End Of An Era For Australia’s Hotel Industry

By Martin Kelly, Editor, Travel Trends

IT’S the beginning of the end of the golden era enjoyed by Australia’s hotel industry over the past two years, a period characterised by high occupancies and aggressive rate rises in key markets.

While Australian demand is still holding up – and many forecasts look good up to next February – momentum is clearly shifting and the industry faces a challenging year characterised by uncertainty, flat rates, and faltering business confidence.

These factors are already beginning to hurt hotels in European and the United States – where the speed of sharp declines in revenue per available room (RevPAR) during September and October have taken the industry by surprise.

But leading Australian hoteliers believe that while demand will inevitably slow, the decline will be both gradual and manageable.

They say the local market is well positioned for a dip thanks to limited new supply and historically high occupancy rates, though it does seem cracks are beginning to emerge.

STR Global figures show RevPAR during September fell in Sydney (-18.3%), Melbourne (-3.8%), Hobart (-6.6%) and Cairns (-12.6%) when compared with the previous year.

Perth (6.5%) and Adelaide (13.7%) performed well while Brisbane was flat (0.4%).

For the year to the end of September, all markets were in positive territory except for Sydney (-0.5%), Cairns (-7.7%) and the Gold Coast (-2.4%).

Once again Perth (14.1%) and Adelaide (5%) were the best performers.

Anecdotal evidence suggests October was more consistent – the poor Sydney result for September seems to be an aberration – with online sellers such as Wotif.com reporting no decline in demand.

“We’re very comfortable with how we travelled during October,” says Wotif.com CEO Robbie Cooke, indicating it was consistent with the September quarter results for the core brand, which were up 12%.

However hoteliers are less certain, with previously bullish forecasts based on recent good times being shelved and business projections continually revised.

Shannon Knapp, Group Revenue Manager at Mirvac Hotels and Resorts, says the next three months were looking good but less certain in an increasingly volatile marketplace.

“As soon we do one forecast the wind shifts and we have to reset the compass,” she says. “The forecast we re-wrote four weeks ago is being re-written again.”

Simon McGrath, Vice President Australia for Accor Asia Pacific, is preparing for occupancy to “taper off” – though he declined to say by how much – and says the first quarter will be tough.

“The first half of next year we’ll have to work very hard for business though good tactical marketing is still getting results,” says McGrath.

He believes room rates “will remain flat” but “I don’t think we are going to see discounting as everyone has learnt from the past.”

Others are not so sure. Ron de Wit, Executive Director at Cushman and Wakefield Hospitality Asia Pacific, believes that if demand drops, rates and RevPAR will follow soon after.

“Our greatest fear for investors and owners based on past evidence is that if demand softens, hoteliers will start buying occupancy,” says de Wit.

“It just takes one big hotelier to start dumping rates and the rest will follow.”

But he doesn’t believe this will be necessary, given that occupancy rates for many key markets are still nudging 80%.

“Even if you get a drop in demand of around six per cent, occupancy rates will still be relatively high leaving hotels at a level of demand where discounting would not be warranted.”

The problem, he says, is that hoteliers will want to keep occupancies at current levels and may be tempted to discount to achieve that.

“The only thing CBD markets have to fear is fear itself,” de Wit says.

Toga Hospitality CEO, Rachel Argaman, a passionate industry advocate, believes occupancies will start easing in early 2009 but, like Simon McGrath, says that smart marketing will yield results.

“The industry as a whole will start seeing a slight softening in occupancy during February,” she says.

“We have been trading to budget but working 20 times harder to achieve it. We’re running line ball and there’s very little wiggle room.

“What I believe with all my heart is that it’s really important for businesses not to put their head in the sand and to take action at times like these.”

She says city hotels – which comprise the bulk of Toga’s portfolio – are to some extent insulated by a lack of supply while the drop in the Australian dollar may encourage more people to travel domestically.

Argaman believes rates will begin to “flatline” however some well-located properties may be able to wrest gains of three per cent to five per cent without hurting occupancy rates.

“Corporate demand at this point is still there in the city centres and the procurement managers we are speaking with still expect reasonable and realistic rate rises.

“I don’t think rates will go backwards,” she says.

She believes the strongest markets will be Sydney, Brisbane, Perth and Adelaide.

– This article originally appeared in The Australian on November 20, 2008

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