Demand Fuels Luxury Recovery

Stephanie Ricca is the Editor in Chief for Hotel World Network, a sister site to TravelAgentCentralcom.

After a year of resort backlash, trip cancellations and slashed rates, luxury hoteliers are anxious for a comeback in 2010. They say the drivers are in place, including increased occupancy, tightened operating efficiencies and a relatively small openings pipeline. But the X-factor critical to long-term success is rate, and the question remains, how long will it take for the segment that slashed its rates the most to recover revenue per available room?

Back in November, Smith Travel Research president Mark Lomanno predicted the luxury segment would lead industry recovery. Lomanno said the reason luxury will rebound quicker is because the segment had a barely perceptible demand dip and won’t have to get over that hump like the remaining chain scales.

“In 2009, of all the chain scales, the best performer on demand was luxury,” he said. “Demand was only down 0.6 percent for the whole year. Industry wide, demand was down 5.8 percent.”

Lomanno said demand for luxury was similar to the last downcycle, from 2001 to 2002. “Yet in that downturn, everybody talked about how well luxury held up,” he said. “The difference was in pricing.”

At the end of 2009, the luxury segment posted RevPAR at down 23.6 percent over 2008. Industry-wide RevPAR dropped 16.7 percent in 2009. According to STR, average daily rate for the luxury segment was $242.99, a 16.3 percent drop.

This isn’t news to luxury hoteliers.

Bob Boulogne, COO of Rosewood Hotels and Resorts, said the company posted a companywide RevPAR decline of about 20 percent in 2009. But in January, he said the company gained 3.5 points in demand just during that month. Part of that success he attributes to brand-wide initiatives to increase consumer value, which over the long term should pay off in rates returning to pre-recession levels.

“This year I think we’ll be up in occupancy and down, even over last year, in rate,” he said. “Why? Partially because of the expectations of the consumer. Every article you read is about deals. The reality is that if [deals] are what the customer is looking for, we need to be able to fulfill that.”

But at what cost?

Shane Krige, general manager of The Plaza in New York, said managing the balance between rate and demand is tricky, particularly at a property like The Plaza, which in 2008 finished a major renovation.

“I have to remind myself that you take RevPAR to the bank. You don’t take rate to the bank,” he said. “Rate is a key player; it does create demand in certain segments, and it’s during those periods that people will want to stay at your hotel. But we generally try to keep our rates the same.”

Krige said he can command high rates because of the services offered at the remodeled Plaza and its relative small size. “You’re not able to offer the amenities if you drop your rate significantly,” he said. “Then you are changing your business model.”

At the same time, Krige agreed with Boulogne’s assertion that any rate drop may pay off by drawing new customers that return later. “I look at the RevPAR, but you’ve got to stimulate people to come back and experience your hotel,” he said.

James Simkins, partner and CEO of MTM Luxury Lodging, which manages six luxury properties in the U.S., including the newly opened Bardessono, in Yountville, CA, said he definitely can tell a turnaround is coming—and that occupancy will keep RevPAR on course.

“We had more flexibility in our yield management to move with rates on a daily basis,” he said. “Right through this downturn, we’ve actually improved our market share. This return will be occupancy-led.”

But not for long. Simkins said growing occupancy is only a short-term fix, and after that, it’s all about getting rate back up.

An exact time for rate recovery is elusive, though, but Lomanno said he thinks it should be sooner rather than later.

“The last time, luxury was the first one out, the most aggressive from an ADR perspective,” he said. “That will happen, but I’m not sure if it’ll be in 2010. The luxury bounceback in 2010 will be an occupancy bounceback. In 2011, it will be more balanced, where rate will play a larger role in performance recovery.”

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