period. While occupancy growth moderated from its post-downturn highs, it nevertheless has remained positive ever since. On a trailing six month basis, transient occupancy growth over the last 12 months has remained between 1% and 4%. Group occupancy growth been more volatile and lagged transient growth, but it too grew at the same rate as the transient segment over the latter half of last year.

There are three observations I would make regarding the dynamics of pricing/ADR, as observed in the historical data from the past two years.

1. First, transient ADR growth has been very consistent, on a trailing six months basis, remaining between 4% and 5% over the course of the last two years. The volatility of transient ADR has been relatively low. The industry has experienced consistently growing occupancy. This has clearly instilled confidence in hotel operators to continue to push retail rates higher and limit the degree of discounting. This is the natural effect of strengthening demand, and given the short booking window of the transient segment, this market dynamic appears first there.
2. Second, group ADR growth has been more volatile, as has growth in group occupancy. We observe that group ADR performance consistently and significantly lags group ADR performance, by as much as six months or more. On the one hand this makes sense, in that group booking windows are long, and last month's performance is based on group pricing decisions that were made months in advance. However, the strength of group business for the future twelve months is observable in both a hotel's own demand and available market demand. Therefore, it would seem that group ADR performance would not lag occupancy performance as much, since future expectations of strong (or weak) group demand would have been factored into group pricing earlier in the group booking window. It makes one wonder whether the 'psychology' of group pricing behavior is to take recent historical group performance too much into account, relative to future demand expectations, when pricing groups six to twelve months out. This would of course not be a sound pricing practice.
3. Finally, while growth in retail rates/ADR has been the consistent driver of transient ADR growth over the last two years, growth in the 'Discount' segment rates, or lower discounting in that segment, has become an ever stronger contributor. This is especially true over the last half of 2012, where discount segment ADR grew between 6% and 9%, relative to overall transient ADR growth around 4%. This outcome is certainly the result of lower discounting overall, across all channels, but given the relatively large share that online travel agencies have of the discount segment, hotels seem to be better at controlling and limiting some of the deepest discounting that occurs through that channel.

e expect ADR growth will continue to lead the way in 2013, playing the primary role in RevPAR growth. Historical data has shown that the 'market' is indeed operating as expected. Hotel operators using the best information, the best tools, and the best practices will always find a way to capitalize on what the market offers, in good times and bad.

Performance Summary

The chart below shows the year-over-year position by market of committed occupancy, reserved occupancy, ADR, and revenue per available room (RevPAR), based on business on the books for the future 12 months. Committed occupancy is group blocks plus transient reservations. Reserved occupancy, ADR, and RevPAR are based only on reservations (group pickup and transient reservations). Shades of green indicate highest performance of the markets, while shades of orange indicate average performance, and shades of red indicate lowest performance.