Even
in advance of the horrific events in the US on September 11, 2001, there
were differing opinions on where the accommodation industry in Canada
was headed. PKF’s forecasts and outlook were and remain one of
guarded optimism. In our view, the impacts of the recent terrorist
attacks on the Canadian accommodation sector will be short-term and
almost impossible to forecast. However, they will not be long term.
As a result, the industry must ensure that its approaches to long term
planning and operations are not negatively impacted by the need to react
to the short-term challenges, which it faces.
The
accommodation industry’s fundamentals are sound. Industry profitability
at a property level was at its highest ever in 2000, up 6%, despite
decreased occupancy relative to 1999. And, the industry’s balance
sheets could not be better. Over 90% of the Canadian Accommodation Industry
was acquired or built prior to 1999. The balance sheets of these assets
reflect conservative debt/equity structures and asset values indicative
of industry profit levels at the time of acquisition or development.
As a result, the ability of the industry to weather a short-term decline
in demand and bottom lines is strong.
Our
original 2001 forecast for a 64% annual occupancy nationally (down from
65% in 2000) was on track to the end of August. However, with a measurable
fall off in demand now expected over the last four months of this year
(mostly in September and October), that occupancy forecast will clearly
not be met. Despite the expected erosion of demand, we see no reason
to revise our forecasted average daily rate of $116 for the year up
from the $111 achieved in 2000. Over the short term aggressive pricing
strategies won’t generate demand and would only result in further
erosion of bottom lines. During the overbuilding period of the early
1990’s, the industry reacted by cutting rates, which had no influence
on demand and only managed to extend the recovery period for the industry.
While we do expect
some short-term impacts on the accommodation sector, we believe our
original forecasts of a 64% occupancy and a $120 average daily rate
nationally in 2002 can still be achieved. In maintaining this outlook,
a key factor will be the ability to maintain economic growth, which
appears to be the case. In an effort to measure the impact of the events
of September 11th on the Canadian and US economies, the Conference
Board of Canada released a revised Economic Outlook for the balance
of 2001 and for 2002. The Conference Board has concluded: ”Although
the economic fallout from the terrorist attack will be significant,
it will not be sufficient to drive either the US or Canadian economies
into a full-blown recession.”
From an overall
economic perspective, the revised forecasts indicate a -0.2% negative
growth in GDP for the 3rd quarter down from +0.8% originally forecast.
Fourth quarter growth is forecast at 1.4% positive growth down from
+1.9% originally forecast. The Conference Board has marginally softened
their Q1 and Q2 2002 growth rates, but are holding Q3 forecast and in
fact are increasing their Q4 forecasts. Overall GDP growth for 2002
is still in the 3.4% range.
The
Conference Board’s Outlook goes on to say that air transportation
and tourism will be among the sectors most adversely impacted. Tour
group and convention cancellations as well as declines in business travel
to many Canadian markets confirm the immediate fall out. A general
desire to stay at home, concerns over safety as well as increased travel
time required for clearing security at airports and border crossings
have all contributed to this current decline in travel which is being
widely felt by the Canadian accommodation sector.
As a result of a measurable fall off in the last four months of this
year, mostly in September and October, our original forecasted national
occupancy of 64% will not be met. Some minor erosion of demand will
occur in the first quarter of 2002, with ski resorts and other winter
destinations more adversely impacted than urban markets. There will
be continued demand growth in the 1.5% to 2.0% range for the balance
of the year (2002) as previously projected by PKF and the Canadian Travel
Research Institute, with supply growth in the 1.5% range. Our forecasted
national occupancy of 64% for 2002 will still be met.
While
our Outlook suggests no long-term erosion of demand levels, it is clear
that the nature and approach to travel will be influenced. As identified,
concerns over safety and increased travel time required for clearing
security at airports as well as border crossings are two key factors
which will have to be, and can be addressed, therefore minimizing longer
term impacts. While there is the potential for some erosion of international
air travel and to a lesser extent domestic air travel impacting some
destinations, this may be offset from increased auto travel to others.
The key influences on the Canadian Accommodation Sector are as follows:
- There will be changing demand factors;
- There is supply growth;
- There are markets and individual assets which have, or which will,
experience negative impacts;
- The industry does face some challenges.
Whether demand continues
to grow at the levels we are forecasting, or slows, or even
declines, the Canadian Accommodation industry will remain solid from
an ownership and investment perspective. Regardless of the outlook, there will
still be a need to watch the cost side of operations and a need
for continued capital re-investment. More importantly, there
will be a need by owners, operators and lenders to brace themselves
for the erosion of bottom lines over the balance of this year,
but to resist the desire to react in ways, which might negatively
impact the long-term sustainability of the business. As noted,
despite some immediate impacts in 2001, the prospects for the
Canadian Accommodation industry in 2002 remain positive with
continued demand growth and bottom line improvements.
In
next month’s issue (September), we will report on the results of
our survey with Trends participants regarding the Impacts of the US
Terrorist Attack on Canada’s Accommodation Industry.
