'09 Europe Hotel View Bleak

As buyers prepare to begin the annual hotel negotiating process for 2009, the picture looks distinctly mixed. While the economic downturn has started to hit average room rates in the United States, there is little sign of hoteliers across the Atlantic feeling the ill winds of change.

Firm evidence of the contrast was provided earlier this month when Marriott reported its average daily rates in the second quarter of 2008 were down 2.3 percent annually in the United States but up 15.4 percent in the rest of the world.

In Europe, rates remain high because demand barely has slackened and the dollar is struggling more than ever, especially against the euro. At press time, it was worth only €0.62. There appears to be little chance of the exchange rate improving, so the big question for buyers is whether demand might finally weaken over the next few months, persuading hoteliers to adopt a less aggressive negotiating stance than over the past three years.

Prevailing expert opinion is that they will not. Instead, rates are expected to rise again, although the silver lining is that the increases will no longer be in double-digit percentages. Buyers will therefore have to resort to such familiar tactics as downgrading, negotiating free extras and trying to move travelers to off-peak nights.

However, one professional is recommending a delay in negotiations, while InterContinental Hotels Group is urging clients to reconsider submitting to dynamic pricing.

TRI Hospitality Consulting research manager Ben Walker is among those who believe hotels will retain the upper hand in negotiations. Figures from TRI for the first five months of 2008 show occupancy levels have dipped in six out of 10 cities, but rates have fallen in only two of them.

"There has been some evidence of weakening demand, but it is pretty minimal," Walker said. "2007 was a peak year for international travel, so it would be wrong to overstate any reversal. Major cities, such as Paris, London and Amsterdam, are still extremely busy. Some hotels are reporting a weakening in meetings bookings by the banking and financial services sectors, but bookings from the pharmaceutical sector remain buoyant."

Walker's views are shared by Jason Harris, senior director for hotel relations with BCD Travel.

"Europe has not seen, or is only beginning to see, a softening," Harris said. "Everyone is talking about decline, but no one is experiencing it yet. However, we know that the City [London's equivalent of Wall Street] is laying off thousands of people and rising oil prices mean that companies will have to look at travel budgets. Whatever happens to demand, there will be tough negotiations because hoteliers and investors had budgeted for rates to continue growing over the next few years."

Russell Green, InterContinental Hotels Group's Europe, Middle East and Africa director of business travel sales, also is looking forward to lively negotiations.

"There is still growth, but it is slowing," he said. "We are seeing occupancy plateau a little. It would be naïve for us to discount all the leading indicators, but the headline numbers say we are OK and we remain cautiously optimistic. The expectation from our shareholders is that we will at the very least be growing rates in line with the market, so we will continue to be somewhat aggressive. Hotel supply in Europe has grown, but not nearly as much as when we last reached this stage of the curve, and as a result the situation won't be nearly as severe for us. Buyers should gird their loins for some challenging negotiations."

Asked how buyers can secure more attractive rates, Green urged those with mandated travel policies to look at moving to off-peak nights, avoiding Tuesday and Wednesday nights, and taking advantage of deep discounts on Sunday nights. Green encouraged buyers to reconsider the hitherto unpopular idea of dynamic pricing, with which clients are given a fixed discount off a floating rate that varies daily.

"In the past, they said they didn't like the idea because the market was so strong," Green said. "Dynamic pricing is more market-sensitive. They could make some really big savings. Let's look at it for locations where you do not have a lot of business."

BCD's Harris suggested buyers who expect occupancy to fall in Europe should delay contracting in the hope of finding themselves in a stronger negotiating position.

However, InterContinental's Green cautioned against taking this too far. "Corporate clients run the risk that the longer they wait, the more the market might improve," he said. "I wouldn't want to wait until October because by the time rates get loaded in Q1 or Q2 next year, our owners wouldn't like that. Our financial year is January to December, and we would have to pass on our general rate increases."

In many key cities around Europe, Harris, Green and Walker said, occupancy has reached a peak but room rates continue to rise.

As has been the case for the past three years, Paris' city center has seen very little new supply, and rates therefore continue to climb sharply. There has been more hotel development elsewhere, such as around the airports and in the La Défense business district.

The bad news in London is that rates continue to grow. The good news is that growth is slowing. According to TRI, average rate climbed 3.7 percent in May 2008, compared to 10.7 percent in May 2007 and 6.9 percent in 2006. Although U.S. visitor numbers have fallen 2 percent, this has been compensated by increases from elsewhere in the world.

However, there are a couple of chinks in the armor that buyers could try to exploit. The first, said Walker, is that "four-star and three-star hotels are holding up well, but there is some evidence that the luxury market is having a tougher time." The second is that the rash of new hotels in and around the City may be feeling more price-sensitive owing to cutbacks in the financial sector, which is the cornerstone of their business.

Moscow is "still the number-one city for rates and still a nightmare," said Harris. "There is new stock coming online, but it is far too slow." Other cities with oil and gas connections in Eastern Europe, such as Almaty, also are experiencing rate inflation.

There are signs that five-star hotels in Brussels are losing business to four-star rivals, but the city is booming as a conference destination, owing to rates cheaper than in Paris or London.

Although Amsterdam's leisure demand has tailed off, the corporate market is holding up well and, with no new supply, rates are rising.

Hamburg is becoming more competitive owing to a rash of new supply. However, the window of opportunity may be limited as a new industrial fair complex is expected to draw many more visitors. Rates are growing in Berlin, Düsseldorf and Frankfurt, but stagnating in Munich.

Prague is one of the few locations in Europe currently good for a bargain, owing to a big drop in leisure business.