Fairmont’s Delta operation is also affected by environmental challenges. A proposed $70 million development at Sun Peaks resort is in jeopardy due to land claims by local native bands for the property. Not only might this add significant cost to the project to settle the claims but the native groups have called for a boycott of Delta Hotels by other native organizations which may cause a small loss in revenue until the issue is settled.
In a country where so many vacation destinations are nature-oriented, the protection of these resources is a significant concern for those competing for these tourist dollars. While this may slow Fairmont’s ability to expand, as the incumbent it will continue to benefit from a lack of competition in these areas and the fact it is easier to expand existing properties than create new ones at environmentally sensitive locations. As long as it can protect its brand from the tarnish of being an environmentally insensitive organization the political environment will be a positive, sheltering its top properties from competition.
- Economic Factors and Trends
Perhaps the biggest issue affecting Fairmont over the next five years is the state of the economy. The hotel industry as a whole is extremely sensitive to economic fluctuations as travel is one of the easiest purchases to add or remove from an individual or company’s budget. The economy has been heading downward since the summer of 2001 and the events of September 11, 2002 have not been good to the industry. In the quarter following the tragedy the lodging / resort sector’s revenue fell 34%. However, the Canadian economy and particularly the hotel industry in Canada has not dropped nearly as much as that of the U.S. Since Fairmont has such a large proportion of their business in Canada, this puts them in a much better position than their U.S. based counterparts. Its revenue per available room in Canada was up 5.4% in 2001 but down 1% in the U.S. during that same period. Luxury and individual travel has recovered which is good news for Fairmont’s high end and resort properties. However, business travel has not recovered and is not expected to until 2003 or 2004 which is not good for Fairmont’s U.S. city-center properties or for its Delta properties. Part of Fairmont’s plan includes acquiring new locations to expand into the U.S. On this front the economic conditions look favorable. The sale of existing hotels has dipped to its lowest level in more than 12 years. Further, Fairmont has a very low debt load compared to other firms in the industry. That combined with much tighter lending practices by banks means less bidders on potential acquisitions.
While Fairmont is better off than its competitors, it is still in an industry at the bottom of its business cycle. While it looks to be well positioned for the long term and the industry will likely recover, the economic outlook for the industry in the next several years is not favorable.
- Social Factors and Trends
There are three main social factors that could affect Fairmont over the next several years: fear of travel since September 11, 2001; a shift in corporate views on the necessity of business travel and a large pool of available labor. However, only the change in view on business travel will have a significant impact.
While 4.1 percent of 1,000 people surveyed in August by Travelocity, an online travel agency, said they are still too afraid to fly since the September 11, 2002 attacks, the Travel Industry Association blames decreases in travel industry revenues primarily on economic conditions and not fear of travel. The number of trips per person in North America is not down, only the dollar value is. People are taking shorter trips to regional destinations. As the economy improves we can expect these trips to become more expensive.
Business travel while expected to improve with a larger allotment of 2003 corporate budgets as the economy improves, it is unlikely that they will return to their earlier levels. Companies have found that since reducing their travel budgets by finding less expensive options, simply meeting less often or switching to phone meetings and other technological methods, their productivity has not been significantly hurt. This could be the start of permanently lower levels of business travel.
Finally, with the hotel industry at the bottom of the business cycle there is an abundance of available labor. This can potentially drive labor costs down and allow firms to obtain better qualified people than they otherwise could, but it could also create problems if overqualified workers leave when the economy picks up. Re-hiring to replace these people could cancel out the savings or benefits of hiring them in the first place. This social factor appears to simply be a cyclical one and will probably not have a big effect on Fairmont or its competitors.
The only social factor that will have a significant impact on Fairmont over the next five years is the change in views towards business travel.
- Technological Factors and Trends
Since the hotel industry is in the mature stage of its product life cycle, technological factors and trends will have a significant effect on the industry over the next five years. From wiring hotel rooms and online ordering to video conferencing, technological change will both be a threat and a source of opportunity for the industry.
As internet and email continue to evolve into crucial business tools, Hotels catering to business customers, as both Fairmont and Delta do, must allow their customers to stay connected from their rooms simply for the hotels to stay competitive. In a Forrester Research survey nearly 60% of business travelers wanted high speed internet access from their hotel rooms. While Fairmont has already invested significantly in deploying a high speed network across its properties’ lobbies and public areas, the cabling has yet to reach individual suites. While this at first may be a source of competitive advantage, it represents a substantial upfront and ongoing cost. Wiring a hotel can cost up to $500 per room. As competitors also upgrade, this expense will merely allow the firm to stay even while shrinking margins.
While taking orders over the web can be a substantial cost savings, the internet has allowed customers to much more easily compare prices. While only 5% of hotel reservations are made over the web, 55% of business travelers and 53% of leisure travelers use the internet to plan their trips. This will put significant downward pressure on room rates. While cost savings can be obtained through online reservations, online booking is growing far slower than online research. Losses in per room revenue will outstrip savings in booking costs over the next five years.
With cuts to travel budgets, many businesses have turned to video conferencing to conduct these meetings. Lower transmission costs through internet protocols, and better picture and sound quality have made video conferencing a viable alternative. With the costs of a video conferencing room ranging from $20,000 - $80,000 the price is out of the reach for all but the largest corporations if purchasing a system for their own use. Hotels, already a common source for meeting spaces, are in a prime position to offer these conference rooms and are able to achieve rates of up to $700 per hour. While less business travel means lower room rental revenues, this loss in revenue can be more than compensated for through the increase in conference room revenue. According to Al Zaccario, manager of information systems at the Hilton Woodcliff Lake, it will likely evolve from profit center into a free-of-charge business meeting amenity. Although for the next five years this will be a positive for the companies that invest in it.
In the short term companies that embrace these technological trends will have a competitive advantage, in the long term all of these technological changes will not benefit the industry.
- Porter 5-Forces Analysis
The Porter 5-Forces Model, developed by Harvard Business School professor Michael Porter assesses an industry’s attractiveness and the degree of competitiveness within the industry by examining the five players that have an influence over it. The following examines the existing competitors, potential competitors, substitute products, customers, and suppliers to the hotel industry to determine if Fairmont is in a beneficial competitive environment over the next five years.
- Existing Competitors
An industry will experience a high degree of competition if it is a low growth industry, has high fixed costs and a large number of competitors. The hotel industry has all three of these characteristics and as a result has experienced price cutting, new service introductions and long term service contracts with its suppliers.
The hotel industry is experiencing low growth. Over the 7 years from 1994 to 2001 the number of person trips in and to the U.S. has risen only 8%. Obviously the fixed costs involved in running even a single first class or luxury hotel are quite high. New York's Carlyle Hotel sold for nearly $130 million while Fairmont paid $85 million simply to restore the Fairmont San Francisco. Fairmont as one of the larger players in the industry has a portfolio of less than 80 hotels while California has over 2500 hotels itself. Clearly, there are a large number of competitors in the industry.
This competitive environment has led to price cuts. A study headed by the Tisch Center at New York University shows that while the Manhattan lodging industry is improving, it will not be until 2005 that occupancy reaches 1999 levels and rates attain marks set in 2000. The same story is true across several other major U.S. centers.
Firms are also introducing new services simply to stay competitive. Many hotels are adding video conferencing abilities and wiring hotel rooms for internet access but in both cases these services are expected to eventually become amenities provided for free with other services offering no long term revenue growth opportunities, only costs.
Finally, the industry is showing another symptom of high competition as long term service contracts with suppliers are standard. Fairmont’s average remaining period on its management contracts with its hotel owners is over 40 years, while Delta has over 20 years remaining on its contracts on average.
With low growth, high fixed costs, a large number of competitors competing by offering price cuts, expanded services and long term service contracts this industry is clearly showing all the signs of a highly competitive environment.
- Potential Competitors
The potential for new competitors to enter the industry is determined by the strength of the barriers to entry relative to the firms that are in the best position to enter the industry. There are a few potential competitors such as hotel owners, foreign governments like that of the United Arab Emirates, and property owners such as airports or ski hills that could begin to challenge Fairmont. The primary barriers to entry for these firms are large capital requirements, high switching costs, government policies, and product differentiation.
Seventeen of the properties that Fairmont manages are owned by others. These hotel owners could move to self manage their own properties. The capital requirements for a move in that direction would be minimal since they already own the property, however in many of these cases the management contracts are quite long and the hotels are even labeled with Fairmont’s brand. Moving to self-manage these would mean a loss of the hotel’s name recognition.
The government of the United Arab Emirates already owns a controlling interest in a Fairmont property in that country. The government is wealthy enough to overcome any capital requirements. The brands of the major American industry players are not strong enough over there and obviously government policies are not an issue. However, the U.A.E.’s ability to enter the luxury hotel management industry is limited to its own nation.
Owners of prime real estate locations such as airport’s or ski hills could choose to develop and manage their own hotels instead of leasing the land. However, they would face huge capital outlays to develop the property. Many of these are community owned operations (such as Le Massif ski resort or Kicking Horse Mountain Resort) or government subsidized operations (Winnipeg Airport Authority) and thus subject to restrictions and scrutiny on what projects they can undertake.
Overall, because of the high capital requirements, long term service contracts and government regulations, the industry is well sheltered from potential new competitors.
- Substitute Products
There are two primary substitute products that could become an issue for Fairmont and other companies in the hotel industry that service the business market: video conferencing and virtual trade shows. Additionally a number of minor substitutes exist on the leisure travel side but only cruise ships could make a significant impact.
Business travel is undertaken to conduct interactions which are far easier or effective face to face. However, video conferencing technology has improved to the point where television quality picture and sound as well as computer displays and presentations can be simultaneous transmitted instantly at a reasonable cost. Video conferencing rooms that once cost over $1 million can now be built for $20,000 to $40,000. Business travel has dropped off significantly over the last two years and while leisure travel has increased, business travel has not, likely because it is being replaced by electronic meetings.
Another form of electronic meeting is a virtual trade show. Unlike video conferencing these often involve hundreds of simultaneous participants communicating over the web and chat interfaces. These can be used for job fairs as well. Also unlike video conferencing which is often offered by the hotels themselves, this takes away from both overnight room rental revenue and meeting room revenue. While this technology has not yet made a measurable impact on the industry, as the technology improves and people adapt it could reach the point where it eliminates a significant percentage of business travel.
Technology is not a major threat on the leisure traveler yet. Scuba diving, skiing or golf in a computer is not close to the same thing as in real life. However, cruise ships provide a compelling alternate form of accommodation. While only an alternative for coastal destinations they offer the same luxuries as hotels, generally more activities and thus more revenue opportunities. They have a pricing advantage as well since they reduce travel costs and receive incentives to make particular harbors their ports of call.
Substitute products pose a significant threat to the business travel side of the market but substitutes on the leisure side will have limited industry impact.
- Customers
There are several factors that affect whether customers will have power or influence over the industry. These relate to the customer’s size, how the purchase affects them, the size of their purchases, and the products themselves. Overall these variables do not give customers much power over the hotel industry.
Some of the factors that give customers power apply to this industry. Customers can easily switch from one hotel to another. Through the web they can obtain information on the demand for rooms and obtain discounts, and in the case of business travelers the hotel they stay in can have little influence over the quality of their end product.
However, the majority of the factors identified by Porter as giving customers power do not apply to the industry. There are a large number of business and consumer hotel customers so no single business or customer can affect the success of a hotel chain. In certain situations, such as tour operators or companies that form agreements with specific hotel chains for all their business travel they may be able to negotiate discounts. Hotels are also not a high percentage of most individuals’ leisure budgets or companies’ operating budgets so they do not have that incentive to negotiate harder. Businesses whose employees travel do not have statistically lower profits nor do individuals who stay in luxury hotels have lower incomes, another factor that would cause downward price pressure. Finally, customers cannot become their own suppliers of accommodations so wield no power from this factor.
Overall the majority of the factors that can give customers power in the hotel industry do not apply and the ones that do are not enough to give the customers any major influence.
- Suppliers
The hotel management industry uses a vast number of suppliers for a wide array of small items. However, two groups of suppliers have some influence, hotel owners and land owners. Both could fairly easily integrate forward and become their own customer. They make up a large percentage of hotel management company’s costs and are crucial to their end product. With a 30% drop off in new hotel construction in the last two years there are also relatively few suppliers. However hotel owner’s only customers are the management companies and service contracts in the industry are very long term.
On the whole, hotel and land owners are a significant force affecting hotel management companies but no other supplier group has significant power.
- Conclusions
Fairmont is in a mature industry that still has decades of life left. Its primary challenges are a poor economy and the threat of technology to drastically reduce business travel.
The main political factors Fairmont is facing is government regulation of its use of natural resources and local pressure groups lobbying for tougher constraints on the hotel chain. While this will create additional cost for the company to maintain its brand and defend itself legally, these same regulations will keep competition out and protect some of its premier locations.
The current poor state of the North American economy as a whole and the hotel industry in particular will hurt the company for at least the next two years before fear of travel dwindles, the economy recovers and leisure travel returns to its previous levels, however a larger issue is the permanent shift in how companies view the need for business travel. Fueling this shift is alternatives like video conferencing. Over the next five years Fairmont can capitalize on this opportunity for revenue growth in its meeting room business but beyond that the service will become an amenity offered for free or very little cost to conference holders. High speed internet access is another technology that will serve as a competitive advantage for Fairmont and other hotels that invest early over the next two years but will then become a required cost of business that does not add to its margins.
The Porter 5-Forces Model leads to the same conclusions as the PEST Analysis. Fairmont is in a highly competitive, low growth industry. It is forced to launch new service offerings yet is experiencing downward price pressure on rates. There is not a major threat of new entries to the field and customers and most suppliers do not yield significant power, however technology is a huge threat to its business travel revenue.
While Fairmont may have a competitive advantage within its industry and may yet be a company that can sustain steady long term growth, over the next five years the industry it competes in will just be crawling out of an economic downturn and continue to face a dwindling of its business travel base.
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