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Travel Restrictions, Rising Costs Challenge U.S. Hotel Space

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The hotel industry continues to be one of the fastest growing industries. Even during the economic recession, it showed little sign of weakness. However, given the recent technological advancements, barriers to entry have decreased leading to an influx of new participants.

In addition, unfavorable governmental policies, uncertainty in certain markets and RevPAR pressures pose challenges for industry players. The sum total of these headwinds will likely weigh on the industry’s growth trend this year.

Below we discuss some of the headwinds that hotel stocks may face in the going forward

Stringent Immigration and Tourism VisaPolicies

On Dec 4, 2017, the U.S. Supreme Court allowed President Donald Trump’s travel ban barring inbound travelers from six Muslim-majority countries to go into full effect even in the face of legal challenges in lower courts.

Continuous efforts to impose travel ban targeting predominantly Muslim nations, along with the ban on a broad range of electronic devices in the cabins of U.S.-bound aircraft from certain countries and talks of expanding the same to other regions threaten travel demand to and from the United States. The administration has also talked about building a wall along the southern border to stop Mexican immigrants from entering the country illegally.

Trump’s stringent policies on immigration and tourist visas appear to have made international visitors rethink their vacation plans in the United States. Notably, there has been a continued slowdown in U.S.-bound air travel bookings ever since Trump took office. Also, online searches by prospective travelers to the United States have also been witnessing a sharp decline.

In fact, per Tourism Economics, an industry research and forecasting firm, the drop in tourism is anticipated to result in 6.3 million lesser visitors in 2018. This adds up to a potential loss of $10.8 billion in revenues for the United States.

Thus, as tourists plan to steer clear of America, the local travel industry is bearing the brunt of his unpopular policies.  With the United States losing some of its appeal as a destination, hotel businesses and the overall industry stare at billions in lost revenues.

Increasing Supply and Lower Visitation Weigh on RevPar

Most of the hotel companies in the United States have been witnessing slowing revenue per available room (RevPAR) trends of late because of muted international visitation. Moreover, an increase in supply of hotels in the domestic market is limiting room rents, thereby hurting RevPAR.

Operating margins for industry players are yet to reach the industry peak of 2007 in the United States, given the spike in costs. The companies are looking to differentiate themselves and keep pace with changing consumer taste through investments in technology, quick customer service and real-time marketing. These are denting margins even further.

Additionally, most of these companies plan to gain competitive advantage and differentiate their brands through renovation. This will come at the cost of near-term margins.

Meanwhile, as the economy improves and unemployment levels drop, the industry players will struggle to control their largest operating expense — labor costs. Rising salaries, wages and benefits, as well as increased staffing levels will add to their labor costs.

Moreover, the companies are unable to increase room rates consistent with the rising cost of operations. This makes it all the more difficult to match up to growth rates achieved in the last four to five years.

Additionally, online booking sites like The Priceline Group’s PCLN, TripAdvisor (TRIP - Free Report) and Expedia Inc. (EXPE - Free Report) are limiting the pricing power of these hotels, thus remaining an overhang on margins. Higher commission rates charged on hotels are also hurting margins. With lower overhead costs and relatively less stringent 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.

Uncertainty in Certain International Markets

In spite of immense growth potential, industry players 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, these regions have their own share of concerns.

Notably, a sluggish economy and oversupply in Brazil are weighing on demand in the Latin American region and checked overall sales. In fact, a weak Latin American economy, aggravated by political turmoil led to softer tourism numbers in 2015, 2016 and 2017. This is not expected to change much in 2018. Continued uncertainty in Africa and macroeconomic factors in Venezuela are likely to limited revenues hotel industry players.

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 clouded by economic uncertainties in the Northern region and deflation in the Eurozone.

Terror assaults 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.

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 hotel companies have considerable presence in the abovementioned markets and are thus vulnerable to adverse economic conditions in these regions.

Stocks to Avoid

A player in the space that induces our cautious-to-bearish outlook is China Lodging Group, Ltd. (HTHT - Free Report) . The company carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To Conclude

Continuous efforts to impose inbound travel ban from certain countries and stringent policies on immigration and tourist visas are clouding the prospects of 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 the woes. Nevertheless, it remains to be seen whether improving economic indicators and initiatives undertaken by the industry players can offset these negatives.

Let us 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 focus on the conditions that are expected to drive the industry forward.

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