Hotels Are Raising Rates as Occupancy Growth Loses Momentum

The global hotel industry is growing, but the latest results from InterContinental Hotels Group (IHG), Marriott and Accor show that rising room rates rather than overall demand are boosting revenues. 

The three groups saw revenues rise in the first half but IHG's growth was slower than rivals Marriott and Accor. IHG rose 4.1%, compared with a 3.4% increase for Marriott and a 2.2% gain for Accor. 

The numbers may not look dramatic, but they add up to huge sums of money when you add up all the hundreds of thousands of rooms owned by these hotel groups. 

IHG takes the lead 

IHG was the best performer in the first half of 2017, with the best growth of the three hotel groups. Last was Accor, followed by Marriott. 

Part of the difference can be accounted for by the fact that the companies are exposed to different markets to varying degrees. 

IHG had a greater number of properties in the US and the Americas, which experienced the most growth this year. Accor, in contrast, had more hotels in Europe and the Middle East, where performance was weakest. 

Growth Driven by Room Rates, Not Occupancy 

The hotel industry as a whole is trending up, but the rate of growth is far less than the rise in room rates. 

Check out the performance of the hotels in the Americas – the strongest region for IHG. Revenue per available room rose 4.8%, with 3.3 percentage points coming from higher rates and 1 percentage point from increased occupancy. 

It suggests that more people are choosing to stay at IHG hotels because of higher prices, not because they have nowhere else to go. 

So, the hotel companies are benefiting from the rate increase as much as they are benefiting from the demand increase. That could change if inflation erodes tourists’ purchasing power, or if tourists believe it is not healthy to spend too much on accommodation. 

China Exhibits a Different Trend 

In the case of China, the picture is quite different. 

In this country the higher rates contribute almost as much as does the higher occupancy. 

The growth for the entire region was 1%, with revenue per available room up 3.1%. At the same time, the number of occupied rooms increased by 1.1%. 

That suggests demand is still rising at a healthy pace in China, one of the few places it is. It therefore has the potential to offset some of the losses elsewhere in the world. 

Second Quarter Poorer Than First 

For the first half of the year as a whole, performance was below expectations. 

Across Europe, Africa and Asia, revenue per available room increased 5.6% in the first quarter but slowed to just 0.6% in the second. 

The decline was mainly attributed to the turmoil in the Middle East in the second quarter, which particularly affected Accor’s results. 

In the Middle East, Africa and Asia-Pacific region, which together make up the bulk of Accor's portfolio, revenue per available room rose just 1.1% in the first half of the year. But for the Middle East, it would have been up 1.9%. 

Regional Disparity Matters. 

“The latest set of numbers highlight the significance of looking at regional disparities when assessing the performance of the hotel industry. Outside the US, the Middle East, Europe and parts of Asia are either underperforming or growing at a much slower rate than in past years. 

In consequence, the aggregate numbers for the world’s hotel industry tend to mask a more complex reality on the ground. 

The big question for the second half of the year will be whether hotel companies will be able to continue raising rates without damaging demand, as the overall trend in the industry appears to be slowing. 

Thus, how many tourists will be willing to spend more on their holidays when they start buying fewer holidays or cheaper alternatives?