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With the start of 2011 hotel negotiations just weeks away for many corporate travel buyers, Marriott and Starwood executives separately this month suggested corporate rates could increase by "high single digit" percentages.
"While raising rate is not something that delights customers, this is a business that is determined by the supply-demand balance. As retail rates rise, corporate negotiated [rates] will need to rise too," said Vasant Prabhu, CFO of Starwood Hotels & Resorts, which posted 15 percent lower net income of $114 million in the June quarter. "In our case, corporate negotiated rates are clearly one of the factors that are holding back average daily rate growth this year. Therefore, [Starwood] would look for high single-digit increases in our negotiations later this year."
But "even if we came up in the high single digits or even a 10 percent [increase] on those rates in special corporate accounts, it's going to leave us quite short of where we were in 2007," lamented Marriott International COO Arne Sorenson.
Fueling 42 percent higher net income of $119 million, Marriott cited"encouraging" business travel trends during the second quarter, including "strong corporate demand." Current corporate rates "are not sustainable," Sorenson said. "We have had a lot of pressure on special corporate over the last couple of years," and Marriott is "already preparing customers for rate increases, including significant increases in many cases."
Marriott's "special corporate" room night bookings rose 21 percent in the quarter, but room rates for such bookings declined 3 percent compared with a year earlier, Sorenson said. Other corporate room nights rose 16 percent year over year for the Marriott brand, and as occupancy jumped hoteliers were able to increase prices for accounts that did not have previously negotiated contracted rates, he said. In such cases, 75 percent of Marriott's hotels increased corporate rates over last year, with one-third increasing rates by more than 10 percent, Sorenson said. Weekday Marriott brand revenue grew 9 percent in the quarter.
Marriott's North America company-operated hotel ADR rose 1 percent during the second quarter (which ended June 18), representing "the first increase in nearly two years," and 3 percent for the accounting period through the end of June, according to the company. Overall, North America systemwide ADR declined 0.4 percent, to $124, and occupancy increased 4.5 percentage points, to 70.7 percent.
Among Starwood's worldwide company-operated hotels, corporate business comprised 75 percent of revenues in the second quarter, according to CEO Frits Van Paasschen. North America occupancy was 74 percent, and rates rose 2 percent at company-operated hotels--a significant improvement attributable to corporate demand, Van Paasschen noted. In corporate epicenters like Boston, Chicago and New York, midweek occupancies topped 90 percent and average daily rates climbed 5 percent. London occupancy in June was 98 percent, while occupancies in Rome and Paris were 92 percent.
"The rebound in business travel bodes well for corporate rate negotiations this fall," said Van Paasschen. "After two years of declines, industrywide occupancies have now reached levels where rates tend to rise."
Real estate investment trust Host Hotels & Resorts, which owns many Marriott and Starwood properties, is "sending the message" that higher rates are to come. Although "that message is being accepted by corporate customers," that "doesn't mean it will ultimately be negotiated," said CEO W. Edward Walter.
Host reported second-quarter net income of $20 million, compared with a loss of $69 million a year earlier.
Winnowing 'Weaker' Clientele
The return of business travel also allows hotel companies to selectively manage their clientele, pushing out less attractive leisure, government and lower-end corporate customers and effectively driving up ADR, according to hotel leaders. "I suspect that we will lose some of those [weaker] accounts as we work our way into 2010, because we will be priced a little too richly for some of those corporate customers to come back," said Walter. "We're still going to be focusing on [corporate] as a key segment of our demand for next year at a higher rate, not a lower rate like it's been this year."
According to Sorenson, "weaker business will find that it gets pushed out and we'll end up with a little bit of a mix even within special corporate." He also noted that Marriott has "had less inventory available for government travelers."
With corporate transient room nights up 9 percent and average rate up 5 percent during the quarter, Starwood also "will be reducing least attractive leisure channels to manage average daily rate up," Van Paasschen said. "This year, corporate transient demand is robust." Starwood's worldwide systemwide average daily rate during the second quarter increased 1.6 percent, to $158.54, while occupancy climbed 7 percentage points, to 68.8 percent.
Wobbly Group Business
Though corporate transient has been the "primary driver of demand" in 2010, Starwood's total group business during the June quarter was in positive territory for the first time in two years, with new leads up 20 percent and group rate bookings up 16 percent, said Prabhu.
Host's Walter said new group bookings are at "higher rates than where they booked last year," but "2011 right now is still a little bit behind." From a rate perspective, Host is "fairly flat right now," but Walter said he expects rates to rise.
Marriott's Sorenson predicted that 2011 group pricing would rise, and noted that group business priced today for next year is "up on average in the high single-digit [percentages]" versus last year. For now, he said, "pricing for group business remains challenging." For the Marriott brand, total group room nights booked in the second quarter increased 8 percent (including 10 percent more corporate group business), but group room rates fell another 2 percent year over year. Sorensen added that "much of [the group] business was booked last minute in the second quarter," and "roughly 25 percent of our group room nights were booked within the three months prior to arrival."
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