The U.S. hotel industry slowed down in the first half of 2016 compared to 2015 levels. Apart from a decline in occupancy levels in the first half, negative currency translation and pockets of geopolitical instability and economic slowdown raised concerns.
However, business and leisure travel increased on the back of an improving economy and positive employment numbers. Moreover, hoteliers have realized that franchising their brand and services is better than owning real estate to counter economic volatility.
Notwithstanding the macroeconomic hurdles, the lodging sector is expected to grow in the second half of 2016, thanks to strong investor appetite, increasing travel demand and higher transaction volumes.
As per the summer forecast fromSmith Travel Research (STR), a leading information and data provider for the lodging industry,the U.S. hotel industry is expected to experience record-high room demand during the Jun to Aug 2016 phase. STR stated that the number of rooms sold during the summer months is estimated to inch up roughly 2.1% on a year-over-year basis, banking on the current trend in the U.S.
However, a healthy supply pipeline is anticipated to lead to a 1.7% increase in the number of rooms available and is likely to keep occupancy growth subdued at 0.4%. Moreover, hoteliers are not likely to raise prices to match 2015 levels.
Nonetheless, as per STR, the average daily rate (ADR) at U.S. hotels is expected to go up 4% in 2016. Further, mega sporting events like the Olympics in Brazil in August should boost tourism in the second half.
Thus, as hoteliers strive to enhance value and competitiveness, industry-best practices such as sustainability, brand refreshment and increased visibility through technological innovation and social networking – especially among millennials – will remain their priorities.
What’s Hurting the Hoteliers?
Hoteliers have been focusing on renovation and digital and marketing initiatives to boost traffic and capitalize on the growing tourism numbers. However, to do that, steep costs incurred by leading hoteliers are taking a toll on profits. Further, online travel agents like Expedia Inc. (EXPE - Free Report) , TripAdvisor (TRIP - Free Report) and The Priceline Group Inc. (PCLN - Free Report) are limiting the pricing power of these brands.
Statistics further underscore the slowing down in the hotel industry. A recent report by PricewaterhouseCoopers (“PwC”) shows that occupancy levels at U.S. hotels have begun to stabilize after reaching peak levels in 2015. PwC also lowered the 2016 and 2017 revenue per available room (RevPAR) growth outlook for hotels to 4.6% and 3.7%, respectively. Notably, RevPARgrowth in 2015 was 6.2%.
The slowdown in China, lingering uncertainty in various international markets, and increased supply growth are expected to pose headwinds. Moreover, in Europe, economic/political conditions are expected to be challenging post Brexit.
Another major threat comes from home sharing companies like Airbnb, which offer a digital service allowing travelers to book homes at holiday destinations. With lower overhead costs and far less regulations than what hotel companies have to comply with, these firms have made steady inroads into the industry and are grabbing shares from giants like Starwood Hotels & Resorts Worldwide Inc. HOT, Marriott International, Inc. (MAR - Free Report) and Hilton Worldwide Holdings Inc. (HLT - Free Report) .
Nonetheless, Marriott’s deal to acquire Starwood Hotels is being viewed as a move to combat the rising threat from online travel agents and home sharing companies. Other hoteliers like Hyatt Hotels Corporation (H - Free Report) and Wyndham Worldwide Corporation (WYN - Free Report) are also investing in home sharing start-ups to combat Airbnb.
Zacks Industry Rank
Within the Zacks Industry classification, we rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.
As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'
The Zacks Industry Rank for the Hotels & Motels industry currently stands at #207. This puts the industry in the lower third of all industries, corresponding to a negative outlook. Most of the hoteliers have been witnessing declining occupancy numbers in many markets, primarily due to economic and political challenges, which possibly had an adverse impact on the industry rating.
The hotel industry falls under the broader Consumer Discretionary sector.
If we look at the overall results of the sector, earnings grew 8.1% in the March quarter while total revenues rose 6.2% in the quarter.
Meanwhile, for the June quarter, though revenues are expected to rise 3.4%, earnings are projected to decline 1.4%. However, for 2016, both earnings and revenues are expected to rise 4.3% and 5.4%, respectively.
For more details about earnings for this sector and others, please read our ‘Earnings Trends’ report.
How Will the Players Fare This Earnings Season?
A look at the table below shows that four of the five largest hoteliers carry an unfavorable Zacks Rank – which does not speak well for the hotel industry at the moment.
A look at the Earnings ESP does not clearly show that any hotelier is likely to beat expectations when it reports its next quarterly result in July/August.
On the whole, while increasing supply growth is expected to limit occupancy levels, overall demand conditions in the U.S. is expected to remain positive on the back of firming group travel. Average daily rates are likely to continue increasing, albeit at a slower pace than earlier expected because of sluggish growth in the overall economy. Meanwhile, lingering uncertainty in some of the international markets is likely to remain an overhang.
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