Hotel Rebound Expected

But room rates are forecast to stay low for at least another year

By: Lisa Jennings

After two years of declining profits and low occupancy rates, the U.S. hotel industry is seeing signs of recovery for the second half of this year.

That’s good news for hotel owners. But there is even better news for consumers and travel agents looking for bargains: Average room rates are likely to remain low for at least another year, analysts say.

War, SARS, and a weakened economy slowed travel in the first half of the year, but Americans are starting to hit the road again, and business travel is expected to resume in the fall, which will help lift the hotel industry out of its current slump, said Robert Mandelbaum, director of research for PKF Consulting in Atlanta.

In major urban markets across the United States, which PKF tracks, Mandelbaum predicts that average occupancy rates will reach 61.7 percent by year end slightly higher than the 61.5 percent at the end of 2002.

Nationally, the average occupancy rate for the first five months of 2003 was 56.7 percent, still below last year’s year-to-date average of 57.8 percent, according to Smith Travel Research.

Still, room rates, which have been on a steady downward spiral, are not expected to increase significantly until 2005, Mandelbaum said.

The average daily room rate in major markets will top only $93.88 by the end of 2003, Mandelbaum predicts, which is even lower than last year’s year-end average of $95.18.

Room rates will remain low because hotel officials are nervous that increased prices will scare off returning travelers in the current shaky market.

Though travel in general is expected to return to pre-war levels next year barring any adverse events Mandelbaum said hotels are more likely to boost profits by trimming services and amenities than by raising rates.

Most cuts will be made in ways consumers probably won’t notice, such as accounting and reservations departments. But travelers may notice some cuts, such as the cutting back of room-service hours.

Looking at state-by-state performance, hotels in Western states fared slightly better, with May showing signs of turnaround for some states.

May occupancy rates increased slightly in Arizona (59.7 percent, up from 59.4 percent), Nevada (70.4 percent, up from 67 percent) and Washington State (62.3 percent, up from 61.2 percent), compared to the same month last year.

The hotel market in San Francisco was among the hardest hit in the West, said Thomas Callahan, executive vice president of PKF Consulting in San Francisco. SARS slowed international travel from Asia, and the economic downturn has crushed business travel, he said.

The average price of a room in San Francisco dipped to $121.74 in May, versus $131 a year ago.

But hotel occupancy rates in San Francisco were up in May, 63 percent compared to 62.8 percent in May last year.

“We’re looking for the market to begin to firm up,” he said.

Hotel occupancy rates were highest in Hawaii, reaching a year-to-date average of 70.9 percent in May, up from 69.1 percent for the same period last year.

Unlike most other states in the country, Hawaii saw an increase in the average room rate.

The year-to-date average in May was $144.53, compared with $141.57 the previous year. And revenues per available room were up 4.7 percent.

That’s largely because travel from the West Coast has remained strong, despite world events, said Murray Towill, president of the Hawaii Hotel & Lodging Association.

And traffic from the Eastern United States has also picked up, which brings travelers who tend to stay longer, he said.

Hotels on Maui and Kauai have done particularly well, but Oahu has lost a huge number of travelers from Japan because of the economic downturn there. Oahu’s occupancy rate in May dipped more than 9 percent to 61.4 percent from 67.6 percent in May 2002, according to Smith Travel.

“Our Japanese arrivals in Waikiki are 70 to 80 percent of what they were a year ago,” said Towill. “But we’re starting to see some recovery, so we’re optimistic.”