At Luxury Hotels, the Recovery Is in Full Swing


Just last year, the stigma associated with luxury was so great that some high-end hotels were changing their names. The four-diamond Ballantyne Resort in North Carolina renamed itself the Ballantyne Hotel and Lodge, dropping "resort" from its name.

Back then, Congress was attacking financial executives for enjoying visits to resorts even while their firms were taking billions of dollars from taxpayers.

No more. Today, the winds are changing -- quite dramatically. People are traveling and spending money again, and hotels are hiring. That's a reflection of higher economic activity, and it could be a harbinger of better times to come. After all, corporate executives are seeing enough demand that they're comfortable with opening up the spigot of employee travel. It also means consumers are getting more comfortable with spending on vacations again.

"The Business Traveler Is Back"

According to the latest jobs report, the leisure and hospitality industry hired 45,000 new workers in April, contributing to the 290,000 net new jobs added last month, the highest one-month gain in four years, according to the U.S. Department of Labor.

"The recovery is playing out better than most people expected, including ourselves," says Frits van Paasschen, CEO of Starwood Hotels & Resorts Worldwide (HOT), the largest global operator of luxury hotels, including the St. Regis and W Hotel brands.

Starwood's W Hotels saw occupancies return to near pre-financial-crisis levels, with gains of 28% in the first quarter in its top cities like New York. At its Phoenician resort in Scottsdale, Ariz., occupancies were up more than 30% in the first quarter. "The business traveler is back, and leisure travelers are rewarding themselves with vacations to our one-of-a-kind properties," says Paasschen.

Indeed, these early signs of recovery have taken many in the industry by surprise. The hospitality sector made some of the deepest cuts during the recession, and few hoped for a comeback so soon. Hotels have been operating with fewer hands -- over 400,000 hotel employees were laid off in the last couple of years because hotels slashed costs to stay afloat as corporations cut meetings and training at hotels. PricewaterhouseCoopers in an outlook report said room occupancy will likely go up, but that the luxury and upscale segments will continue to see declines.

As Demand Recovers, Wage Increases Are Likely

However, many hotel operators are seeing the high-end market bouncing back more quickly. Laurence Geller, CEO of Strategic Hotels and Resorts (BEE), in a conference call with analysts, pointed out that guests' spending rose at the Four Seasons Punta Mita, which the company views as the leading indicator of luxury spending in its portfolio of hotels.

"Over the 10-day Christmas and New Year period, average rates were up 18%, to $1,428. Per occupied nonroom spend was up 20%, increasing to $1,250," he said.

As demand for rooms bounces back, wages will likely increase too. At Strategic Hotels and Resorts, which owns an interest in 11 hotels, staffing has been reduced by 27% from 2007. Geller says the company now has a rehiring plan in place that will be triggered when the hotels reach certain levels of occupancy.

"We expect that in 2010 there will probably be a fair amount of pressure on wages and benefits because for the most part, our operators haven't given raises or bonuses in 2008 or 2009," says John Murray, president and chief operating officer of the Hospitality Properties Trust (HPT), which owns and operates InterContinental and Hyatt hotels, among others. "You can only go on like that for so long and expect your staff to greet the hotel guests with a smile."

"More Than a Lagging Indicator"?

Indeed, as signs of improvements in jobs and wages come in, some analysts expect the industry to have a trickle-down effect on the rest of the economy, as well as corporate and consumer sentiment. In fact, some even say that data about rising jobs have the potential to influence behavior, even though the conventional wisdom is that jobs are a lagging indicator of economic recovery: First comes demand, then come jobs.

Indeed, during this recession especially, many economists expect companies to be extremely hesitant to take on more workers unless the companies are convinced of long-term demand and economic expansion. But others disagree.

"There are rare occasions, such as today, when we should think of the unemployment rate as much more than a lagging indicator. It has the potential to influence future economic behaviors and outlooks," said Mohamed El-Erian, CEO of the influential investment firm Pacific Investment Management Co. (Pimco), in an article published last year.

For now, hotels are hopeful of prospects for higher wages and jobs for the rest of the year.

Says Murray of InterContinental and Hyatt hotels operator Hospitality Properties: "Typically for our hotels, the second and third quarters are the strongest quarters anyway, so that should help. As the economy is lifting and we're heading into the stronger parts of the year for us, that should all dovetail nicely."