PricewaterhouseCoopers Sees Upward Trend In RevPAR Plus Continuation Of Profitability

NEW YORK? If PricewaterhouseCoopers? forecast of U.S. lodging industry performance for the next several years holds, it will prove a period of slight dips and upticks across fundamentals to 2002. Against a backdrop of slowing real GDP growth and accelerating consumer price inflation (CPI), PwC set the stage for an optimistic outlook prior to its annual trends wrap-up and briefing by predicting RevPAR would trough by spring of this year. Bjorn Hanson, who heads PwC?s hospitality and leisure practice, drove home the point at the formal breakfast meeting held here late in the fourth quarter at The Pierre. ?This is good news,? Hanson said, indicating that after it bottomed out at 3.1% this year, RevPAR would begin trending upward to 3.3% in 2001 and 3.8% by 2002. As a key indicator of industry performance, positive changes in RevPAR may impact publicly traded lodging companies. ?We don?t know if this is enough to cause repricing of equities or changes in interest rates applied to the lodging debt markets, but we think it?s good news. It should help lodging stocks somewhat,? said Hanson. Record levels of profitability are expected to continue, according to PwC, although occupancy is expected to drop from 63.4% in 1999 to 63% this year. Hanson said he believed occupancy in the U.S. lodging industry would bottom out at 62.7% in 2001 and remain flat into 2002. ?We have to remember the industry hit 61% a couple of years ago and lost $5.7 billion,? said Hanson. ?Break even in those days was somewhere around 64%, so actually we?re going to be operating below the break even of a couple of years ago but having these very robust industry profits.? According to PwC, 1998 estimated break-even occupancy for U.S. lodging sat at 50.5% and may hit 50% in the near future. The average daily rate is expected to climb upward? although at a slower rate? from its 1999 level of $81.07 to $83.99 in 2000 where it will trough at 3.6%, then accelerate slightly, gaining strength in 2001 ($87.10; 3.7%) and 2002 ($90.40; 3.8%). ?Room rates continue to surpass inflation but the margin, the difference between CPI and its achieved average growth rates, is the lowest we?ve had since 1996,? noted Hanson. Over the next several years, room supply will be slow but steady, according to PwC. ?We?re showing a continuing slowing of room supply but still at levels very, very substantially above the long-term history,? said Hanson. ?Long-term history of supply growth is about 1.9%, so we?re looking at a nice decrease only down to 2.6% [by 2002].? PwC?s end-of-year U.S. room supply projections show 4.044 million for 2000; 4.159 million for 2001; and 4.267 million for 2002. Estimates for 1999 sat at 3.908 million. Where some of the supply will come from also was forecast by PwC. Utilizing information from number trackers? Smith Travel Research and Lodging Econometrics? PwC noted that among chain segments, market share of existing supply didn?t always mesh with what?s in the construction pipeline. Based on third-quarter 1999 figures, upper upscale represented 18% of existing supply but 24% of pipeline projects. Upscale showed 12% in supply with 24% in the pipeline. The economy segment, with the greatest share of the existing supply (29%), only showed a 21% share of the pipeline, while midscale without F&B, with 16% of supply, showed the greatest pipeline share with 26%. Midscale with F&B, holding 25% of supply share, only showed a 5% share of the pipeline. PwC also predicted the performance among key fundamentals for each segment. Of note, the trough in RevPAR occurs at different times for different segments. For example, the current forecast has upper upscale troughing at 2.4% in 2000; its last trough was in 1991 at -3.2%. Upscale and midscale with F&B both bottomed out in 1999 at 0.5% and 2.5%, respectively. These segments also previously troughed in 1991 at 0.2% and -3.5% respectively. PwC said economy will trough in 2001 at 2.5%, its previous low being -3.9% in 1991. O

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