Hotel RevPAR Declining

We highlight Marriott International, Inc. (MAR - Analyst Report), Starwood Hotels & Resorts Worldwide, Inc. (HOT - Analyst Report) and Intercontinental Hotels Group PLC (IHG - Snapshot Report).

Cheap Hotel Rooms a Growing Problem

Travelers looking for a cheap hotel room this summer are in luck. And as a result, hotel companies such as Marriott (MAR - Analyst Report), Starwood (HOT - Analyst Report) and Intercontinental Hotels Group (IHG - Snapshot Report) are likely to experience a prolonged downturn, even after economic conditions have stabilized.

According to data released today from Smith Travel Research, Inc., average daily room rate, or ADR, fell 10.0% last week versus the year-ago period. Average occupancy fell 12.6% year-over-year.

Combined, this resulted in a decline in revenue per available room, or RevPAR, of 21.4% year-over-year. RevPAR is a key hotel industry operating metric, and is calculated by multiplying ADR by the average occupancy percentage.

Although the deterioration in RevPAR has remained relatively stable this year, with the metric averaging a decline of 19.5% in 2009, there has been an acceleration in the decline of ADR, as presented in the chart below.



We believe that the accelerating decline in ADR will likely increase both the severity and length of the downturn in the lodging industry, for two primary reasons.

First, changes in ADR have a greater impact on the bottom line than do changes in occupancy. Changes in occupancy are accompanied by changes in expenses, such as housekeeping, laundry and utilities. When a hotel is full, these expenses rise, and when rooms go vacant, these expenses fall. Changes in ADR, however, fall almost entirely to the bottom line, as they have very few associated expenses.

Second, once hotel owners and operators cut ADR, it can be difficult to return those room rates to their pre-cut levels without generating significant resistance from customers. This can keep room rates depressed for a longer period of time, prolonging the downturn.

Although we expect that the year-over-year comparisons will begin to ease later this year, due to weak performance in the latter half of 2008, the overall state of industry fundamentals remains challenging.

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