The U.S. economy has experienced three business cycles over the past 26 years and counting, defined by the National Bureau of Economic Research as follows: March 1991 (trough) through March 2001 (peak) (“1991 cycle”); November 2001 through December 2007 (“2001 cycle”); and June 2009 to the present (“2009 or current cycle”). The tepid recovery in business transient demand in the current cycle has puzzled hotel operators, who have expressed concerns about the impact of muted corporate travel demand on the operating performance of hotels, particularly those in downtown or major metropolitan areas.
RevPAR growth trajectories have varied widely in the past three economic cycles (Figure 1), with performance in the current cycle suggesting the top-line impact of lackluster corporate travel performance has been somewhat muted. Further, the current cycle is approaching the duration of the 1991 cycle, with underlying economic conditions remaining strong to date. So the question is: Has corporate demand lagged this cycle? Several factors, including corporate profitability, airline load factors, international travel and weekly demand patterns present different answers to the question.
A strong indicator of a company’s appetite for travel, corporate profitability, has grown at a much more moderate pace in the current cycle. Indeed, pretax corporate profits (Figure 2), as reported by Moody’s Economy.com, increased 170.8 percent between the trough and peak of the 2001 cycle. However, pretax corporate profits increased 69.9 percent in the 1991 cycle and just 48.4 percent to date in the current cycle. Additionally, between 2002 (the earliest date available) and 2009, airline passenger load factors, which represent airline “occupancy,” increased 9.4 percent, from approximately 72.6 percent to 79.7 percent. However, between 2009 and 2017, load factors increased just 3.4 percent, to 82.5 percent, albeit airline capacity in the current cycle has increased at a slightly stronger pace than in the previous cycle. Muted growth in corporate profits and increases in airline load factors would initially suggest pressure on corporate travel demand has existed in this cycle.
Looking at weekly demand patterns, (Figure 3) a comparison of weekday (Sunday through Thursday—a proxy for corporate travel) and weekend (Friday and Saturday—a proxy for leisure travel) occupancy and ADR levels in the trough and peak months of the current and previous economic cycles paint a different picture. Weekday and weekend ADR performance from trough to peak is largely comparable between the latest two (2001 and 2009) cycles. However, during the current cycle, weekday occupancy has increased at a much faster pace (16 percent) than weekend occupancy (10 percent), a trend that is counter to what would be expected if corporate travel had been stagnating. Given this weekly demand pattern, it might appear that corporate demand has continued to grow in the current cycle.
A potential explanation for the mixed results may actually lie in an unsuspected source: inbound international arrivals. As shown in Figure 4, international travelers visiting the U.S. for business purposes between 2009 and 2016 grew commensurate with those travelers visiting for leisure purposes, though a slight deceleration occurred between 2015 and 2016 (likely attributable to the U.S. presidential election cycle). However, inbound international travelers that did not fall exclusively into either the business or leisure category have grown at a significant pace, increasing nearly 60 percent since 2012. This is consistent with the growth of so-called “bleisure” trips, in which travelers (largely millennials) choose to arrive at a business destination early (or stay late) in order to incorporate leisure activities into their itinerary. According to Google Trends data, which measures the frequency with which a particular phrase or term is searched for, the term “bleisure” peaked in popularity in June 2016 and continues to be a popular term in online search parameters. This travel pattern, which could include more shoulder nights (such as Sundays and Thursdays) would help to partially explain the strength in weekday demand.
Overall, the importance of corporate travel to the U.S. lodging industry remains significant, and any deceleration in this source of demand would represent a major concern. However, shifting travel preferences of millennial (and generation-Z) consumers ought to be top-of-mind for hotel operators as they look to adjust to shifting demand patterns.
Abhishek Jain is a director at PwC, specializing in the lodging sector. He can be reached at a.jain@ pwc.com.