Opportunities And Challenges for '06

What a year 2006 promises to be. If you listen to your gut or to the industry prognosticators (see pgs. 50-52 to read what they say), you realize that this may be the best year ever for the U.S. lodging industry. Yet while all the signs point to a boffo year for demand, rates and profits, the industry faces a few challenges that at the least will make the year interesting and at the worst cause a few properties and companies to stumble.

Cost pressures

With good sense and strong management, it's possible to control most aspects of a hotel property's bottom line. Unfortunately, the industry has had to grapple in recent years with several line items that have proved hard to control. This year should be no different, particularly when it comes to utilities and to some extent, labor.

During the second half of last year, most lodging companies experienced energy cost increases above 10 percent, with further increases anticipated for this year. In one survey, hoteliers said they expect utilities to rise on average by 13.5 percent in '06. While these escalations are more an annoyance than a true threat to most bottom lines, they should reinforce the need for hoteliers to devise and execute strategies to mitigate this issue.

Gas prices

A related but separate concern for the travel business is the cost of gasoline at the pump. Last summer's flirtation with prices above $3 a gallon panicked a few people into thinking that Americans were going to stop traveling. It didn't happen and prices eventually fell, but any number of events — from terrorism to natural disasters to increased demand — could push the pump price back into uncharted territory.

The good news is that research from marketing guru Peter Yesawich shows that less than three percent of travel demand is at risk from rising gas prices, even if pump prices rise above $3.50 a gallon. As Yesawich constantly preaches, consumers value their leisure time too much to stop traveling.

The Katrina effect

The odds are against it (after all, it didn't happen after Hurricanes Charley, Ivan et al in 2004 or even Hurricane Andrew in 1992), but last summer's disasters on the Gulf Coast, and the subsequent non-stop media coverage, could put a damper on travel to those regions next summer and fall.

I was recently in Puerto Rico and the hoteliers I spoke to there said last fall's season was particularly soft for them, a condition they attributed to hurricane fears, even though none came close to the island in the most recent storm season.

Union muscle

Some believe that '06 will be the year the labor unions have a significant impact on the hotel industry. The unions, particularly the powerful Unite Here, know how well the industry is doing and see this as the right time to get a bigger share of the pie.

And Unite Here, which represents more than 100,000 hotel workers in the U.S. and Canada, seems to have an upper hand, as labor agreements are set to expire this year in six major cities — Toronto, Chicago, New York, Honolulu, Boston and Los Angeles. Any widespread work stoppages could have serious repercussions for unionized hotels in those cities and elsewhere, as well as presumably higher labor costs once new agreements are reached.

We at Lodging Hospitality will be following these and all industry developments throughout the year. A great way to get regular perspectives on industry issues is at the new Lodging Hospitality weblog. Go to www.LHonline.com/blog to keep up with the latest news, trends and viewpoints from LH editors.

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