VIPs
- Travel isn’t just a gauge of discretionary spending, it’s a leading business cycle indicator
- Early data shows September brought about an end to a near 8.5 year revenue expansion
- Only luxury hotel revenue expanded while economy, midscale and upper midscale all declined
- Travel can be scaled back quickly and those with tighter budgets (and corporate expense accounts) are the first to make that decision, especially on the hotel room choice
- A top in hotel numbers harkened the last cycle end; it’s very likely it will give forewarning of the next
Watersheds, by definition, are rare moments. Such was the case in 1976 with the title track release, “Hotel California,” marking The Eagles’ original fifth album (millennials, please Google “album”) and its apex as a musical phenom. In Don Henley’s words, the tour de force exemplified nothing less than the, “loss of innocence, the cost of naiveté, the perils of fame, of excess (and the) exploration of the dark underbelly of the American dream.”
To this day, hotels are an enclave of anonymity in a world turned altogether too public care of social media. Gauging Americans’ appetite to step out arguably denotes more than it once did, what with the Griswolds taking that family vacation. But hotel traffic nevertheless reflects our collective appetite for sleeping away from home, whether for business or pleasure.
To gauge our inclinations, the hotel industry uses “RevPAR,” or revenue per available room, calculated by multiplying a hotel’s average daily rate (ADR) by its occupancy rate. It can also be tabulated by dividing a hotel’s total room revenue by the total number of available rooms in the period measured.
Smith Travel Research (STR) is the standard for the hotel industry. You could go to the Bureau of Labor Statistics for hotel rate pricing, both from the consumer price index and the producer price index. But these reports fall short on details. STR, to our approval, gives a snapshot of demand (occupancy), pricing (ADR) and total sales (RevPAR).
So when STR made a preannouncement last Friday, our ears perked up. Here are the key excerpts (bolding ours):
- “Early data suggests September end to RevPAR streak for U.S.: The U.S. hotel industry’s long run for revenue per available room growth could end at 102 months.”
- “Early numbers indicate U.S. hotel RevPAR will be flat to down 2% overall, mostly due to tough year-over-year comps with a demand surge created in the wake of hurricanes in 2017.”
- “Largest hits are to upper-midscale and midscale hotels, with both segments preliminarily reporting declines of between 3% and 5% in RevPAR and occupancy. Economy hotels indicate declines of between 1% and 3% in RevPAR, and occupancy down between 2% and 4%, according to the early data. Luxury hotels fared the best in the preliminary results, with a projected RevPAR increase of between 1% and 3%, driven by ADR growth of between 2% and 4%.”
The first bullet raises a red flag regarding the hotel travel cycle. RevPAR hasn’t contracted on a year-over-year basis in eight and a half years, when the economy was emerging from the Great Recession. That’s what you call a trend change, from persistent expansion to contraction – even if it’s just one month’s decline.
You doubters should look at the last cycle. The first decline in RevPAR printed in March 2008.This single month’s decline flagged a peak the very next month in hotel worker hours worked, an approximation of hotel activity. Why hours worked? Without the workers, a hotel is just an empty building; the workers are the output. The persistent declines in RevPAR that followed tracked the down cycle in hours worked. This is not an indicator to be ignored, in our view.
The second bullet downplays the decline in RevPAR and blames it on the venerable base effects of last year’s hurricanes that created temporary demand in 2017 that should not be repeated in 2018. We’ll give STR that point for big cities like Houston and Miami. But that’s not the whole country. We’re skeptical their take here explains the entire deterioration over the last 12 months.
The third bullet reveals a bifurcation in performance. The middle-to-lower tier hotels are underperforming, while the upper tier is outperforming. It’s entirely possible that the ‘lower case’ wealth effect for retail sales we mentioned two Feathers ago gets credit here. Either way, it reveals a vulnerability that starts from the bottom of the income distribution upward.
One can also make a case that the weak spots in the hotel universe translate to a cooling in business travel. Pressure on corporate earnings are coming from the rising costs of labor, interest rates, raw materials and tariffs, just to name a few. Cutting discretionary travel budgets in a higher cost and competitive pricing environment would seem like a rational reaction.
Travel is one of the most discretionary purchases that consumers or businesses undertake. It can be scaled back quickly, especially when too many headwinds are buffeting household or corporate budgets.
But travel isn’t just a gauge of discretionary spending, it’s a leading business cycle indicator. A top in travel activity from the lens of hotel worker hours would call a top in the business cycle. RevPAR gave an early warning last cycle; it will do so again this cycle. Perhaps it’s best to remember, you can check out any time you like, but you can never leave.