10 years ago, France posted a drop in its RevPAR across 14 consecutive months. 1991 closed with a 10% drop in the…
10 years ago, France posted a drop in its RevPAR across 14 consecutive months. 1991 closed with a 10% drop in the RevPAR to stabilise itself the following year and post another major drop in 1993 (-11.4%). The French hotel industry only began to recover from the repercussions of the Gulf War and the economic slump starting in 1996. Will these same causes have the same effects in 2003? Is it time to prepare for 5 years of dearth for Europe`s hotel industry?
Three points in common, three reasons not to be optimistic!
- First point in common: Europe`s economy at the end of 2003 will undoubtedly be closer to the 1.0% growth posted by the French economy at the end of 1991 than to the 2.5% forecasted by the French government in its budget law or the 3% forecasted by the European Commission.
- Second point in common: the risk of seeing oil prices skyrocket is high. It will be remembered that in 1991, the price of oil reached its ceiling at $40.
- Third point in common: the hotel industry continues, as in 1991, on the road towards maturity. Of course, a few markets are already well advanced in the cycle (France and the United Kingdom) while others a bit more behind. Overall, across the European Union, the market is in a structuring phase. It may be observed, for example, that the European chain supply is mostly positioned on mid- and upscale segments, which is not favourable to strong resistance for the sector. In 1991, like more recently, 3* and 4* hotels were sometimes hit hard because of a fairly clear deficit of international clientele (in particular Japanese and American). An eventual conflict in Iraq should have the same consequences with a drop in demand on the mid- and upscale segments that would lead to a drop in occupancy rates and RevPARs.
Why the European Hospitality Industry will do better than in 1991
Nonetheless, taking a closer look with respect to 1991, the situation has evolved considerably. The existing differences lead to the belief that the sector will resist well. The best proof of this is the resistance demonstrated by Europe`s hotel industry after the events of September 2001, the most significant crisis since 1991. The French example illustrates this perfectly.
Aligning the changes in occupancy rates and average daily rates in the months that followed 1991 and 2001 shows:
- The two situations present strong similarities. Globally the occupancy rate and the average daily rate return to an uptrend one year after the crisis and than it stabilises after 18 months.
- But there are also major differences. The drop in the occupancy rate is much less pronounced in 2001/2002 than it was during the Gulf War. Furthermore, prices generally remained firm in 2001/2002. They did not collapse like in 1991.
During the Gulf War, hoteliers undersold their rooms, the average room rate decreases by 3,7% in 1991 compared to 1990. In 2001 / 2002, straight from the beginning they opted for relative rate stability and did note give in to the panic. Therefore, the average room rate rose by 3,1% in 2002 compared to 2001. Furthermore, since 1991, budget chain hotels developed significantly. Their excellent resistance to the event in September 2001 allowed groups positioned on these segments to post perfectly solid results. Thus, in case of a major crisis, contrary to what could be observed in 1991, occupancy rates should certainly drop, while average daily rates should change only slightly.
Three possible scenarios in 2003
If there is any conflict, its intensity and duration nonetheless remain to be seen. Three scenarios may be drawn up.
- The first is based on a hypothesis of a blitz war (a few weeks maximum). In this case, the hotel industry could be fairly clearly impacted during the conflict, but this time of the year (the first trimester) is not crucial for hoteliers. If in the three months following the conflict there has been no major terrorist attack, then the second semester 2003 should see strong growth in the occupancy rate and average daily rates. The year could close with fairly significant growth in the RevPAR.
- The second, based on an intermediary hypothesis (a conflict that last a few months and / or a resumption of more or less important attacks), could penalise the hotel industry for a few additional months without necessarily challenging the long-term trend. The year could thus close with performances fairly similar to 2002.
- The final scenario, catastrophe, marked by a sinking of the conflict and a fairly significant renewal of terrorist attacks, could penalise the hotel industry for the whole of 2003, with a recovery that could begin only from 2004.
Today, experts in geopolitics seem to agree that a rapid scenario is the most likely. It is to be hoped that this hypothesis is confirmed so that the confidence of households and corporations alike may head in a positive direction, leaving a recovery for the economy and the hotel industry in their wake.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.