Report shows drop in hotel profitability

The decline in occupancy levels is blamed on a lack of group business

Hawaii's hotels and resorts experienced softer room demand in June as occupancy levels declined 6.4 percentage points to 75.7 percent and led to the first half-year room-revenue decline in five years.

While hotel performance in the state has eased from the exceptional levels achieved in 2005 and 2006, Hawaii's hotel industry still compares favorably with other U.S. markets, ranking second behind New York City in room rates and revenue per available room, and fourth in occupancy, according to a hotel flash report released today from Hospitality Advisors LLC.

Hawaii hoteliers experienced lower peaks and shallower valleys in June, as they have for most of this year, and are expected to finish the industry's current down cycle at 2005 levels. While room rates across the islands increased during the first six months, demand for rooms was down across all major markets, and industry analysts have said that it is likely to stay there or flat for the remainder of the year.

Occupancy levels at Hawaii's hotels and resorts dropped 6.4 percentage points in June as the industry suffered its first half-year room-revenue decline since 2002.

The number of guests occupying rooms fell to 75.7 percent during the month, with revenue per available room -- the industry's main measure of profitability -- off 1.4 percent to $151.85 from the year-ago period. Even though room rates increased by 6.9 percent to $200.59 in June, the gains were half those enjoyed a year ago, according to a hotel flash report released today by Hospitality Advisors LLC.

"Occupancy was down a little in June," said Keith Vieira, senior vice president of operations for Hawaii and French Polynesia for Starwood Hotels & Resorts. "The U.S. market was up a little, but there was still a struggle with the Japanese market due to higher fuel surcharges. Ultimately, occupancy is down on Oahu because of lack of group business -- that's why we are undertaking a $750 million renovation on our Kyo-ya properties (in Waikiki)."

In June, Kauai was the only island to show improvement in occupancy. Kauai occupancy increased slightly by 0.4 percentage points to 76.3 percent while the average daily room rate improved by 8.9 percent to $213.37, leading to a 9.5 percent increase in revenue per available room, or RevPAR, to $162.80.

While Oahu held the highest island occupancy at 78.0 percent, the result represented an 8.6 percentage-point drop from the prior year. However, the average daily room rate paid for a hotel on Oahu rose 5.9 percent to $164.84.

Maui occupancy declined 5.7 percentage points to 75.7 percent. However, Maui achieved the highest island room rate at $274.88. Based on statistics released by the state Department of Business, Economic Development and Tourism, a 6.8 percent increase in independent travelers to Hawaii, a 4.2 percent growth in higher-spending U.S. East visitor arrivals to Maui and a 41.9 percent increase in Japanese visitor days on Maui pushed demand for luxury Wailea up and contributed to the island's strong price gain.

The Big Island trailed all other islands in occupancy at 67.1 percent but managed a 4.8 percent average daily room rate gain to $194.55.

June's lackluster hotel performance -- the result of softer room demand -- contributed to an overall 2 percent total room-revenue decline to $1.5 billion during the first six months of 2007.

"We're still doing quite well, and we are in the top five industry categories nationally," said Joseph Toy, president and chief executive of Hospitality Advisors. "We are predicting that 2007 will approximate 2005 levels, which was a record year."

After Hawaii's hotel market experienced three successive record-setting years in room revenue, room demand began falling and arrivals started softening, he said.

"The market began softening in late 2006, and we began seeing shallower peaks and steeper valleys," Toy said. "This cycle was pretty well anticipated by the market."

During the first six months of the year, Hawaii hotels achieved a record average daily room rate of $198.68 but could not overcome a 6 percentage-point drop in occupancy to 74.6 percent. Statewide revenue per available room also slipped to $148.20, a 1.1 percent decline.

While Hawaii's hotel performance has eased from the exceptional levels achieved in 2005 and 2006, the industry still compares favorably with other U.S. markets, ranking second behind New York City in room rate and RevPAR, and fourth in occupancy, Toy said.

While room rates across the islands increased during the first six months, demand for rooms was down across all major markets.

Through midyear, Oahu occupancy fell 7.1 percentage points to 75.8 percent. However, room rates on Oahu grew by 6.7 percent to $164.70. Maui occupancy dropped by 6.1 percentage points to 76.1 percent, but room rates rose by 7.2 percent to $264.29. Wailea, Maui, led the state's luxury destinations with the highest ADR of $422.32 and RevPAR of $320.21.

Kauai occupancy fell by 2.5 percentage points to 72.5 percent, but room rates increased by 8.6 percent to $201.97. Hotel occupancy on the Big Island fell 4.2 percentage points to 69.2 percent, while room rates rose 6.7 percent to $203.57.

While statewide luxury and upscale hotels reported year-to-date RevPAR gains, performance at the state's economy and budget hotels slipped. Statewide economy hotels' RevPAR slipped by 0.4 percent due to a 7.8 percentage-point occupancy decrease, while budget hotels reported declines in both occupancy and average daily rate, resulting in a significant 17.2 percent drop in RevPAR for the first six months of 2007.

The June 2007 hotel survey, compiled by Smith Travel Research in conjunction with Hospitality Advisors, included 147 properties, or 81.4 percent of all lodging properties with 20 rooms or more in the state.