Despite a drop of 34% in first quarter net profits, Marriott pleased Wall Street last week during its results presentation by not reducing forecasts.
While difficult financial markets have forced the company to adjust the outlook regarding timeshare securitisation, the rest of its guidance was unchanged from that given in February with the full-year 2007 numbers.
The expectation had been that the deteriorating US economy would lead to further cuts in revpar expectations but Marriott has stuck with revpar guidance of 3% to 5% growth in 2008.
The news sent the shares up 3% as market watchers generally welcomed the outlook. Goldman Sachs, however, lowered its rating on Marriott to a hold, stating that although the stock was its preferred pick in the lodging sector it had hoped Marriott would have used its presentation to "reset" estimates and be more conservative.
But Marriott's comparative bullishness is based on a reasonably robust demand from business travel. There is weakness in the leisure segment but it was a "much friendlier" environment when compared to the last cyclical downturn in 2001.
Celeste Mellet Brown, an analyst at Morgan Stanley, wrote in a note that the 2008 consumer led downturn was far less dramatic than the business led downturn of 2001 because 80% of lodging demand is from business travel.
During the first quarter of 2008, revpar at company operated comparable hotels in North America was up 2.3%. The early Easter had a dramatic effect and if the week before Easter was excluded from the numbers, then revpar would have been about 3.3% in North America.
Figures from Smith Travel Research for the first three months of 2008 showed revpar up1.9% compared to 2007. Rate was up 4.7% but occupancy was down 2.7%.
Marriott said its house profit margins in the period were down 0.7 percentage points but the increase in house profit was still 1.0%.
During the conference call, chief financial officer Arne Sorenson said that an increase in revpar of 3.5% was necessary to enable flat margins and therefore for the full effect of the revpar rise to feed through to house profit.
Sorenson said that all of Marriott's North American hotels were now at the first of three levels of contingency planning for cost control. All limited service properties were at the mid-level and 65 full-service hotels were at the tightest level (which includes measures such as not replacing vacant staff positions).
However, some parts of the business remain strong in North America including group bookings. Cancellations were lower than in the first quarter of last year.
Another reason for optimism was the ongoing strength outside of North America. Company-operated, comparable hotels achieved a revpar rise of 18.5% (11.5% in constant dollars).
The UK was described as soft, particularly outside of London, but elsewhere in the world the numbers were robust. South Asia was seeking 30% revpar growth and thanks to strong energy markets Russia was strong as was the former Soviet Republic of Kazakhstan which had revpar up 50%.
The performance of international hotels was not only stronger but they are contributing materially more to Marriott's bottom line. International incentive fees were just 15% in 2000 but they were 43% in the first quarter. Sorenson said he expects the full year figure to be nearer 40%.
So far, the credit crunch was having only a limited impact on Marriott's pipeline. Limited service hotels could still obtain finance as the lot sizes were less than $25m and the owners were usually existing franchisees with good relationships with local banks.
The impact on full-service is expected to be more severe but 75% of this pipeline in fully financed and 60% of it is overseas. The main effects will be felt in a couple of years when the projects still seeking financing were due to come out of the ground.
During the quarter 40 new hotels were added to Marriott's portfolio with 20 exiting the system. The net extra room count was just under 3,000, giving a total system size of nearly 538,000 rooms.
The current pipeline is 130,000 rooms, of which 79,000 is limited service. There are 55,000 rooms in construction.
Marriott's own financial position remains robust with a $2.5bn revolving debt facility which has four years remaining. Sorenson said that he expects there to be opportunities going forward, particular with hotels that have been financed with high leverage. But he added that currently there were no bargains.
A couple of other issues were raised during the question and answer session of the conference call: the consolidation in the airline industry and green building certification.
Consolidating airlines were likely to increase the total cost of travel. This would have most effect on the leisure market, thought Sorenson.
In terms of green buildings, just one Marriott property currently has the US LEED (Leadership in Energy and Environmental Design) certification. Sorenson said this number would increase dramatically but it would still be a long time before most hotels met the standard.
The incremental costs associated with meeting LEED were coming down. Sorenson cited the example of an air conditioning supplier who was now able to meet LEED at a much lower cost.
While tightening environmental regulations would have an impact it would be much less marked than the tough financing situation.