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Iraq war dampens hotel turnaround in 2003 – Research companies estimate how war effects the recovery for branded hotels

Next year looks to be a solid year for the chain-affiliated sector of the hotel industry, as indicated by lodging performance forecasts…

Next year looks to be a solid year for the chain-affiliated sector of the hotel industry, as indicated by lodging performance forecasts produced by Boston-based Torto Wheaton Research (‘TWR’) and the Atlanta-based Hospitality Research Group, the research arm of PKF Consulting (‘HRG’). The forecasts are for chain-affiliated properties and are based on actual performance levels through the second quarter of 2002 as compiled by Smith Travel Research and are developed using HRG/TWR proprietary forecasting models. Despite the frustrations that many are feeling about securities market performance and slow growth of lodging demand, the prospects look quite favorable for chain-affiliated hotels in 2003. The unanticipated consequences of a war in Iraq, however, shifts hotel revenue forecasts noticeably downward, notes Jack Corgel, Ph.D., Managing Director for HRG.



Assuming a war does not occur, the forecasts reveal growth in chain-affiliated demand and supply that are expected to produce increases in both occupancy and average daily rate (ADR) during 2003. While supply growth is anticipated to moderate at 2.3%, demand for hotel rooms is forecast to increase by 6.3%, leaving a sizeable gap in supply and demand conditions. As a result, Revenue per Available Room (RevPAR) growth, a key industry performance measure, is forecast to turn positive in 2003 and increase 6.8% by year-end. Occupancy is expected to increase by 2.4 percentage points and ADR is expected to climb 2.9% in 2003. While 2003 is not projected to be a banner year for the lodging industry, reasonable growth will occur as the US economy recovers.



Economic recovery is still expected in 2003 by many economists. The August 2002 Blue Chip consensus forecasts indicate a 3.5% growth rate for real GDP during 2003 versus 2.6% for 2002.3 and 3.0% for 2002.4. A somewhat less optimistic set of economic growth estimates for the future underlies the HRG/TWR lodging forecasts. Our quarterly lodging forecasts for the nation and metropolitan areas come directly from econometric models, which convert forecasts of economic activity into forecasts of demand, supply, and financial performance, states Petros Sivitanides, Ph.D., Vice President for Research at TWR.



The HRG/TWR forecasting models also reveal that most movements in the general economy are reflected in the demand for chain-affiliated hotel rooms during the same quarter as they occur. As a result, hotels with brands should benefit by the end of 2003 from momentum building in the economy. According to Smith Travel Research monthly reports, chain-affiliated hotels have been impacted the most during this economic downturn. These properties will likely experience the earliest and strongest rebound in percentage terms, Corgel adds.



What if War Occurs?



Economists at HRG and TWR believe that a war with Iraq will have the largest impact on chain-affiliated full-service hotels. Our analysis shows that RevPAR growth in this segment will be significantly reduced in the case of a ‘Short War’ scenario, while it will turn negative in the case of a ‘Long War’ scenario, states Sivitanides. The ‘Short War’ scenario assumes that the war will last for only one quarter while the ‘Long War’ scenario accounts for a protracted engagement with the Iraqi forces that lasts for four quarters.



Economists at HRG and TWR have estimated the effect on the nation’s full-service hotels by applying to the quarterly demand forecast the percent of room nights lost in the first quarter of 1991 due to the Gulf War. This loss of business was independent of the 1990-1991 recession. The attached table presents estimates of RevPAR changes for branded, full-service in the nation through 2004 under the ‘No War’, ‘Short War,’ and ‘Long War’, scenarios. According to Corgel, The effects of this war on the economy, should it occur, hopefully will be moderate because of so much advanced warning.

Theodore Koumelis
Co-Founder & Managing Director - Travel Media Applications | Website

Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.

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