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US hotels vulnerable to sharp declines in airline capacity

July 14, 2008 | Hospitality Industry

Hotels in the US could face a decline in lodging demand greater than that experienced during the turmoil following the terrorist attacks on September 11, 2001, according to the latest analytical data from PKF Hospitality Research.

Under a worst-case scenario, a 1% decline in the number of seats flown within the US will result in a 0.39% decline in the demand at the nation’s hotels.

Using historical data from Smith Travel Research, Moody’s Economy.com, and the Department of Transportation, and controlling for the effects of changes in income and employment, PKF-HR found what many intuitively believe: a highly significant relationship exists between available seats and hotel room night demand.

“Many industry participants have been speculating about the spillover effect a deteriorating airline industry will have on hotels,” said Mark Woodworth, President, PKF Hospitality Research.

“Our research measured the historical relationship between these two components of the travel industry. This allowed us to project just how much business hotels stand to lose given the cutbacks in capacity announced by the major airlines,” he said.

“If airline capacity is reduced by 10% as some have suggested, then lodging demand would fall off 3.9%. To put this in perspective, the decline in lodging demand experienced in 2001 was just 3.3%,” said Woodworth.

Given PKF-HR’s second quarter Hotel Horizons forecast for 2008, a 3.9% reduction in lodging demand for the year would translate into approximately 40 million fewer room nights occupied, or $4.3 billion in revenue, on an annual basis. “With losses like this, hotel operators would be forced to make drastic cutbacks in staffing and other operating costs,” Woodworth said.

Several factors, however, suggest that the decline might not be quite so bad. “As one would expect, the airlines are eliminating those flights that are in least demand and lowest in fuel efficiency. Some portion of the demand that would have booked a flight that is no longer available will simply adjust the timing of their travel plans. Trips will still be made,” he said.

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