The moderating but positive outlook on lodging demand growth raises hope. Then again, the so-called “Trump Slump” in travel -- the anticipated decline in foreign travelers to the United States due to Trump administration policies regarding immigration -- is a threat to the U.S. economy or the hotel industry.
Additionally, increased supply coupled with macroeconomic concerns in several emerging economies could keep hoteliers’ growth in check. This makes it important to take a closer look at some of the dampeners before investing in the hotel industry.
Below we discuss some of the headwinds that hotel stocks may face in the near and the long term:
Trump’s Policies Hover Over Hoteliers: President Trump’s efforts to impose a travel ban on inbound travelers from some predominantly Muslim countries along with the ban on a broad range of electronic devices in the cabins of U.S.-bound aircraft from certain countries has affected travel demand to and from the United States.
Though the bans have been temporary, his stringent policies on immigration and tourist visas to deter foreigners from entering the United States appear to have made international visitors rethink their vacation in the country, thereby castinga pall on future travel demand. The President has also talked about building a wall along the U.S. southern border to curb Mexican immigrants entering the country illegally.
Notably, since Trump took office, though there have been clear signs and data suggesting that though more people are traveling than ever before,the number of people willing to travel to the United Stateshas reduced dramatically thanks to his plans. In fact, there’s been continued slowdown in U.S.-bound air travel bookings ever since. Also, online searches by prospective travelers to the United States have also been witnessing a sharp decline.
America is thus bucking the trend and not in a good way. Per new insights from the U.S. Travel Association, visitor numbers contracted in four out of the seven months for which data is available this year, materializing fears that Trump’s policies are putting tourists off visiting the United States. Notably, the declines were the steepest in February and March, immediately after the so-called “Muslim ban” came into force.
In fact, as per Tourism Economics’ earlier estimations, the drop-off in tourism is anticipated to result in 4.3 million fewer visitors this year. This adds up to a staggering loss of $7.4 billion in revenues for the United States. Meanwhile, another 6.3 million visitors and the $10.8 billion that they would have spent is likely to be lost in 2018 due to these policies.
Thus, as tourists plan to steer clear of Trump’s America, this is sure to be detrimental to the hotel businesses and the overall Leisure & Hospitality industry.
Lingering Uncertainty in Certain International Markets: Despite immense growth potential, hoteliers are still apprehensive of several macroeconomic issues like the social/political impact of ‘’Brexit’’ and decelerating growth in certain parts of Asia. Though Trump’s stringent policies might make travelers opt for Europe and Asia, instead of the United States, various concerns in these regions raise eyebrows.
Notably, a sluggish economy and oversupply in Brazil are weighing on demand in the Latin American region and has checked overall sales. In fact, a weak Latin American economy, aggravated by political turmoil led to softer tourism numbers in 2015 and 2016. This has continued so far in 2017 and is not expected to change much for the rest of the year. Continued uncertainty in Africa and macroeconomic factors in Venezuela are likely to restrict hoteliers’ revenues.
In Europe, economic/political conditions are expected to be challenging after U.K.’s exit from the 28-member economic bloc. Business in Europe is as it is clouded by economic uncertainties in the Northern region and deflation in the Eurozone.
Terror attacks in key European cities like London, Paris, Zurich and Brussels have also affected tourism. Challenging market dynamics in France is a potent headwind. Additionally, concerns of further terror attacks and violence against foreign tourists are increasingly hurting trade in many African countries such as Kenya and Nigeria.
If these aren’t enough, a cooling economy in China — which might continue to hurt discretionary spending and travel — and concerns over Japan owing to a weaker yen and tax increases are adding to hoteliers’ woes.
Meanwhile, in the Middle East, political unrest, lower government spending, new hotel supply and a tough oil market continue to hurt tourism and RevPAR trends. Any respite from these ills in the region is not expected in the near term.
Most of the leading hoteliers’ have considerable presence in the above-mentioned markets and are thus vulnerable to the economic conditions in these regions as it might limit their business growth.
Fluctuation in Exchange Rates: Most of the major hoteliers like Marriott International, Inc. (MAR - Free Report) , Hyatt Hotels Corp. (H - Free Report) , Hilton Worldwide Holdings Inc. (HLT - Free Report) and Wyndham Worldwide Corp. WYN generate a substantial portion of their revenues from customers outside the country and are therefore highly vulnerable to fluctuations in exchange rates. Thus, continued volatility in exchange rates would continue to hurt their results as it has been doing so over the past few quarters.
Meanwhile, if the U.S. dollar strengthens against various other currencies, negative currency translation is going to be a major concern for these companies. Also, a strong dollar means that travel to the United Statesis becoming more expensive for visitors from other countries and they might look for alternative destinations. This, in turn, will likely thwart travel demand and length of stays. Both these factors would possibly be detrimental to the hotel industry.
Slowing RevPar Trends & Operating Margins Under Pressure: Most of the hoteliers in the United States have been witnessing slowing revenue per available room (RevPAR) trends of late because of continued muted international visitation. Moreover, continued increase in supply of hotels in the domestic market is limiting room rents, thereby hurting RevPAR.
Moreover, the majority of leading hoteliers expect soft demand in the oil producing regions, mainly parts of Texas, Houston, Louisiana, Houston, Oklahoma City and West Virginia, to continue taking a toll on RevPAR.
Operating margins for hoteliers are yet to reach the industry peak of 2007 in the United States given the spike in costs. Hoteliers are looking to differentiate themselves and keep pace with changing consumer tastes through investments in technology, quick customer service and real-time marketing. These are denting margins even further. Additionally, most hoteliers plan to gain competitive advantage and differentiate their brands through renovation. This will, however, come at the cost of near-term margins.
Meanwhile, as the economy improves and unemployment levels drop, hotel managers are expected to continue struggling to control their largest operating expense — labor costs. Rising salaries, wages and benefits, as well as increased staffing levels have been adding to hoteliers’ labor costs.
Moreover, hoteliers are unable to match the rising cost of operations with the increase in room rates. This is lowering their ability to achieve levels of profit growth observed in the last four to five years.
Additionally, online booking sites like Expedia Inc. (EXPE - Free Report) and The Priceline Group’s PCLN Booking.com are limiting the pricing power of these hotels, which contracts their margins. Higher commission rates charged on hotels are also hurting margins. Meanwhile, with lower overhead costs and less strict regulations than hotel companies, home sharing companies like Airbnb, Inc. are competing head-to-head with traditional players in certain segments of the market, and even seizing share from them.
Stocks to Avoid
A couple of players in the space that induce our cautious-to-bearish outlook are Wyndham and Red Lion Hotels Corp. (RLH - Free Report) . Both stocks carry a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Negative sentiments related to traveling to and from the United States areacting as the major spoiler for the U.S. hotel industry. Additionally, various geopolitical and economic woes, oversupply and higher costs are wreaking havoc on the hotel industry. Thus, softness in the lodging industry’s growth is expected to continue in the near term.
A strengthening U.S. dollar may further add to these woes. Nevertheless, it remains to be seen whether improving economic indicators and initiatives undertaken by hoteliers can offset these negatives.
Let's see how these companies fare, brave the challenges and register profits in the coming days. In “U.S. Hotels Bank on Expansion, Unique Offerings for Growth” we focused on the conditions that are expected to drive the industry forward.
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