It is that time of year again. We have turned the corner on winter and by the time one reads this, the first quarter of operations will be in the books. Therefore, it is a good time to review performance against one’s budget. (You did prepare a budget, didn’t you?)
Once again, as in all years, we are receiving mixed messages about year-to-date performance and where we are going for the rest of the year. The Operations and Marketing people are trying to manage Management/Owner expectations and Owners/Developers are trying to manage Consultants’ projections. Everywhere we continue to hear the lament about the negative impacts of the Canadian dollar and declining U.S. travel into Canada. We never realized that there would be such an attraction to live in a country where a weak currency would negatively impact our overall standard of living, and that this would be looked upon favourably by an entire industry.
At this time last year, we had projected RevPAR growth in the order of 4% for the Canadian Lodging Industry, but we also speculated that, with some courage (rate growth) on behalf of the industry, we could see 6% RevPAR growth. In fact, demand grew by 4%, Average Daily Rate increased by 4%, supply expanded by 2% and in the end RevPAR grew by 6%. Bottom line (profitability) grew by 13%. At the end of the day, GDP grew by plus or minus 3%.
The PKF Outlook for 2007 is calling for RevPAR growth in the order of 5% in 2007 and bottom lines to grow by 6%, which should get us back to earnings that we have not seen since 2000. In 2000, the average bottom line for the Industry was $11,100 per available room and was the best performance in the history of the industry in Canada. In 2007, the Canadian economy is projected to grow somewhere in the order of 2.6% to 3.0% depending upon which economist you listen to. Regardless, the projections are for growth.
It is also important to recognize that demand has continued to grow. There has been a lot written (fact and fiction) about the disappearing U.S. tourist. The amount of U.S. travel into Canada has been declining in recent years, but heavily skewed by the decline in “same day.” Overnight travel by “air” is actually up and overnight by “rubber tire” is down in the range of eight to ten percent. Despite all this, overall demand in Canada has continued to grow, fuelled by domestic travel predominately and helped by a strong upswing in overseas visitors. Most of our clients who historically had relied upon U.S. rubber tire overnight travel had experienced the melt down of this business by 2005. Thus as we look forward, the consensus of most of these operators is there may be little downside left in this travel segment.
Barring an unforeseen catastrophe, demand will grow by plus or minus 3% in 2007, supply is expected to grow by 1% and thus occupancy will advance on a National basis to 66% from 65% in 2006. Our projection is for ADR to grow by 3% and thus RevPAR to grow at 5%. However, the industry could perform better than these estimates. One cannot get the higher rates, unless one asks for them!
These Outlooks are supported by Conference Board projections for Business Travel Growth of 2.5%, Domestic Leisure travel growth of 3.0%, overseas travel growth of 4.8% and offset with a decline in U.S. travel of –2.4%. As mentioned earlier, overall GDP is forecast to grow at plus or minus 2.6%. On a simpler basis, in virtually every community that we are working in across Canada, the industrial parks are filling up, are full and/or new parks are being serviced and opened. In short, our economy continues to grow, demand for accommodation continues to grow, supply of new accommodation continues to grow, but at a slower pace than demand, thereby giving us a great opportunity to grow average rates at above inflation levels.
On the issue of average rates, the customer does not set pricing, the operator is supposed to do that. In this regard, the customer does not know how many occupied rooms you have, especially via the telephone or Internet. Over the years, we have observed the significant vigour with which our clients attempt to negotiate our fees. If that same level of intensity were applied to negotiating higher room rates with customers, we could write about a different subject.
David Larone, Director
PKF Consulting
