Headwinds As We Sail Into a Strong 2018

By Christian Boerger, CRME, Corporate Director of Revenue Strategy, Pacific Hospitality Group — member of HSMAI’s Revenue Management Advisory Board

The 2018 outlook for our industry is strong. According to the Cleveland Research Company’s recent Lodging Industry Update, Q4 2017 finished ahead of expectations for revenue managers, who are increasingly optimistic about the year ahead. 

That assessment tracks with the opinions of HSMAI’s Revenue Management Advisory Board. On our most recent call, more than one board member said they were expecting 2 to 3 percent growth in 2018. “We’re not seeing anything in what we looked at externally or internally that has us overly concerned with that number,” one member said, “or believing that the industry is going to greatly outperform that number.”

Not that it will be completely smooth sailing. During our call, Revenue Management Advisory Board members identified possible “headwinds” that could affect performance throughout the year, including:

1. Commission costs. The full effects of Marriott’s decision to reduce its commission rate for group business are still being debated, but for now, it’s anyone’s guess as to what will happen. That makes commissions a significant potential rough spot. “I think there is a reasonable expectation,” one board member said, “that it could have some short-term pains and short-term implications.”

Another board member added: “If other [hotel] companies follow Marriott, then I think it’s less impactful. It becomes the new norm.” That’s one way of looking at it. Other board members noted that it’s simply a question of when other companies follow Marriott’s lead.

2. Natural disasters. Climate change is leading to increasingly unpredictable, severe weather events, from last fall’s California wildfires, which led to a nearly $20-million drop in hotel revenue in Napa County alone, to the historically destructive 2017 Atlantic hurricane season, which killed up to 1,300 people and caused nearly $300 billion in damage. The Caribbean was particularly hard hit, and the effects on our industry have been pronounced, with business shifting to other traditional resort destinations such as Hawaii, Florida, and the Mexican Riviera — good news for some revenue managers, but bad news for many others. “The Caribbean rebuild is underway, but it’s going to take a while,” a board member said. “That will probably continue for the next 14 to 16 months.”

3. Government uncertainty. From the new U.S. tax plan to the threat of a shutdown, the federal government is creating instability in some revenue-management plans. One board member noted that while on the plus side, “tax cuts are probably good for everybody, leisure or business,” destination like San Diego have been hard hit by this year’s sporadic shutdowns. “When we ran the budget shortfall for the month of January,” the member said, “it was literally 97 percent of the revenue loss could be attributed to the government segment.”

Since our Revenue Management Advisory Board call, Congress has passed a spending bill, meaning shouldn’t be any more shutdowns for at least the next two years. Now the overall question around government uncertainty shifts to areas such as immigration, infrastructure, and trade — especially if any bilateral trade deals are canceled or altered, which could lead to declines in sector-specific demand and negatively affect hotel performance.

4. Rising costs. A robust economy is driving up costs across the board, especially in areas such as wages and health care — on top of the effect of $15 minimum-wage laws being considered or passed in California and other states. For smaller properties in particular, it can be difficult to make up for that with cost-cutting measures that don’t erode service. “How do we still hit our metrics,” one Revenue Management Advisory Board Member asked, “while ensuring that the guest has a positive experience and we’re servicing them the way we should?”

We don’t want to make too much of any of these possible headwinds, or take away from the positive results revenue managers should expect this year. But we definitely need to keep our eyes open — and that’s what HSMAI’s Revenue Advisory Board will continue to do.

Categories: Revenue Management, Forecast
Insight Type: Articles