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Will Slump in U.S. Tourism, Decelerating RevPar Hurt Hotels?

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Though the hotel industry performed well in 2017 and the first quarter of 2018, there are a number of threats that remain. Unfavorable government policies, uncertainty in certain markets and RevPAR pressure pose challenges for industry players. These issues could potentially offset the group’s positive growth prospects in the near-to-mid-term.

Decline in U.S. Tourism a Major Concern

Travel and tourism has witnessed a decline in the past few years. At the recent annual NYU International Hospitality Industry Investment Conference, Jonathan Tisch, Chairman and CEO of Loews (L - Free Report) and Chairman Emeritus of the U.S. Travel Association, said travel and tourism is an $8 trillion market and represents approximately 10% of global GDP. He further said that that the sector is likely to grow by $3.5 trillion over the next decade.

Despite the growth in the global tourism, the U.S. share of the market has declined roughly 13% over the past few years. International visitors have declined 7.4 million over that time period.

The Trump administration’s restrictive policies on immigration and tourist visas appear to have played a role. The slowdown in U.S.-bound air travel bookings ever since the Trump administration came into office also point in that direction. Also, online searches by prospective travelers to the United States have declined.

Continuous efforts to impose a 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 threaten travel demand to and from the United States.

While the U.S. tourism industry remains very strong, the change at the margin is less robust than could potentially have been without these restrictive policies, which is a net negative for many industry players.

Decelerating RevPar Growth & Rising Costs

Though, per the recent estimates by PricewaterhouseCoopers (PwC), RevPar in 2018 is estimated to increase to 3% from 2.9% in 2017, the rate of growth has declined sharply over the past few years. Most of the hotel companies 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.

With an improvement in the economy and drop in unemployment levels, 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.

Uncertainty in a Few 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 limiting overall sales. In fact, a weak Latin American economy, aggravated by political turmoil resulted in 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 limit revenues of 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 headwinds in the region is not expected in the near term.

Most of the leading hotel companies have considerable presence in the above-mentioned markets and are thus vulnerable to adverse economic conditions in these regions.

Stocks to Avoid

Players in the space that induce our cautious-to-bearish outlook are Red Lion Hotels Corp. (RLH - Free Report) , China Lodging Group, Ltd. (HTHT - Free Report) and Wyndham Destinations, Inc. (WYND - Free Report) . Red Lion Hotels carries a Zacks Rank #4 (Sell), whereas China Lodging Group and Wyndham Destinations have a Zacks Rank #5 (Strong Sell).

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

Wrapping Up

Decline in inbound international travelers is a major concern for the industry. 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 industry.

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.

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