Hub hotels insulated a bit from airline woes

Study predicts properties here will be hurt less by carriers' cutbacks

More than three-fourth's of Boston's hotels are higher-end properties, where guests tend to be less sensitive to rising airfares. (Wiqan Ang/for the boston globe)

As the country's cost-burdened airlines cut seat capacity to drive up airfares, US hotels could face a bigger drop in demand than they did the year of the Sept. 11 terrorist attacks. But Boston properties could fare better than those in other cities.

According to an analysis by Atlanta-based industry consultancy PKF Hospitality Research, a 10 percent decline in the number of seats flown to US airports would result in a 3.9 percent drop in demand for lodging - compared to a 3.3 percent plunge in bookings in 2001. Over a year, that could translate into about 40 million fewer rooms occupied for one night, or a loss of $4.3 billion in revenue for the industry.

And although Boston has the second-highest average room rates in the country, PKF predicts hotels in the Hub wouldn't be hit as hard because more than three-fourths of them are higher-end properties - whose guests tend to be less sensitive to rising airfares. And many of Boston's domestic visitors arrive by cars, trains, and buses, making them less likely to cancel trips when airlines cut capacity.

PKF's calculations are based on the relationship between airline capacity and hotel bookings over the past 20 years, controlling for how income and employment changes affect travel behavior. Historically, a 1 percent decline in the number of seats flown within the United States will result in a 0.39 percent decline in demand at the nation's hotels.

"If you are an owner at a hotel or if you work at a hotel, lower demand obviously means less business, and less business means we don't need as many people working in our hotels," said PKF president Mark Woodworth.

Squeezed by record fuel costs and scrambling to address multibillion-dollar losses industrywide this year, several US airlines have said they would get rid of daily flights to certain destinations, eliminate routes altogether, and in some cases withdraw from airports entirely. The world's largest airline, American Airlines Inc., said it plans to cut fourth-quarter seat capacity by 11 to 12 percent. UAL Corp.'s United Airlines, the second-largest US carrier, said it plans to reduce capacity by 17 to 18 percent in 2008-2009. Delta Air Lines Inc. and Continental Airlines Inc. have also announced capacity cuts.

Further reductions may be ahead. After Delta and American's parent company, AMR Corp., each reported quarterly losses exceeding $1 billion, Lehman Brothers airline analyst Gary Chase forecast Wednesday that seat capacity would fall 11.2 percent in the fourth quarter. At current fuel prices, he said, the airline industry needs to cut capacity 15 percent by the end of next year to break even.

"This environment will force deeper reductions in capacity," he wrote.

The predictions paint a dismal picture for the hotel industry. Hotels in Miami, Orlando, Phoenix, and Denver - cities that are largely leisure destinations or are isolated from other major metropolitan areas - have historically been the most sensitive to changes in airline seat capacity, according to PKF's analysis. But hotels in cities like Boston that are built upon diverse industries or are easily reached by car or train from other metro areas tend to be better equipped to weather airline cutbacks.

Travelers can reach the Hub from New York, Philadelphia, and Washington, D.C., on high-speed trains, as well as on several low-cost bus lines. And 85 percent of the domestic visitors to Massachusetts arrive by driving, said Paul J. Sacco, chief executive of the Massachusetts Lodging Association.

Additional insulation from the seat capacity reductions comes from 76.7 percent of Boston's 40,000 guest rooms falling into the "upper priced" segment, which includes places like the Four Seasons Hotel Boston and Boston Marriott Copley Place. The remaining 23.3 percent land in the "lower priced" category, places like Hampton Inn & Suites Boston Crosstown Center and Days Inn of Boston. Nationally, the distribution is closer to 50-50, said Woodworth, from PKF.

"For a state like Massachusetts, I wouldn't think it would have a major impact," on hotels, said Sacco.

Not that Boston has been shielded from airline capacity cuts: Several airlines have said they will cut flights leaving from Logan International Airport. For example, US Airways said it will offer 10 percent fewer seats - or an average of 9.2 fewer daily flights per week - at Logan in October, compared to the same month a year earlier.

The airline has ditched three destinations - Bermuda International Airport, Long Island Macarthur Airport, and Westchester County Airport - and will run less frequent trips to almost a dozen other destinations. American and Delta also have announced cuts at Logan.

Overall, seat capacity at Logan is scheduled to fall 5.7 percent in both October and November compared with a year ago, said spokesman Matthew Brelis. In December, it is slated to rise 0.9 percent compared to a year before.

The Boston hotel industry is seeing slower growth as business and leisure travelers tighten their budgets to deal with rising airfares. The Pinnacle Advisory Group, another hospitality research firm, predicts hotel occupancy rates will slip to 76 percent in Boston and Cambridge next year, compared with a forecast 77 percent for this year. Suburban hotels are projected to fill only 62 percent of rooms in 2009, compared with this year's expected 63 percent.

But it remains to be seen how big of an impact airline capacity cuts will have on the Hub.

"Maybe it just means those remaining flights will be better utilized," said Jan D. Freitag, vice president of Smith Travel Research, a hospitality industry data clearinghouse. "It's not a question of getting not as many people, but getting more people on the flight."

Nicole C. Wong can be reached at nwong@globe.com.