2008 Business Travel Survey: Buyers' Prospects Rise After Hotels' Strong '07
Travel buyers are beginning to see better negotiating opportunities as the seemingly insurmountable momentum propelling the hotel industry for the past few years begins to show signs of slowing, even though 2007 proved another banner year for hoteliers in terms of rate and revenue growth and profit.
Smith Travel Research reported that average daily rates were up 5.6 percent in 2007 compared with 2006, down from the 5.9 percent growth in 2006 over 2005. Revenue per available room growth also dropped from 5.7 percent to 5.1 percent, and total occupancy dropped from 63.2 percent to 62.9 percent, according to Smith Travel Research.
Kathy Pruett, senior director of consulting at BCD Travel's consulting arm Advito, said 2007 rates across the board increased by 7 percent to 9 percent, similar to the increases seen in 2006. High-occupancy cities remained a challenge for buyers, particularly those seeking to obtain last-room availability.
"In major cities, it was still just as difficult," Pruett said. "The problem with major markets is there's no space, so there's not a lot of opportunity for new builds."
PricewaterhouseCoopers, in its U.S. Lodging Industry Report and Forecast issued at the end of last year, predicted that growth would continue to slow slightly this year and that occupancy would drop slightly. Its latest forecast called for a 4.8 percent increase in average daily rates this year, according to Bjorn Hanson, the firm's hospitality and leisure group principal.
The forecasts give hope to buyers aiming to moderate high rate increases, including some double-digit percentage increases in high-occupancy cities, they've seen in past years. Some are even using the f-word—"flat," that is—when talking about their 2009 hotel programs.
"I hope there's an opportunity for some lower rates," said Richard Wooten, Lockheed Martin's director of corporate travel services. "There's certainly a little bit better leverage to get last-room availability in some other markets."
Analysts, meanwhile, are keeping an eye on deteriorating economic conditions to determine if and by how much travel will be cut by businesses needing to trim expenses and leisure travelers faced with skyrocketing gas prices. All indications thus far are that the pendulum is swinging, though not as far as buyers might like.
"It's certainly not as strong of a seller's market as it has been the past three to four years, but I wouldn't classify it as a buyer's market either," said Robert Mandelbaum, director of research information services for Atlanta-based PKF Hospitality Research.
With that in mind, hoteliers remain cautiously optimistic. Mike Fegley, InterContinental Hotels Group's vice president of global sales for the Americas, said he expects demand to pick up again in the second half of this year.
"We're disappointed in the softening, but I told people not to panic on this," Fegley said. "Some markets that are very strong are going to remain strong in 2008 and 2009 and see average rate increases still hover between 7 and 9 percent. Average rates are going to still continue to grow around 3 to 4 percent industrywide."
Nancy Johnson, Carlson Hotels Worldwide's executive vice president of franchise operations for full-service hotels, echoed his optimism. Carlson's Radisson brand had a 6.8 percent year-over-year increase in RevPAR in 2007, ahead of the industry average, and Johnson said rate growth will continue to benefit from a new revenue optimization program.
"Americans aren't going to stop traveling. It's our God-given right to get out and see the world, so I'm cautiously optimistic," Carlson's Johnson said. "One thing we should have learned from history is if you provide a good value proposition and deliver to them, you'll be able to maintain rate and occupancy."
Global Hyatt Corp. chief marketing officer Tom O'Toole said demand remains strong in some segments of corporate travel. "Revenue is holding up surprisingly well," he said. "One does see an erosion of growth in certain industries, but there also is very strong growth in other industries."
Advito's Pruett said recent meetings with major hotel chains proved that they were aware and cautious of a potential business travel slowdown but that they had not experienced it yet. As a result, many are still in research mode in terms of their pricing strategies for next year.
The typical hotel industry cycle is a period of profitability, which leads to rapid development and more competition that results in a decline in occupancy levels, then room rates and finally development levels, said PKF's Mandelbaum. Now, the industry appears to be on the cusp of a decline, he said.
A few factors are changing the cycle, however. "It used to be that you could set your watch and calendar to the three-year cycle with rates," Pruett said. "Then, Sept. 11 happened. Since then, it's not been the same year after year, and I've never really seen this situation before."
Inbound international travelers are one such factor. Those seeking bargains from the falling dollar will boost occupancy levels in gateway U.S. cities, said Mark Williams, Advito's vice president of global business development.
"Any weakening of domestic demand is going to be made up by international," he said. "With the weak dollar, people are coming with empty suitcases just to shop."
Hoteliers also are seeing much stronger growth numbers internationally. Partly as a result, hotels are not easing off ambitious development plans. IHG's Fegley said his company is making much stronger gains in Asia, Europe and particularly in the Middle East, and most major chains particularly are eyeing the budding markets of China and India.
IHG has been doing business in China since 1983 and now has 84 properties in the country. In the next seven months, it plans to open 40 more. "We also have 107 hotels in the pipeline there," Fegley said, "so we have more hotels in the pipeline than we have open. As soon as we open them, they're full."
Other hotel companies have similar targets. Best Western International plans to open 200 hotels in the Asia/Pacific region by 2010, Carlson in 2007 partnered with Lotus Hotel Investment fund on a $1 billion private equity fund to further develop its hotels across the region and both Marriott International and Hilton Hotels Corp. also are planning numerous properties in the region.
PricewaterhouseCoopers has maintained its forecast for U.S. supply growth at 2.1 percent, according to Hanson. Although that's about equal to the long-term average, it's the highest level of growth the industry has seen since 2001.
Hotel deals also showed no sign of slowing in 2007. Rather, it was a record year for hotel industry privatizations and mergers and acquisitions, largely because of one single transaction. The Blackstone Group, which already had more than 100,000 hotel rooms in the United States and Europe, including its luxury LXR brand and La Quinta Inns & Suites, announced in July a $26 billion acquisition of Hilton—the largest deal in hotel industry history.
Other privatizations completed in 2007 included Cascade Investment's purchase of Four Seasons Hotels, Apollo Investments' acquisition of Innkeepers USA Trust and Whitehall Street Global Real Estate Fund's acquisition of Equity Inns. In addition, Blackstone also sold Extended Stay Hotels to private real estate company The Lightstone Group for $8 billion.
Brand proliferation—another sign of supply growth—also grew in 2007, with the number of total brands growing by 10 to 324, according to PwC. All but one of the new brands were in the luxury and upscale tiers.
Hotels continued to enhance amenity offerings in 2007, although this also coincided with the growth of surcharges for various services. PwC reported that this would continue to be a growing way to get revenue, with such fees as automatic gratuities, in-room safe surcharges, resort amenities fees and Internet surcharges.
"It's a trend right now, so travelers need to make sure that when they book that hotel room, they're fully aware of what the room rate includes," PKF's Mandelbaum said. "When times are good, hotels have the leverage."
As demand softens, however, buyers will have additional ability to negotiate those fees into rates. Consultants long have advised buyers not to be too rate-focused in negotiations, as ancillary fees add up over time.
"If I were a hotelier, I would say that even if it does start to soften, I'm going to protect my rate and throw amenities into the mix," Advito's Williams said. "I'll throw in high-speed Internet and breakfast to try not to erode my rate, because I don't want to have to climb that hill again if I've already reached this level."
Midprice hotel chains generally are much more price-inclusive with their rates in regards to amenities, particularly high-speed Internet. That trend, along with growing full-service rates and more acceptable, corporate-traveler-oriented midprice properties on the market—such as the recently introduced Hyatt Place brand, which already has grown to more than 100 properties in a few years—had traveler buyers seeking to shift even more of their hotel volume into the tier in 2007.
"There are some very large companies that say 63 percent of their program is in the midscale, so there's a shift," InterContinental Hotel Group's Fegley said. "If you look at the supply growth, Holiday Inn Express and Hampton Inn are fastest-growing brands."
Maria Chevalier, manager of travel services for Johnson & Johnson, said 70 percent of her program's hotels still are in the upscale full-service sector.
"Are we looking at shifting that? Absolutely," Chevalier said. "It's getting upper management's attention."