• Marriott slashes forecasts

Marriott last week slashed its forecasts for the full-year 2008 to the range down 1% to plus 1%. Previously, at the first quarter results, it had been in the range 3% to 5%.

At the start of June, the company altered its forecasts for the second quarter, downgrading to 2% for North American revpar but not commenting on the full-year. Last week was the first time in the current cycle it has forecast negative revpar.

In the event, second quarter revpar for North America came in at 1.4%. CFO Arne Sorenson commented on the conference call for the results: "If anything since the first week in June, the economic climate in the US has turned more bearish. Housing prices continue to decline, oil has generally continued its rapid upward march and the airlines are raising fares and cutting flights, and to top it off consumer confidence is at a 28-year low."

However, it was not all gloomy, said Sorenson. Outside of North America revpar for company-operated comparable hotels grew over 15% in the second quarter including the impact of foreign exchange or 7.2% excluding the impact.

Sorenson did admit that the financing environment for US hotels was getting tighter and that as a result new full-service hotel development was involving several lenders with modest leverage. Smaller projects, under $15m, and for relationship customers, were still being financed.

This tough financing environment had spread to Europe and Latin America but as yet Asia and the Middle East were unaffected.

Despite the sluggish revpar, house profit dollars per available room were up almost 1% in North America. This is thanks to cost saving plans that have been implemented ranging from modifying menus and restaurant hours to mandatory holidays and hiring freezes.

Internationally, the performance was generally better than North America although the UK continues to suffer from similar economic conditions to the US and revpar growth was in the low single digits. In the UK, hotels are being deflagged and £240m is being spent at the remaining hotels.

Other regions have much stronger performance. The Middle East, for example, showed revpar up 22%. And all but five hotels in central and south eastern Asia reported double-digit revpar growth.

A key driver for Marriott's profits given sluggish revpar is system growth. At the end of the second quarter ended June 13, the pipeline stood at more than 130,000 rooms with 60,000 under construction. During the quarter, 9,400 rooms were opened taking the system to 545,000.

The company said it was confident in adding 30,000 rooms in the current year and 30,000 to 35,000 rooms in 2009. Total fee revenues for the full-year is expected to be in the range $1.45bn to $1.475bn. This is a decline of $40m to $45m on the guidance given in the first quarter.

Despite the difficult economic environment, Sorenson said that is was not a given that in the US pricing would be down for corporate rates. He did expect, however, that there would be a "wait and see" attitude among corporate clients in terms of rates and that negotiations during the autumn would take a while to finalise.

In terms of airline capacity cuts, Sorenson said that for major cities in the US there would probably not be that much of any impact on Marriott hotels as travellers will still be able to fly. However, on longer haul trips such as Hawaii, capacity cuts and higher fares would have an impact.

Looking into prospects for 2009, Sorenson said during the question and answer session of the conference call that there were plenty of reasons for optimism in 2009. "I think we feel like the things that we can control best we feel great about," he said.

"We know with unit growth and with the increasingly global nature of our business that we're going to produce tremendous fee growth going forward. We can't tell you precisely when and how that kicks in but we know with almost total confidence that over the next couple of years we're going to have really accelerating fee growth and that's going to be great for our business."

Meanwhile, Host, the owner of about 70 upscale Marriott properties in the US, reported higher second quarter profits this week as room rates were pushed up despite falling occupancy.

The company also reduced its revpar outlook for the third quarter to the same range as Marriott, a decline of 1% to growth of 1%. And operating profit margins were cut to between a 300 basis point drop to a 230 bp drop.

Host owns 118 properties in the US and 11 through a joint venture in Europe.


HA Perspective: There are good reasons to be sceptical about Marriott's optimism, particularly in how the economy might turn for the better in 2009. Moreover, the faith it is putting in international markets requires that the contagion does not spread – but it clearly is already impacting Europe and the high inflation in many emerging markets means some form of economic slowdown has to happen.

Where the confidence seems more surefooted, however, is with unit growth delivering fee growth. And clearly Marriott is much less exposed to revpar stagnation than owners of hotels.

But with unit growth, the medium term outlook requires the current turmoil among banks to end. While Marriott has 60,000 rooms in the ground, if debt financing continues to tighten around the globe then beyond 2010 this number is certain to fall markedly. And if the global economy is still slowing, then revpar will also provide no sanctuary.

Longer term, Marriott's perspective is absolutely correct. It is looking to generate more than half of its fee income outside of the US (currently international hotels contribute 35% to 40% of incentive fees).

While the company is going to hurt in the current cyclical downturn, perhaps much more than it is willing to admit at this point, it stands to benefit enormously from the structural growth in global demand for hotels.

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