Marriott International president and CEO Arne Sorenson during the company's recent earnings call touted a "steady as she goes" view of lodging demand looking ahead to 2019.
On hotel companies' earnings calls in recent weeks, questions from analysts have hinted at concerns about the U.S. economy and whether a recession is on the way. The consensus from hotel company executives has been that indicators for 2019 look positive. Sorenson told analysts: "We do not see an economic downturn on the horizon, but given recent stock market volatility, there is clearly uncertainty about the direction of the U.S. economy."
Based on Marriott's early budgeting, the company expects 2019 systemwide revenue per available room to grow 2 to 3 percent year over year and North American RevPAR to increase 1 to 3 percent. Sorenson said 2019 is looking similar to 2018.
As for third-quarter results, the company suffered from lackluster RevPAR growth for North America, up 0.6 percent year over year as a result of weaker-than-expected transient demand in the U.S. "We went into October with some concern," Sorenson said. "The best news here is that October was by and large reassuring." However, the rest of the fourth quarter looks less strong, he added. Marriott's guidance for the quarter is 1 percent RevPAR growth.
STR, too, reported weaker performance across the U.S. hotel industry in September. U.S. RevPAR fell 0.3 percent year over year, driven by a 2.1 percent year-over-year drop-off in occupancy. "Very important to state, this is not the beginning of a downturn," said Jan Freitag, STR SVP of lodging insights. He pointed to difficult year-over-year comparisons as a result of the hurricanes that hit the U.S. last September.
Corporate Rate Outlook
Negotiations between Marriott and its corporate clients are still underway. Nevertheless, Sorenson said that with a few of the negotiations complete, it appears that comparable corporate accounts in North America are expected to see rate rises within the low single digits.
One analyst asked whether, in conversations with corporate clients, Marriott was seeing any indication that 2019 demand was at risk of softening. Sorenson responded with a resounding "no." His reply aligns with remarks made by Hilton president and CEO Christopher Nassetta during Hilton's earnings call last month.
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Cutting Payouts to Intermediaries
Marriott made waves this year when it announced it would slash the commissions it pays to large groups and meetings intermediaries in North America from 10 percent to 7 percent. Despite the anger from group and meeting planners and corporate customers, Sorenson said Marriott's group RevPAR growth is steady. In the third quarter, group RevPAR rose 3 percent year over year at Marriott's largest group hotels in North America.
With changes to its revenue management practices, the company also is taking aim at online travel agencies. "Some distribution channels are just too expensive for the value they deliver," Sorenson said. Marriott's revenue management systems now account for distribution costs when considering to which channels to open up inventory during times of high occupancy. The result has been a decline in contributions from OTA channels on midweek business in North America. Sorenson said the strategy is having a slight negative impact on RevPAR growth—a few tenths, he said—but that it's improving hotel profits.
Relatedly, the share of Marriott's business coming through its direct digital channels is growing; it's about 30 percent currently, according to Sorenson. The company officially united Marriott Rewards, Starwood Preferred Guest and Ritz-Carlton Rewards under Marriott Rewards during the third quarter, and the program now totals 120 million members.
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An Aside on Marriott Strikes
Strikes in recent months have impacted 21 Marriott properties in six North American cities, including Detroit; San Diego; Oakland, Calif.; San Jose, Calif.; Boston; and Oahu, Hawaii. Sorenson said Marriott has been negotiating in good faith for months with labor workers, which are represented by Unite Here, and "are already making progress." Strikes are resolved in Oakland and Detroit. Sorenson said the impacted hotels have continued to operate, "in many cases with full occupancy," and the strikes won't have a material impact on fourth-quarter earnings.
Other Q3 Results
Systemwide occupancy declined 0.2 percentage points year over year to 76 percent, while average daily rate rose 2.2 percent to $159.06. Excluding North America, Marriott saw a 0.9 percentage point rise in occupancy to 73 percent and a 4 percent ADR gain to $160.50. The company added more than 18,000 rooms during the quarter, 10,000 of which were in international markets. As of Sept. 30, Marriott's pipeline totaled 471,000 rooms. Third-quarter reported net income fell 0.4 percent year over year to $483 million.
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