Will low gas prices really boost occupancy?
 
Will low gas prices really boost occupancy?
12 JANUARY 2015 8:24 AM
While it might seem obvious lower fuel costs should lead to increased travel and hotel demand, the data shows a more complex picture.
BROOMFIELD, Colorado—With gas prices continuing to decline in the United States, many of us wonder how much of an effect it will have on hotel demand. There is a seemingly obvious relationship between gas prices and hotel demand; we expect declining gas prices will induce more travel, particularly family trips and drive-to vacations, thus increasing hotel demand. But while this seems to make sense, it is difficult to quantify a correlation between the two.
 
Part of the difficulty in correlating gas prices and hotel demand lies in the seasonality of both factors. The majority of these family “drive-cations” take place during the summer when the weather is better and children are on summer vacation. This also happens, not accidentally, to be when gas prices typically peak. So then, at the time when gas prices are peaking, so are hotel occupancies in most markets. This seems to be the reverse of the correlation we expect. Moreover, only a portion of hotel demand likely is affected by changing gas prices, primarily transient leisure and non-corporate commercial demand.
 
The analysis
STR Analytics, sister company of Hotel News Now, looked at hotels in interstate locations in an attempt to focus on transient leisure demand and remove corporate and group demand from the equation. The map below illustrates these interstate hotels. In order to account for the seasonality of both gas prices and hotel occupancy, we used 12-month moving averages of both data sets.

 
Click chart to enlarge.

Similarly, we also focused on inflation-adjusted gas prices, because while prices have fallen recently, they remain well above levels from five or 10 years ago. The following chart illustrates the 12-month moving average of inflation-adjusted gas prices and hotel occupancy for interstate hotels since 1988, the first full year of available data for 12-month hotel performance. 



Looking at gas prices, we see that on an inflation-adjusted basis, they were fairly consistent through 2002. However since 2002, gas prices have grown at rates far above inflation. Much of this price increase is typically attributed to the conflict in Iraq during that time. We also notice that gas prices began a steep decline in 2009, coinciding with the national recession in the U.S. With so much going on during that time, most do not remember that gas prices fell rather dramatically during that period. Gas prices have rebounded to levels prior to the recession similar to hotel demand, but peaked in early-2012. Since that time, horizontal fracking methods and increased production in the U.S. have positioned gas prices on a consistent declining trend.
 
Interestingly, when looking at interstate hotel occupancy, we see that it has generally declined since 1988. The decline began in 1995, with a two-year rebound in 2006 and 2007. Of course, interstate occupancy decreased sharply along with the rest of the hotel industry starting in late 2008 and has since rebounded although is far below the levels of the early 1990s. This trend is not surprising but the long-term declining trend is surprising. The decline of occupancy is even sharper when focusing on the economy and midscale segments of interstate demand.
 
In examining these two trends, we do see that more recently, interstate occupancy has risen during a time when gas prices have fallen. Also, over the long-term period, the two 12-month moving averages have moved in opposite directions, which seems to reflect some correlation. However, using statistical methods of analyzing the data does not show a lot of correlation. Simply charting monthly gas prices versus monthly occupancy for interstate hotels yields a scatter plot with a wide bandwidth and a small correlation coefficient. However, looking at the 12-month averages we can see how the two have moved in relation to each other over time.



Because the chart above shows 12-month moving averages, we can see how the relation of gas prices and interstate occupancy has moved over time. The red mark on the top left represents January 1988, and the red mark on the right represents November 2014. Notice the increase in gas prices from roughly $2 to nearly $4 from 2003 to 2008. This large increase in gas prices seems to have had little impact on interstate occupancy, and occupancy did not begin to decline until 2007. A logarithmic trend line does show decreased occupancy as gas prices increase, although the data fluctuates significantly from that trend line.
 
So then, while the data does seem to support our hypothesis on a long-term level, as well as in the past two years, overall the data does not show much correlation. This does not mean that it is untrue, however. The problem is that hotel occupancy, especially on a national level, is tied to many other factors. 
 
Also, while declining gas prices might induce more leisure travel in general, month-to-month increases or decreases do not have an effect on travel plans, and the effects would surely lag months behind any changes. The fact that the data does not strongly correlate might be an indication that hotel demand is much more indirectly affected by changing gas prices, and that reduced prices at the pump simply puts more money in consumers’ pockets that can be used for travel.
 
 

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