The hotel industry’s recent earnings season has unveiled critical insights, reflecting transformative shifts within the sector.
As the industry evolves, several emerging themes indicate how hotels are navigating intricate challenges, from pricing strategies to labour efficiencies.
Hotels Embrace “Normalized” Labour Patterns
The recent analysis of the hotel sector reveals a focus on the normalization of labour patterns. This shift is helping to stabilise operational costs, which executives view positively. Apple Hospitality, one of the prominent real estate investment trusts, mentioned a significant drop in their reliance on contract workers, indicating a competitive job market that’s driving better employee retention.
Business travellers, who are accustomed to midweek stays, have seen increased bookings. This trend is beneficial as their stays tend to be less service-intensive compared to leisure travellers, resulting in lower operational costs. CEO Justin Knight highlighted the strategic importance of catering to business travellers as leisure travellers become more price-sensitive.
Inflation’s Waning Impact and Lingering Costs
Chatham Lodging Trust reported a partial relief from operational cost inflation, although some expenses continue to rise sharply. The cost of providing complimentary breakfasts has soared, impacting margins significantly. Dennis Craven noted that the increased breakfast costs stem from brand requirements coupled with inflationary pressures.
In addition to breakfast costs, property and healthcare insurance premiums have also been climbing, putting further pressure on margins. The upward trend in these expenses demands strategic management to avoid eroding profitability.
Focusing on Higher Rates Over Occupancy
Hotels are opting to maintain higher room rates rather than focusing solely on occupancy levels. The emphasis is on sustaining pricing power even at the cost of tolerating vacancies.
PPHE Hotel Group, known for its expansive property portfolio, supports this strategy. Vice President Robert Henke underscored the profitability derived from higher rates, which offer nearly 100% flow-through to the bottom line. Meanwhile, while occupancy increases are visible, they still lag behind pre-pandemic levels for many hotels, like those under Hyatt’s brand. Revenue per available room has notably increased, primarily due to rate hikes.
Resurgence in Corporate Travel
Corporate travel is gradually returning to its pre-2019 levels, though it remains about 18% below. Xenia Hotels & Resorts highlights a noticeable increase in bookings from substantial corporations and professional services in cities like San Francisco and Houston.
While the rates for corporate bookings have seen modest increases, the volume is the main factor driving this rebound. The resulting compression allows hotels to set higher rates for non-corporate guests, thus boosting overall revenues.
Tech Industry’s Role in Reviving Hotel Demand
The revival of the tech sector is positively influencing hotel demand, especially in areas with significant tech company presence. Cities like Sunnyvale and Bellevue report substantial increases in revenue per available room, driven by tech giants.
Despite this positive movement, some areas still trail behind 2019 performance metrics. Jeffrey Fisher, CEO of Chatham Lodging Trust, pointed out that places like Bellevue are approaching their past performance benchmarks, with significant contributions from firms like Amazon and Microsoft. In contrast, Sunnyvale still lags, highlighting the uneven recovery across different markets.
The improved demand is largely attributed to rising interest in AI and associated technologies, which have sparked renewed business activities and travel needs in these areas.
Selective Adoption of Major Hotel Brands
There’s a discernible trend of independent hotels contemplating partnerships with major hotel chains to leverage loyalty programs. However, not all are eager to make this shift, as highlighted by DiamondRock Hospitality.
The potential revenue boost from such alliances must be weighed against the associated costs and compliance requirements. Jeffrey Donnelly, CEO of DiamondRock, argues that profit, rather than merely top-line revenue, is the priority. The financial implications of these alliances can be substantial.
Brands often offer incentives like “key money” to attract independent hotels. Yet, these incentives come with strings attached, demanding high returns on investment, a factor that hotel owners must consider carefully.
Live Music as a Catalyst for Travel
The role of live music in driving travel demand is undeniable. Nashville stands as a prime example, thanks to its vibrant music scene and infrastructure development. According to Colin Reed, Ryman Hospitality Properties’ CEO, music tourism could soon bring in $15 billion annually.
Key drivers include social media’s amplification of artists’ reach, significant infrastructure investments, and high-profile events. The potential construction of new venues, like a planned NFL stadium, exemplifies the city’s growth trajectory.
Hotel operators are taking note, recognising the importance of such demand drivers in shaping future strategies. Other potential areas of interest include emerging sports and entertainment activities, which could mirror Nashville’s success.
The latest earnings reports underscore an industry at a crossroads, grappling with inflation and evolving demand dynamics.
As hotels adapt, the strategies they employ today will shape the future landscape of global hospitality.