Luxury hotels may see continued recovery amid energy cost concerns

This summer's robust recovery in travel demand drove average RevPARs and ADRs to record levels in key hotel markets, such as the US and Europe. The positive trend appears to continue, at least for now: data from Amadeus and ForwardKeys show that hotel bookings for the fourth quarter have outpaced 2019 levels, while flight bookings for September, October and November were 33% below 2019 levels in the last week of September, compared to a bigger 40% gap recorded this summer.

But the outlook has become gloomy since the summer. The combination of increasing interest rates, fast-rising energy prices and the growing possibilities of a global recession are major threats to the recovery of international tourism through the remainder of 2022 and 2023, the UNWTO said. Costlier air tickets, higher power and gas bills and the expected decline in household disposable incomes are bad news for most hotels, which could see demand growth decelerate going forward.  

A key segment of the global hotel market, however, appears to be in a better position to withstand difficulties caused by inflation and energy costs. Luxury properties traditionally find it easier to increase room rates to offset higher operational costs as their guests tend to be less price-sensitive.

"Travel is primarily a luxury pursuit, with 70% of travel spend coming from the top three income deciles, who are less affected by the energy price rises and have the bulk of the excess savings," experts at Bernstein said. Upscale and luxury hotels are the most exposed to margin pressure by rising food and staff costs, but "trophy luxury hotels may be able to counter some of this inflationary cost pressure due to their ability to drive rates," according to Savills.

In a recent example of this ability, the Le Bristol palace hotel in Paris was able to increase rates by as much as €5,000 for its most exclusive suite during the summer peak season as a result of increased demand from well-off American guests. "There is no price resistance" from our customers, Catherine Hodoul-Baudry, the hotel's commercial and marketing director, told Bloomberg. Wealthy US visitors are also benefitting from the record strength of the dollar.

Luxury hotels in the Asia Pacific region also seem to have more room to maneuver when it comes to room rates. The region's luxury market has been resilient through the pandemic and continues to show greater strength in many key countries, with ADR growth outperforming the overall market, according to CBRE. It said this strength has been underlined by the performance of resort destinations, such as the Maldives, which had a 146% year-to-date RevPAR growth in the luxury segment as of July 2022 compared to 2019. Growth in the country's overall hotel market was much lower at 116%.

In a development that supports the fairly positive prospects of luxury hotels, the pandemic expanded the group of potential customers high-end properties can target. Credit Suisse said in a new report that the number of ultra-high-net-worth individuals with a wealth of over $50 million climbed by 89,400 to 264,200 globally in 2021 from 2019. These increases were "more than double the increases recorded in any other year this century," it said.

Among affluent customers, travel is being prioritized over other discretionary spend as it has been the most restricted activity during Covid-19, which led to pent-up demand, according to Bernstein. The surge of revenge travel - the phenomenon of people making up for trips canceled or delayed because of the pandemic - helped fully book many luxury hotels this year and may continue to play a role as several major destinations are just lifting or easing their long-running Covid-19 restrictions. They include Japan, Hong Kong, Taiwan, Thailand, Canada, New Zealand and the UAE.

It is also good news that customers are still willing to travel despite concerns about the rising cost of living. About 37% of Americans still intend to travel as planned this fall, regardless of inflation and rising fuel costs, up from 32% in an earlier survey about plans for the summer, Tripadvisor said. Many well-off customers in Asia Pacific are looking to resume travelling in style: 48% said in a recent survey by ILTM that they plan to spend more on holidays compared to pre-pandemic trips and 45% said they would take vacations longer than a week.  

In summary, the general resilience of high-end properties against rising energy prices and persisting high inflation, combined with strong demand from wealthy travelers who are insulated from cost-of-living problems, may support continued recovery in the luxury hotel market.

About the author:  Roger  A. Allen, RLA Global Group CEO

Roger is the Group CEO of RLA Global and brings a no-nonsense approach to the leisure industry,  which is based on a proven track record of representing owners and operators best interests. Roger has worked with many of the leading real estate developers, entertainment venues, hotel operating brands and most influential hotel owners around the world.  Furthermore, successful ongoing engagements with government entities and high-net-worth individuals keep him fully engaged with the day-to-day project development responsibilities.