2009 IN REVIEW To state the obvious, 2009 was an unprecedented year in the hotel industry throughout the world. The recession had significant and long-term implications for the industry and the strategies required to recover from it. Many have criticized the industry for taking drastic action to survive the environment of 2009. Industry experts and consultants revisited the environment of 2001 and strongly recommended to the industry not to slash rates arbitrarily. The lesson from 2001 was rates take a long time to recover. However, this may not have seemed possible in many specific circumstances. In an effort to combat the difficult environment of 2009, the industry did use rates as a tool to attempt to drive demand. Arguably 2009 was not 2001, and rates may have been a very worthy tool to exercise in an effort to drive demand. Many hoteliers find themselves in the position, once again, of finding the best and most effective strategies to increase rates back to a “normalized” level. The questions on many revenue managers’ minds today are, “What are my best strategies in this stabilizing or recovering economy? And how do I maximize my RevPar in this current environment?” The key to maximizing rates is fourfold: 1) understanding and staying aware of the macroeconomic trends; 2) understanding the behavior of the customer; 3) understanding the behavior of the competitive forces, and; 4) consistently and regularly revisiting and testing to find the best rates and distribution strategies. In this new environment where the future is unclear, the best strategies are defined by staying aware of any changes in the environment. It is not an environment where yesterday’s strategies can simply be recycled. New strategies must be constantly invented and tested. Pegasus recommends that revenue managers 1) revisit their dashboards and potentially improve upon them to ensure they stay one step ahead of any changes in trends in 2010 and 2) increase the frequency of dashboard reviews and “market testing” tactics they use to determine changes in pricing trends. Dashboards may be improved by adding major macroeconomic indicators that are also leading indicators for the hotel industry. Hotel industry growth typically lags an economic recovery. Therefore, leading indicators such as regional GDP, unemployment and personal spending levels may give properties an edge on anticipating a rebound or stabilizing economic cycle. For example, as the graphs below show, GDP and Personal Income Consumption for Services in the United States turned positive starting in the third quarter of 2009. Early reports indicate that this positive growth continued through the fourth quarter. Although this macroeconomic information is factored into major industry prognosticators’ views and estimates for growth, it may be helpful to understand them more specifically and to track them independent of relying on other industry forecasts, because revisions to forecasts usually stem from major discrepancies in macroeconomic expectations. Revenue managers may be able to better 1
anticipate macro trends that will change industry projections far in advance of the industry experts telling them the forecasts were inaccurate. 2009 is a very good example of this issue. Most industry experts markedly revised their RevPar projections mid-year in 2009. However, tracking the macroeconomic factors would have enabled revenue managers to see these trends emerging as early as Q1 2009.
Macroeconomic data such as this is available in the U.S. through the Bureau of Economic Analysis. Similar governmental organizations in most countries track the same data. Pegasus also recommends that in setting targets for 2010 rates that revenue managers do not consider 2007 the “normalized� rate for this economy. 2007 was a peak year in the hotel industry with significantly different macroeconomic forces at work, one of the most important being unemployment levels. Targets are tough to set in unprecedented and unique economic circumstances. The approach should be a triangulation of how the industry emerges from recessions and whether a property was able to maintain rates through 2009 (e.g., its base level). 2
Certainly, 2010 will be a challenging environment in which to maximize revenues. The best performance will be achieved by taking a nimble approach – constantly measuring the critical market factors and adjusting tactics in both pricing and distribution channels to capture the greatest amount of revenue. YEAR OVER YEAR 2009 started as 2008 had finished, with booking volumes and ADR down and under continuous pressure, resulting in lower net revenue. This trend continued, in general, through the first half of the year. ADR in particular was a concern through all of 2009, with ADS in particular being vulnerable and depressed relative to 2008 and 2007.
On a more positive note, ADS bookings have grown year over year, no doubt as a direct result of the aggressive discounting through this channel. Lead times to booking have also fallen, making it more difficult to predict specific trends, but as usual new trends are starting to develop.
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In addition to the loss in revenue resulting from reduced ADR for ADS, there is a corresponding increase in cost as can be seen in the look-to-book (L2B) numbers. The graph below is baselined against October 2008. It shows a dramatic increase in the L2B ratio during this period of growth in ADS bookings, coupled with a decline in ADS ADR. Despite some false dawns where the L2B dipped, we finished the year with the L2B being significantly higher with a +54.7% increase above October 2008 levels.
GDS has trended slightly differently than ADS. ADR for GDS is also down YOY, but not as dramatically as the ADS channel. ADR has shown greater resilience and finished the year coming back to parity with 2008 comparative months. However, it still substantially trails 2007 levels.
GDS net bookings were down year over year, unlike ADS. However there was a strong finish to the year with Q4 2009 beating Q4 2008, and maybe more importantly, December 2009 net bookings exceeded December 2007 net bookings by more than 15%. The net result was a lower net revenue change from bookings through the GDS channel than ADS. This highlights the importance to the industry in raised ADR in 2010, in conjunction with greater booking volumes. 4
2009 ENDS ON A POSITIVE NOTE All the indications that Pegasus has analyzed over the past couple of months indicate that the market has bottomed out and bookings are returning to hotels. This was confirmed by strong performance in December in both the GDS and ADS channels. Importantly, 2009 ended with more net bookings made than in December 2008 and December 2007 from both GDS and ADS channels. Net revenue remains depressed though as ADR continues to lag, particularly through the ADS channel. The North American market continues to grow strongly, but other markets appear to be picking up as well. GDS CHANNEL (CORPORATE TRAVEL FOCUS) GDS bookings had another strong month in December with bookings up +6.28% over December 2008 numbers. The increased bookings, in conjunction with ADR running close to parity with December 2008 (down -1.0%), resulted in positive revenue movement for the second month running up +5.34%. The strong showing in bookings also exceeded December 2007, resulting in Q4 2009 exceeding both Q4 2008 and Q4 2007. Overall, 2009 ended with ADR down -11.84% and Net Revenue down -17.22% vs. 2008. This provides a good indication of how severe the drop in corporate travel was earlier in the year, despite the stronger performances in December, with ADR down -1.00% and Net Rev up +5.34% vs. December 2008. The strong performance in December, however, was not enough to bring the levels back.
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NORTH AMERICAN GDS For the fifth consecutive month, North American GDS bookings grew over 2008 figures with December showing a rise of +8.07% compared to December 2008. However, ADR continues to lag, although December 2009 did show it as close to parity with the prior year, down only -0.06%. Despite small drops in length of stay of -1.85% there has been growth in Net Revenue of +5.90%. Overall, the year ended below 2008 levels with bookings down -3.06% and Net Revenue down -17.6% vs. 2008. The North American market has shown the fastest signs of recovery, with month-on-month increases in net bookings starting to appear in June, while the small growth in Net Revenue only started to show in November. It appears the appetite for travel returned earlier than the associated budget allowances for corporate travel, leading to a continued depression in ADR.
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ALL OTHER GDS For the second consecutive month GDS bookings have improved with increased net booking volumes of +4.15% vs. December 2008. Additionally, ADR has started to close in on the prior year with the lowest variance in 2009, only down -1.90%. The figure that has shown the most significant improvement is Net Revenue, which is up +4.87% vs. December 2008. A noteworthy point is that the length of stay has been steadily increasing over the last four months and ended the year up +1.13% above 2008 levels. Comparisons to December 2007 are rather sobering though, despite bookings increasing at +13.9%, ADR reduced -13.18%, and that has resulted in a negative revenue variance of -2.98%.
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ADS CHANNEL (LEISURE TRAVEL FOCUS) The volume of bookings through the ADS channel continues its meteoric rise, showing its seventh consecutive month with an increase on year-over-year numbers. December was up an impressive +17.18% over December 2008, and the year ended up +5.04% vs. 2008. The decrease in ADR continues to slow with December down only -9.05% below December 2008, the smallest fall of the year. However, the year ended with ADR figures down -21.92% below 2008 year end. There is some good news in these numbers to report, due to the volume of bookings. December is the second month which shows an increase in Net Revenue of +5.79%. Overall, 2009 ends with a revenue shortfall of -22.35% vs. year-end 2008. To put this in perspective, the volume of bookings received in December 2009 is up +22.49% over December 2007, however due to the greatly reduced ADR (down -26.79), the overall revenue is down 8
-16.94% below the figure achieved in 2007. The conclusion is that the move to the ADS channel as the preferred route for bookings continues, and looks like it will do so despite small rises in ADR.
One concern regarding rate and technology providers is that the L2B ratio continues to increase at an alarming rate, growing +17.8% over December 2008. As this figure increases, the pressure on the infrastructure providers to return high volumes of rates and availability in a reasonable time also increases. Indications are that this won’t reduce in the short term as consumers are increasingly rate conscious, and are becoming more educated in the use of shopping engines. This in turn, will have an effect on the ADR, most likely suppressing growth as hoteliers react to the very competitive Internet booking environment.
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NORTH AMERICAN ADS In terms of booking volume, the ADS channel had a very strong year in the North American market, with only two months showing bookings below 2008 levels. December continued the upward trend with a growth of +19.9% year over year, giving the year end an increase in bookings of +10.72% over 2008. However, ADR was suppressed with December down -9.96% and year end down -20.48%. Despite the high booking levels, this led to a very modest rise in Net Revenue of +6.45% vs. December 2008 and an overall fall of -17.31% for the year vs. 2008.
ALL OTHER ADS This has shown a similar pattern of improvement as the “All Other GDS� category, with a steady increase in LOS. December 2009 was up +4.57% over December 2008), with a much slower improvement in booking volumes. Following the trend, December was the first month to show a year- over-year positive 10
increase in booking volume of +0.87% vs. December 2008. There have been signs of steady month-overmonth improvements in ADR, leaving the Net Revenue up +3.37% in December 2009 vs. 2008.
FORWARD-LOOKING INDUSTRY TRENDS Forward-looking indicators for GDS bookings show the same patterns of previous months. For any month more than one month out, the volume of reservations are down compared to the same time in previous years. However, due to the much shorter lead time of bookings, this is no indicator to an overall fall in bookings, as it appears that bookings pick up and surpass previous years’ volumes in the 30-days prior. Due to the short lead time, it is difficult to see how ADR and Net Revenue will trend. Indications are that ADR will remain below 2008 levels, but will improve slightly due to the increased booking levels, and there will be some positive gains in net revenue.
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The ADS forward indicators are showing positive bookings growth, over the same period for 2008, for each month in the first two quarters of 2010. Given booking patterns, we expect ADS to continue to grow in 2010, although the pressure on ADR remains unabated as shown in the forward view. Additionally, the expectation is that bookings closer to arrival will come under even more stringent rate pressure.
Overall, for the hospitality industry, all indicators are that the upward trend that we have seen since the middle of 2009 will continue, and that ADS bookings will continue to increase at a significant rate. KEY TAKEAWAYS 2009 bookings finished strongly, in particular for the GDS channel, with Q4 surpassing Q4 2008 and Q4 2007. There are no signs of ADR coming back to 2007 levels anytime soon. Increases in Net Reservations continue to claw back net revenue, despite lagging ADR. Pegasus indicators point to a slow turn in fortune, which we will to continue to monitor.
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We look forward to sharing more about industry trends and developments in the next edition of The Pegasus View.
Mike Kistner President and CEO, Pegasus Solutions
Ric Leutwyler, COO, Pegasus Solutions President, Utell Hotels & Resorts
ABOUT PEGASUS Pegasus Solutions is the world’s leading provider of technology and services to hotels and travel distributors, supplying state-ofthe-art central reservation systems and electronic distribution services, advanced agency commission processing and payment services, and hotel marketing representation services. Founded in 1989, Pegasus created and launched the hotel switch, and today its customers include more than 95,000 properties around the globe as well as a majority of the world’s travel agencies. Additionally, Pegasus’ powerful representation arm incorporates Utell® Hotels & Resorts and Utell Connect, services that have been chosen by nearly 11,000 member hotels in more than 130 countries, making Pegasus the hotel industry’s largest thirdparty marketing, sales and reservations specialist. Pegasus also powers the niche consumer Web site www.hotelbook.com™, dedicated to promoting independent and boutique hotels throughout the world. Headquartered in Dallas, Pegasus has 18 offices in 11 countries, including regional hubs in London, Singapore and Scottsdale, Arizona. For more information, please visit www.pegs.com or www.utell.com.
NOTE: PEGASUS CHANGES TO CONSTANT RATE REPORTING In order to more easily follow the impact of currency changes, Pegasus has decided to change the basis used in calculating aggregated ADR and revenue from an actual historical exchange rate to a single constant exchange rate. The benefit of this is that the percent change will mirror the local, regional and summary movements in each currency. The impact on the numbers reported in prior editions of The Pegasus View is minor over all. For reference, we have included the year-to-date tables, completed through December 2008 and 2009 below. For simplicity, we will not be including or quoting these going forward. All references in this edition, and tables and graphs contained herein, are based on the constant exchange rate.
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GDS CHANNEL – ACTUAL RATES
GDS NORTH AMERICA – ACTUAL RATES
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GDS ALL OTHERS – ACTUAL RATES
ADS CHANNEL – ACTUAL RATES
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ADS NORTH AMERICA – ACTUAL RATES
ADS ALL OTHERS – ACTUAL RATES
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