The UK hotel industry is front-page news - but not for the best of reasons. Daily news on the troubles at Meridien, the attempt to take Macdonald Hotels private, and aggressive shareholder-driven changes at Thistle and Hanover are all are symptoms of the very difficult trading times hoteliers find themselves in. Bill Marriott recently said that he had not faced such challenges in all his 47 years in the industry and that other industry heavy weight - Starwood’s Barry Sternlicht - described the convergence of recent events as the, ‘perfect storm’. The future is certainly far from clear.
It is perhaps little comfort to know that the rest of the world’s hoteliers are suffering along with the UK. In comparison to the Asia Pacific region and the Middle East (affected predominantly by SARS and the Iraq war respectively), European markets have fared better, even though performance is still significantly behind historic levels. Occupancy, particularly in Europe’s gateways, has fallen, as the level of international visitation has declined. With the US, Japanese and German economies still spluttering and the fall-out from corporate scandals and the technology, media and telecommunications (TMT) crash still fresh in everyone’s memory, many European markets have seen their highest-spending market segments seriously eroded.
Following a period of gradual recovery, the outbreak of SARS and then prospect of, and start of conflict in Iraq has seen particularly poor revPAR performances (the product of occupancy and average room rate) across many European markets in April and May 2003.
The UK regional hotel market has historically been less exposed to international influences than London, although cities such as York, Edinburgh and Chester (which are all on the tourist circuit) have been hit by reduced international visitation. UK hotels also enjoy relatively high levels of occupancy compared to many of their European neighbours, driven by historically strong economic growth and a mature weekend leisure market. Even with a significant growth in budget hotel rooms over the past 10 years, demand for full-service hotels has remained strong allowing average room rates to increase ahead of inflation.
As in much of Europe, the downturn in performance began prior to 9/11, and in many markets as early as Spring 2001. In particular, the M4 corridor and Home Counties (such as Hertfordshire and Essex and Berkshire) have continued to suffer from the difficulties in the TMT sector and the decline of corporate and meetings-related demand from this so-called Golden Triangle and within the M4/M3/M25 motorways.
In 2002 these areas were again the worst affected, with year-on-year revPAR declines of 8 to 10%. Gatwick hotels were particularly affected by the decline in flights as BA cancelled or moved flights to Heathrow. By comparison, other provincial areas held up well, and revPAR for regional UK was stable in at 2002.
Several events helped to maintain performance levels in the regions during 2002. These included the Ryder Cup in September (Birmingham revPAR rose by 8%) and the Commonwealth Games in July and August in Manchester (3% growth in average rate). The closure of Wembley and the move of many major sporting events to the Millennium Stadium in Cardiff, led to an 8% revPAR improvement in the city.
The budget sector continues to demonstrate resilience. To ensure direct comparability of year-on-year data, Deloitte & Touche analysed the performance of a consistent sample of hotels. The analysis focuses on moving annual totals (also known as rolling 12’s), a statistical technique that illustrates trends over a set period of time and removes seasonal bias from the equation. Chart B demonstrates the budget sector’s relative immunity from the aftermath of 9/11, the weakened economy and Iraq crisis, with occupancy improving by three points between January 2000 and May 2003. Average rate has moved ahead 2.5% during the same period resulting in a revPAR increase of 5.5%. Luxury hotels have not fared well, with both occupancy and revPAR levels falling to their lowest point for three years.