British Hotels Hit by Falling Prices

The scale of the battle facing UK hotels is laid bare today by data showing that average room rates will fall back to 2005 levels over the next 12 months and the industry will not move into recovery mode until late next year, according to PricewaterhouseCoopers.

The accountancy firm forecasts that the average room rate (ARR) will fall by 8.1 per cent to £77.69 a night in 2009, down from £84.53 last year – the biggest drop since 2002, when rates fell by almost 6 per cent.

Robert Milburn, the UK hospitality and leisure leader at PwC, said: "While rate declines will slow at last, economic and travel fundamentals remain weak, and despite accelerating cost cutting programmes, the evidence points to more savage trading at the end of the year." Next year, consumers will be able to find ARRs of £76 across the UK, which is back to a similar rate as 2005.

While the rate of decline in room rates will ease in 2010, there will be no growth in revenue per available room – a key performance metric for hotels – next year. PwC forecasts that revpar, which accounts for occupancy rates, will fall to £52.38 in 2010, down from a forecast £53.67 this year.

While the hotel sector has been hit by a myriad of problems, arguably the biggest problem facing the entire industry is businesses cutting back on corporate travel.

Whitbread (WTB.L), the group behind the successful budget Premier Inn brand, has suffered from business customers staying for shorter periods than last year. This month, the group, which also runs Costa Coffee and pub restaurants, including Beefeater, said that its revpar fell by 9.4 per cent in the 24 weeks to 13 August, and its like-for-like sales were down by 7.7 per cent.

Alongside its half-year results in September, Alan Parker, the chief executive of Whitbread, said: "I am pleased with the trading figures that we announced last week. Premier Inn's total sales have been maintained in what is still a very challenging trading environment. Evidence suggests that business travellers are trading down from 3 and 4-star hotels to find better value for their money and our Premier Offers deal is attracting new price-conscious leisure customers to our hotels."

However, for smaller, independent hoteliers, falling revpar and ARRs can be a lethal cocktail, when combined with debts. Stephen Broome, the director of hospitality and leisure at PricewaterhouseCoopers, said: "My gut feeling is that there will be an increase in insolvencies in the industry [in 2010]," although he pointed out that banks had been more lenient with hoteliers recently and the level of insolvencies in the sector was less severe than the early 1990s.

In July, PwC said that the number of hotel businesses becoming insolvent had rocketed by 120 per cent since June 2008, but the rate of collapse in the second quarter actually declined as businesses were spared by banks.

Mr Broome said: "We expect lenders to focus more intensely on hotel debt levels this autumn. So far we have seen an inclination to seek alternative financial restructuring that is less likely to simply result in further losses through debt writedowns."

But occupancy rates in London have fared better than the rest of the UK during the recession. PwC forecasts that occupancy rates will fall by just 1.2 per cent in 2009 in London, while they will tumble by 6 per cent in the provinces.

However, hoteliers are more optimistic about the future than six months ago. In March, PwC found that all but one of its respondents were pessimistic in their outlook, but in the survey out today 71 per cent of those surveyed said they are more optimistic than they were then. PwC forecasts that UK revpars will increase slightly in the final two quarters of 2010 to be down by just 2.7 per cent and 1.2 per cent respectively.

Independent operator feels the pinch as customers focus on price

Mark Bryant's family has owned The Swan Revived in Buckinghamshire for 25 years, but 2009 has been its toughest to date. Mr Bryant, the current owner, has been hit by a cocktail of cost pressures, but falling average room rates is one of the biggest challenges it faces.

While the recession has only added to the downward pressure on room rates at The Swan Revived, an old coach house in the market town of Newport Pagnell, the internet and proliferation of new hotels being built nearby has exacerbated the situation.

Mr Bryant said: "Business is very fragile and has been dropping considerably for the last couple of years, but it has really been bad since January. However, we are starting to see light at the end of the tunnel."

He added: "The room rates have been decimated. Two years ago, I was selling them for £85 a night for a single room, including breakfast, but they are now about £50 to £60. This comes straight off the top line, which affects the bottom line."

Hotel operators putting up a host of brand-spanking new hotels in nearby Milton Keynes has not helped The Swan Revived – a 3-star, 40-room hotel, either.

But the internet has also driven down prices rapidly. Instead of negotiating on the phone with hotels, customers now just log on to a web site and pick the cheapest price, Mr Bryant explained: "People are not putting any value on the services...They are just looking at the price. We cannot see how we are going to get room rates back."

With a 25 per cent rise in energy bills over the last two years, maintenance costs for his hotel and red-tape associated with the ever-changing labour and health and safety laws, it is easy to see how small independent hoteliers are struggling.

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