Jan Freitag
As the lodging industry continues to face challenging conditions, many travel buyers are tearing up hotel contracts from September and going back to the negotiating table in an attempt to seek further rate discounts. As this happens, some are finding that negotiated group rates and daily transient rates are similar. Noting what had been an industry rarity, Smith Travel Research vice president Jan Freitag on April 16 said that "transient rates are deteriorating and declining rather rapidly," and on average have come within just $9 of group rates. During a webinar hosted by ProMedia.travel Content Solutions and sponsored by Orbitz for Business, Freitag addressed this and other topics, including advice to travel managers who are on the lookout for great deals in a down economy. "This is a cyclical market," he said. "You're in the driver's seat today, but the hotels will be in the driver's seat tomorrow. Tell the hotel, 'I'm here for you today, but what can you do for me tomorrow?' " Additional excerpts of his comments follow.
Some hotels are still inflexible even in down markets. Why are hoteliers not opening up to more negotiations?
I assume that the hoteliers who are not really budging right now on price really learned their lesson post 9/11. They realized that if they cut rate today by 10 percent, they can't get that 10 percent back tomorrow--that takes a long time. If you take the rate of the year 2000 and adjust it by inflation, you see that the rate cuts of the years 2001 and 2002 were so steep that it took the hotel industry six years to catch up. So some hoteliers may have learned their lesson and said, "I can't give you any cuts because I won't be able to get it back next year." What they may say is, "My rate stays, but what can I give you in terms of added value? How about free breakfast, guaranteed late checkout and so forth?" Maybe they're negotiating with a slightly different playing field other than just rate.
How are hotels renegotiating contracts already in place?
This is obviously a two-way street. It's easy for the corporation to come back to the hotel and say, "Hey, I want a better deal," but the question is, can you deliver on the room nights, given that a lot of corporations have curtailed their travel? You have to understand the hotel perspective as well, saying, "Yes, I would be willing to deal with you, but, with that said, I need those room nights."
With the changing economy, what is the value in trending?
Meaning looking back at what did happen and then base what will happen ... As we go forward, we get asked that question all the time. People ask, "Jan, how good is your data really?" The last three months are really what this is all about. No one really asks us any questions about April 2008 because that's like 20 years ago. The question really is how good is the back data as an indicator of the future? I think we obviously can take the longer-term view. We can look at the recession of 1990 or we can look at the downturn post 9/11 and say, "Here is how hoteliers reacted to external shocks to the system." Yes, trending has a lot of value if you can take the long-term view. I am not suggesting that what we are in right now will be like that forever. It is very easy to look at the microcosm of your own hotel or your own company and look at January, February or March and say, "Oh my God, the sky is falling." Well yeah, for right now. But really in the long term, this is a cyclical industry. The hotel industry will bounce back and the general economy will bounce back. So will the individual company that you are with right now. It will also bounce back; there will be demand for leisure and business travel. I would suggest taking a really long view of this--not just for the last couple of months--and see what happened in the last two external shocks to the system, and see how we reacted and how the suppliers reacted. Call and ask them, "What did you do post 9/11? What did you do in 1990?" and see maybe if you can get some long-term, win-win relationships that way. [Travel buyers] will look at the last two months and look at the occupancy deterioration and will come to the hotels and say, "It looks like I have a lot of negotiating power," and the hotels will say, "Yes, we want your room nights." The question is, what rate are you using to start your negotiation? There, it is probably fair to look at a little longer-term view and look at the rate of maybe the end of 2008 just to have a starting point. But obviously I don't think anyone wants you to look back at June of 2007--the peak of the market--and say, "Let's use that number."
Do you expect service levels to decline in hotels as a result of cuts in hotel property staff?
You as a travel buyer really want that strong supplier base. You don't want to beat [suppliers] when they are down. The travel buyer is in the driver's seat, yes, and you can take advantage of that to a degree, but you also want to be very mindful that if you have a group booked into a property and your group shows up and the property is in foreclosure that doesn't help anybody. Your group members aren't happy, and the hotelier obviously isn't happy. Just be mindful of what you are trying to negotiate, and not try to extract every last ounce of value from the negotiation. You want a supplier that is going to be with you through this downturn and then a couple of years into the upturn. Are service levels going to be affected in the upper end in the good hotels? No, they are going to cut the back of the house as much as they can, but if service delivery suffers you aren't going to go back to them when you have the money. I think people are getting very creative on how they are looking at service delivery and how they can impact their bottom line without impacting the guest service.
Is there a sign of a turnaround?
From a very high-level perspective, room demand in the United States is tightly correlated to gross domestic product growth, and we believe that GDP growth is going to be slightly positive in the third quarter and positive in the fourth quarter of this year, which, to us, means that room demand is going to be positive in the fourth quarter of 2009 compared with the fourth quarter 2008, and probably in the first quarter of 2010 compared with the first quarter of this year. Obviously, the fourth quarter of 2008 and the first quarter of 2009 were terrible. I was giving a talk and this gentleman raised his hand and said, "Jan, aren't we just looking at terrible numbers and looking at which one is not quite as terrible?" The answer is yeah, maybe, but perception is reality. If we think that we have hit the bottom, we probably have hit the bottom.