2009 Business Travel Survey: Buyers Gain Sway As Hotel Seller's Market Halts

Analysts warned that the seller's market that had dominated the lodging industry for several years would ebb in 2008, but none predicted the sharp U-turn the industry took, leaving buyers in an unexpectedly strong negotiating position amid falling rates, revenues and occupancies.

"2008 started off very well until the third, almost the fourth quarter," said Isadore Sharp, founder, chairman and CEO of Four Seasons Hotels and Resorts. "We assumed it was going to be a slowdown. We had planned to be a little more conservative in our forecasting. It was the latter part of the fourth quarter when things fell off the cliff."

That cliff dive ended with every hotel tier from luxury to economy in the red in terms of year-over-year change in occupancy and revenue per available room for the full year, according to Smith Travel Research.

Overall occupancy was down 4.2 percent, and revenue per available room was down 1.9 percent, though hotels did manage to increase average daily rates by 2.4 percent for the year.

Performance in the first quarter of this year has not been much better, with overall RevPAR plummeting 17.7 percent, occupancy down 10.9 percent and average daily rate down 7.7 percent, according to Smith Travel Research. For the full year, RevPAR is expected to drop by 9.8 percent, occupancy by 6.5 percent and average daily rate by 3.6 percent.

Few markets globally are bucking those trends—outside of a few emerging markets, like Abu Dhabi—which makes this lodging industry downturn one for the history books, said Sue Brush, senior vice president and global brand leader for Westin Hotels & Resorts. The hotel industry has always been one of up and down cycles, said Brush—a 30-year industry veteran who is retiring at the end of this year—but the global scope of this downturn makes it unique.

"It's not as finite," Brush said. "The Gulf War started and ended. Sept. 11 was one catastrophic event. This one seems to be more pervasive, and there's more uncertainty around it."

That uncertainty extends as buyers prepare to enter into negotiations for 2010 hotel rates. They already have been renegotiating the rates they set for 2009, before the extent of the lodging industry downturn was evident. Some buyers found themselves in a looking-glass world as 2009 began: group rates near or above transient rates in certain markets, discounted leisure rates cheaper than corporate negotiated rates and hotels that previously shunned negotiations suddenly returning phone calls.

"Companies and hotels are looking at ways to maintain the greatest degree of flexibility in pricing," Tom Griffiths, vice president of the Americas for WorldHotels, said in a recent American Express-sponsored live chat event about hotel negotiations. "The old days of seasons are long gone. Every month will be a new season."

The unstable market is once again bringing dynamic pricing to the forefront of some corporate negotiations. Most hotels companies submitting survey data to Business Travel News indicated they had a dynamic pricing model in place. Although to many buyers the concept makes budgeting untenable, hoteliers have aggressively pushed it at the negotiating table. With the change in market conditions, some travel buyers have warmed up to it, Kelly Phillips, Hilton Hotels vice president of leisure and business travel sales, said during the American Express chat.

"Dynamic pricing has never been more relevant," according to Phillips. "It fluctuates with the market and provides a cost-neutral solution, saving time in the requests-for-proposals process and the actual negotiation."

Still, some buyers remain reticent to accept the model because of the difficulties it presents in budgeting, though many have adopted it as a method of handling second- or third-tier cities. Omni Hotels corporate director of global business travel sales Brad Frazier said he still gets pushback on dynamic pricing because it is difficult for buyers to see the value of it in strong economic times.

No tier has taken a tougher beating from the downturn than luxury. Hotels in the tier were never ones to appeal to the cost-conscious travel buyers, but the damage was compounded in September by the birth of the "AIG effect," when the insurance giant hosted a $440,000 incentive trip at a luxury resort a short time after taking billions in federal bailout dollars.

Suddenly, corporations—and not just those receiving bailout money—became concerned not only about spending, but how the public might perceive their travel habits.

"Right now, luxury is a four-letter word, and we've returned to our puritan roots in this country. Excess is bad," according to Lalia Rach, who is divisional dean at New York University's Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management. "This will pass, but this outlook will never go back to what it was."

The lodging industry has fought back, urging government leaders to tone down the rhetoric directed toward business travelers. Most are satisfied with their efforts.

"The industry has done a very good job of getting to the government and letting them understand that this industry is vital to the economy," Four Seasons' Sharp said. "It's one of the largest industries in the world and employs about one out of every 12 people. Their efforts should be to encourage travel and encourage people to continue running their business in a normal way."

Upper upscale properties have fared marginally better, though many also are looking for ways to boost business outside of their normal channels. Omni, for example, is trying to diversify the types of corporate clients it attracts, according to Frazier.

"Our locations are in the backyards of the major financial companies, and what happened at the end of 2008 with the financial institutions affected us significantly," Frazier said. "We've taken in more government business, and in some of these markets, the government rates are pretty good. We've also taken in more medical business than we have in the past."

Midprice hotels, meanwhile, are courting buyers by focusing on the value proposition angle.

"Nobody's doing great in this environment, with a dramatic drop in travel across all segments, but it's good to be in the midscale price tier with very strong brands," said Kevin Kowalski, senior vice president of global brand management for InterContinental Hotels Group's Holiday Inn brand family. "It's better being there than in some parts of our industry."

Besides its lower rates, the midprice tier has wooed buyers with its inclusive pricing models, in which many amenities, such as parking, breakfast and particularly Internet access, are included as part of the room rate. A few hotels on the upscale side have begun to offer Internet for free as well, and NYU's Rach said that the economic downturn ultimately could spur more to follow suit.

"The idea that the luxury hotels perhaps have had, that they can charge for everything when the other levels provide it for free, those days are going away," Rach said. "The worm has turned."

Still, even though the buyer has newfound negotiating leverage, the old adage of "it's a partnership," albeit an adage often forgotten by whomever is holding the ball, should hold up, Rach said. If too many buyers push too hard to chop rates, it will be detrimental to the industry overall, she said.

"If you're talking about upscale or luxury, there's a point where the service will begin to diminish because of the rate," Rach said. "The last time this happened, the hotel industry stopped doing renovations, and it was very apparent. For some of the hotels, the impact was tremendous."

While leaders at most hotels have pledged to maintain current service levels during the downturn, the construction pipeline is already seeing the implications of the downturn's effects. Supply growth is expected to continue and reach a peak this year, as projects that began construction in better economic conditions come to completion. It will begin tapering off in 2010, according to an April report by Lodging Econometrics.

From the second quarter of 2008 to the first quarter of 2009, the total U.S. pipeline has dropped by 16 percent, according to the firm. The report also said that project cancellations are at the highest level that they have ever recorded and that many projects are stalled because it has become nearly impossible to secure financing for hotels larger than 200 rooms.

Some iconic hotel brands are continuing their capital projects throughout the downturn. The Holiday Inn brand is continuing a relaunch that it began a few years ago, in which properties are getting new signage, better exterior lighting and improved bedding and bath, and the hotel company expects to complete it next year. The brand itself is growing as well, Kowalski said.

"We have the biggest pipeline of any hotel brand in the world, 1,100 hotels, and all will be opening in the next couple of years," according to Kowalski. "We're still seeing significant growth and are continuing to get deals done.

Starwood Hotels & Resorts' Sheraton brand also has indicated it is moving forward with a $4 billion worldwide makeover, including $1.3 billion in renovations and more than $2 billion in new hotel openings. Starwood expects to complete the three-year initiative this year.

Other hotel companies are attempting to reach new market segments. Hilton Hotels Corp., for example, this year launched a midprice extended stay brand, Home2 Suites by Hilton, hoping to compete with such brands as IHG's Candlewood Suites and Marriott International's TownePlace Suites.

Other hotels have enhanced their reward programs. Starwood last year altered its program to allow guests to book flights on most major domestic international carriers through its Web site, using accrued points to pay, an industry first.

More recently, Omni expanded its program to add a new tier and allow guests to earn free stays.

Global growth also continues for most major brands, particularly in the emerging markets of China, India, Russia and Brazil.

NYU's Rach said China should be one of the quickest markets out of the recession—unusual for an emerging market. Development in India has slowed somewhat, however, because external investments have dried up, she said.

As for the rest of the world, Rach said she expects the United States will emerge alongside China at the beginning of the recovery, and Europe probably will emerge more slowly.

Even though most hoteliers and analysts agree that the demand drops appear to be at or near their bottom level, however, emergence won't be quick, Rach said.

"It's not going to be a V-shape or a U-shape; it's going to be a bathtub-shape," she said. "When we hit bottom, we're going to be there for a while. We are changing our approaches in business and with our discretionary monies, where we finally recognize the difference between a want and a need."

Hoteliers, meanwhile, are exercising cautious optimism.

"We're making some advance bookings, and even the group business is starting to show some life," according to Four Seasons' Sharp. "I would say 2009 will continue as a roller coaster, but when we get to the end, we'll be back to normal action."

Westin's Brush said there were opportunities that can be exploited to emerge stronger from the downturn as well. With lower occupancies, hotel staff will have more time to spend with the fewer guests staying in their properties, so it's a good time to test new products and ideas, she said. She compared it to a car race.

"It's like there's been an accident and the yellow flag is up, so you can make a pit stop and tweak the engine, but you can't go out on the course and pass anyone," Brush said. "You can make sure you're as strong as you possibly can be for the upswing, and when we come out of it, we'll have guests for life." •