• Marriott forecasts frighten


Marriott frightened stock market investors last week by giving much worse than expected forecasts for the rest of the year and dropping any formal forecasts for 2009 entirely.

The numbers the company did share were for "at least" a 3% decline in North American revpar and flat for international hotels.

The revpar decline is expected to feed through to a drop of between 4% and 5% on total fee revenues to just under $1.4bn.

But Marriott said that as international incentive fees could account for about 70% of the total, further falls a limited because about half of these international hotels do not have to meet owners' priority hurdles before the incentive fees are earned.

Timeshare is being hit harder than the hotels business within Marriott, defying previous claims by some in the industry that timeshare is more resilient in downturns.

During the conference call with analysts to discuss the third quarter figures, there was some discussion about whether Marriott should spin-off its timeshare operations.

CFO Arne Sorenson said: "We're obviously disappointed in the way this economic market has walloped our timeshare business."

He said it was partly about financing and also about weaker consumer demand. "We remain confident today that when the economy turns, we will produce great returns from this business. If there ever comes a time when we don't have that confidence, we'll have to address that."

During the quarter, Marriott opened 6,500 hotel rooms and it said the development pipeline remains at 130,000 rooms despite the difficult financing environment. Sorenson said more than half the pipeline was under construction and another 10% or so has construction financing in place meaning that nearly two-thirds of the pipeline will open "almost no matter how weak the economy".

Marriott was confident of hitting 30,000 room openings in 2008 and 35,000 in 2009 although it was now starting to see some slowdown in the pace of new development. Sorenson gave as an example that Marriott's franchising activity had slowed in North America in the past few months.

He forecast that a portion of the existing projects will get cancelled or delayed and he doubted the company's pipeline would remain at its current level for long.

The 3% decline in North American revpar was for internal planning purposes, said Sorenson, and he added "of course, revpar declines could be more severe" and he warned they were unlikely to be better. Margins in North American hotels were expected to decline at the property level by 250 to 300 basis points.

There was considerably more uncertainty than normal given the current global economic and financial climate, he added, which is why the company was not prepared to provide a forecast as such for 2009.

Outside of the US, Sorenson said he was even less certain of the future given the typically lower mix of group business. But if revpar comes in flat, then margins at property level would be down between 125 and 175 basis points.

During the third quarter to September 5, worldwide revpar rose 3.4% (up 1.1% in constant dollars). Internationally the rise was 13.4% (5.7% constant). In North America, revpar was down 1.0% despite a 1.6% increase in rate.

Reported income from operations was down to $94m compared to $122m in the same period a year ago.


HA Perspective: The forecast numbers from Marriott, where they felt able to produce them, were gloomy and the company is taking the threat of a downturn seriously.

From anecdotal news coming from Marriott, there has been a severe tightening on costs corporately and the headcount has been cut.

But Sorenson made some telling points in the conference call as to why the hotel industry is in better shape than in the last downturn in 2001.

Firstly, the industry is now more oligopolistic, particularly in North America, and these bigger players have less of a temperament to chase occupancy by slashing rates.

Secondly, the relationship with the internet channels is more balanced. The third-party intermediaries will be less able to take on bundles of rooms and sell them off at cut price rates thus destroying pricing integrity.

Having said that, Sorenson admitted that the industry still has thousands of players who are involved in pricing rooms and some will take a short-term focus due to pressure on financing and will chase business by cutting prices.

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