The 50 percent drop in oil prices during the second half of 2014 has put plenty of cash into consumers’ wallets and that could mean good things for the lodging industry this year. Crude oil is selling for $47.64 per barrel today compared to over $90 a year ago. And while prices have started to stabilize a bit, there’s still a chance for them to decrease even further due to the glut of crude and the expectations of weak global growth pulling down the market.
A report released today by Moody’s analyzes how an extended period of low oil prices could affect different industries, and pointed to travel (specifically airlines) as one of the direct beneficiaries in the coming year. PKF Hospitality Research, which uses Moody’s data to develop its own reports and forecasts for the lodging industry, has been looking at how much this travel boost may increase hotels’ bottom lines in 2015. “The two main assumptions we use for the lodging industry is that low oil is going to have a positive effect on the overall economy in terms of GDP growth, income growth, and employment growth,” says Jamie Lane, senior economist at PKF Hospitality Research. “A positive effect in the overall economy translates to more demand for the lodging industry.”
Beyond just travel, oil prices also have a role to play in the operational expenses of hotels. Lower prices can bring down utility bills and transportation costs on goods and services and, depending on how long oil prices stay low, properties may see this impact their bottom line. “There’s certainly going to be an operational benefit,” says PKF Hospitality Research President Mark Woodworth. “The ultimate benefit is mitigated quite meaningfully by the fact that 45 to 50 percent of hotel expenses are labor related.”
And when it comes to fueling demand, there’s delayed reaction. “From a timing perspective, the low oil benefit is going to be realized more quickly by some then a little bit later than others,” Woodworth says. According to Lane, a lot of this is due to how much weight oil prices carry as a percentage of a individual’s total income. Those with lower incomes feel a more pronounced impact. There’s also a significant disparity in how quickly oil prices affect different fuel prices. While lower prices are reflected almost immediately in the price of gas, airplane ticket prices take longer to change because airlines hedge their purchases of jet fuel, and the contracts last for months. “In the near term it’s going to be the leisure ‘drive to’ type of demand,” Lane says. “Longer term we’re likely to see some relaxation in airline prices.”
Exactly how much lower gas and airline prices impact demand is difficult to forecast. A 2011 PKF report found that increasing oil prices had a hampering effect on RevPAR growth. “We found that it took quite a change in oil prices to influence human behavior on the upside,” Lane says. “Once oil got up to $125 per barrel, we started seeing some impact and when it reached $145, the impact was significant.” He adds that dynamic plays out differently when it comes to low oil prices. “People love gains and don’t want to take losses, so the reduction on the downside is more immediate and more pronounced.”
Lane sees low oil prices affecting ADR in two different ways in 2015. “On one side, low oil prices will lower the inflation outlook for the year and in our studies we’ve found that a lower inflation rate for the entire economy means lower increases in the ADR for the hotel industry.” While this could negatively affect PKF’s ADR forecast for the year, he says higher demand and higher occupancy levels have the potential to mitigate the impact of low inflation. “The net net is that we don’t see any change to our forecast for ADR as a result of the low oil prices,” Lane says. “Though right now we’re biasing our forecast toward the upside.”
Photo credit: Pumping Gas via Bigstock.
