June 14, 2002

HVS AIRPORT TRENDS UPDATE: SOUTHWESTERN U.S.

Written by: Gretchen Hazel

The Dallas office of HVS International publishes regular updates of airport trends in major Southwestern United States markets.  For each update, we select one market to discuss relevant hotel market trends.  In this article, we have summarized first quarter results for the relevant airports and highlighted the Dallas/Fort Worth hotel market.

Airports continued to experience reduced traffic levels through the first quarter of 2002, as companies kept a tight lid on travel expenses, and scaled-back meetings and leisure incentive travel.  Companies continued to reduce and streamline business activity throughout the region, which manifested in a reduced need for airline travel.  The following chart sets forth passenger statistics for the major Southwestern United States airports, ordered from the highest volume of 2001 passenger traffic to lowest.

Year-end 2001 statistics indicate that declines in passenger activity ranged between a minimal 1.3% at Houston�s George Bush Intercontinental Airport to a more substantial decline of 9.2% at D/FW International Airport, when compared to the prior year.  First quarter passenger statistics indicate that airports throughout the southwest continue to see substantial declines in activity, with five airports experiencing double-digit reductions in passenger volume.  Love Field has experienced the greatest decline, at 23.1%, followed by Austin, D/FW International, Houston Hobby, and Phoenix Sky Harbor.  Relative bright spots remain in Houston and Albuquerque, two markets less reliant upon the badly hit technology and telecommunications sectors, which continue to experience passenger declines of less than 5.0%.

Market Insight: D/FW International Airport

American Airlines remains the primary carrier to D/FW International, accounting for roughly 70% of total activity for 2002 through March.  American�s parent company, AMR, is headquartered just south of the airport.  On April 17, 2002, AMR Corporation reported a first quarter 2002 loss of $548 million, or $3.53 per share.  This loss is significantly higher than the loss of $43 million, or $0.28 per share reported during the first quarter of 2001.  For year-end 2001, AMR reported a loss of $1.8 billion, or $11.43 per share.  Not surprisingly, the significant financial loss for AMR directly correlates with D/FW International Airport�s decline in passenger traffic totaling 9.2% during 2001 and an 11.6% decline during the first quarter of 2002.  The magnitude of D/FW International Airport�s decline represents a loss of approximately 5.6-million passengers during 2001 and a loss of approximately 1.6-million passengers during the first quarter of 2002.  Of that 1.6-million, approximately 1.2 million directly resulted in a reduction of American Airlines traffic.  Declines have been in the double-digits for each month during the first quarter and have ranged from 11.2% to 12.3%, with an average of 11.6%.  The following table provides a month-by-month breakdown of passenger traffic during the first quarter of 2002 and 2001. 

 2002 Monthly Passenger Statistics for Dallas/Fort Worth International Airport

A direct correlation exists between passenger statistics and room night demand for airport hotels.  Airport hotels are highly dependent on passenger activity, which normally sparks demand such as airline crews, distressed or delayed passengers, or individual and group travelers seeking airport-convenient accommodations.  Due to the substantial loss in passenger traffic at D/FW International Airport, hotels in the local market area have accordingly experienced significant declines in occupancy and average rate.  To better illustrate the declines in hotel demand, the following table illustrates supply, occupancy, and average rate trends for the Dallas/Fort Worth International Airport hotel market.

Performance of the Dallas/Fort Worth International Airport Hotel Market

The declines in hotel demand within the DFW International Airport hotel market have closely mirrored the declines in passenger traffic for year-end 2001 and during the first quarter of 2002.  The airport�s passenger declines of 9.2% in 2001 and 11.6% in the first quarter of 2002 are relatively similar to the declines in hotel occupancy of 12.7% and 11.0%, respectively.  Based upon the dynamics of the market, a significant portion of the base contracted room night demand has been eliminated resulting in lower hotel occupancies and a higher degree of rate sensitivity throughout the market.

As indicated by the figures in the previous chart, the hotel market at D/FW International Airport historically achieved occupancy levels in the low to mid 70�s between 1996 and 2000.  This historical trend took a significant downturn in 2001 as indicated by the 12.7% decline in occupancy and a 0.7% decline in average rate, resulting in a 13.3% decline in RevPAR.  More recently during the first quarter of 2002, hotel demand indicated an overall RevPAR decline of 17.3% over the comparative period in 2001.  As the market has become more competitive, significant average rate declines are being noted in the airport market area during the first quarter of 2002 equating to a decline of 7.0% for this period.  Important considerations when analyzing these statistics include the demolition of the 558-room Hyatt West Tower in October of 2001 at D/FW airport, which mitigated the market declines in occupancy during the last quarter of 2001 and the first quarter of 2002.  This is primarily attributed to the market�s reduction in hotel room inventory and the displacement of Hyatt�s previously accommodated room night demand to other hotels within the market. 

According to hotel managers in the D/FW International Airport market, times are very tough for the market�s hotels.  The unfortunate market conditions contributed to the recent closure of the 60-room Sleep Inn, which originally opened in January 1999 and is located in the north D/FW International Airport sub-market. Trends in the current market indicate increasing levels of rate sensitivity in order to maintain occupancy levels. As a result of the rate declines, full-service hotels appear to be experiencing the greatest sensitivity because business travelers have had their traveling expense budgets reduced.  As a result, travelers that may have previously stayed at a full-service hotel are now staying at a limited-service hotel to save on travel costs.  Additionally, the length of stay for travelers has been reduced.   For example, business travelers may only be staying at a hotel for one night when they previously stayed two nights in the market for business meetings.  In other cases, business travelers are not even using hotel accommodations as they schedule their flight into D/FW International Airport during the morning and fly out during the late afternoon or evening. 

There is optimism on the horizon as D/FW International Airport continues the Terminal D expansion project, which is scheduled for completion by the first quarter of 2005.  Reportedly, the new International Terminal D will provide service to 37,000 passengers daily or 12,800,000 annually.  However, local hotels will likely have at least two new competitors by its opening.  A new 300-room Grand Hyatt is anticipated as an on-site component of the new terminal and is expected to open in 2005.  Also on the horizon is the massive 1,500-room Gaylord Opryland project, located just north of the airport in Grapevine.  This project is expected to open in mid-2004.  Therefore, while we expect airport activity to stabilize this summer and return to positive growth territory in 2003, new supply on the horizon will likely lengthen the road to recovery for airport area hotels over the long term.  The Sleep Inn closure, and any other properties which may close in the interim, will also need to reopen and be reabsorbed into the airport market before a recovery can truly gather steam.

Gretchen Hazel
HVS International
Suite 101
2601 Sagebrush Drive
Flower Mound, TX 75028

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About the Author:

Gretchen Hazel, Vice President, has returned to HVS International after filling the position of Senior Development Analyst with Wyndham International.  During her work experience with Wyndham International, Gretchen gained valuable expertise with corporate hotel development, acquisition, and disposition.  Her core responsibilities for underwriting projects at Wyndham included market analysis, fieldwork, financial analysis, pro forma projections, investment analysis, and preparation of capital/transaction/executive committee presentations.  Prior to joining Wyndham, Gretchen gained more than two years of appraisal experience with HVS in the New York office.  During this time, Gretchen worked with all senior-level staff and assisted on assignments in locations such as Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, North Carolina, Pennsylvania, Texas, and the Caribbean, as well as many others.  Gretchen is working towards her state certification education and has completed the work experience requirement.

As Vice President, Gretchen now oversees and handles consulting and appraisal assignments for our valued clients.  She will continue to provide expertise nationwide, with a particular emphasis in the Dallas/Fort Worth Metroplex and other Texas markets.

Gretchen attended the University of Wisconsin and graduated with honors in 1997 with a major in Hospitality and Tourism Management.  Prior to working for HVS, Gretchen held positions with Bass Hotels and Resorts and Marriott Hotels and Resorts, and has front-line experience in both rooms and food and beverage operations.

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