Buyers Face Further Hikes In '07 Hotel Rate Season

Corporate travel managers reluctantly are accepting the inevitability of another round of room rate increases in the upcoming negotiating season. Many suppliers contend favorable market conditions affords them leeway to raise rates. As a countermeasure, buyers hoping to offset inflating rates will need to prove to suppliers that they possess the ability to move marketshare. More buyers are likely to employ last-room availability contract clauses or submit to new dynamic pricing approaches next season.

The National Business Travel Association this week will unveil a new definition of last-room availability and a white paper on dynamic pricing at its convention in Chicago.

Regardless of how well a buyer is prepared, suppliers will wield the upper hand when it comes time to negotiating 2007 rates. "The hotel industry is firmly in the driver's seat when it comes to pricing," said Jan Freitag, vice president of Hendersonville, Tenn.-based Smith Travel Research, a provider of lodging industry data. "Occupancies are up and probably will be at the highest level ever recorded in 2007 on a 12-month moving average, which necessitates higher room rates."

Bjorn Hanson, leader of PricewaterhouseCoopers' hospitality and leisure practice, forecasted an aggregate corporate travel rate increase of 5.25 percent for 2007, but Freitag predicted that the increase would be over that number, especially in higher price-point hotels located within gateway cities. "In the large markets, in the upper-upscale and luxury segments, which normally is what the business traveler uses, the rate increases may be as much as 10 percent to 15 percent."

Hilton Hotels Corp. will be one company looking for increases well above the 5.25 percent range, specifically in markets with high demand and tighter availability. "Customers will come to us and say, 'We'd like you to keep the rates flat.' That's not a reasonable request in today's marketplace," said Denise Lodrige-Kover, Hilton's vice president of business travel sales. "While there was definitely an increase in rates last year, you'll see the same this coming year. Some markets will be able to get double-digit increases, while some will remain flat—it depends on occupancy. We've done higher than that this past year and certainly we are looking to do higher than 5 percent for next year, but again it's all relative to which brand, marketplace and demand." While Hilton rates may be higher for 2007, Lodrige-Kover did stress the additional revenue would be reinvested into hotel property improvements.

With brand being a key component in pricing, Choice Hotels International, a purveyor of midprice brands, is one chain that doesn't expect to levy the same increases as some of its higher-segmented colleagues. "Choice is rather conservative in price increases," said Christine Chippindale, senior director of travel industry sales for Choice. "Some of the other brands really imposed very high price increases. We're seeing about a $5 rate lift worldwide."

While Choice may be an anomaly, if 2006 is any indication of 2007, then corporate travel buyers again will be hard-pressed to negotiate favorable rates. However, Sam Schisler, co-chairman of the NBTA hotel committee and global hotel program manager for clothing manufacturer Limited Brands, sees a glimmer of hope for 2007.

"I do think negotiations will be similar to last year," he said, "but they will be better because we'll have a full two years under our belt of the upswing in travel. We also have a better outlook on top cities and better knowledge of the data." Schisler noted the help received from Smith Travel Research's STAR Reports, which give data snapshots of the hotel industry. "The reports really help to understand the trends from the downswing to the upswing," he said. "This year will be a pretty good year to understanding where everything sits."

According to Kevin Kelly, executive director of sales for Hyatt Hotels & Resorts, having a firm grasp of data and intelligence is necessary when developing the hotel component of a travel program, and can go a long way to appeasing senior management. Hyatt last month invited nearly 50 of its top corporate travel managers to meet in Austin, Texas, at what Hyatt dubbed "Travel Exchange." With the aid of STR's Freitag, Hyatt intended to empower travel managers with intelligence on industry trends and forecasts.

"Our hope is that those travel managers will go back and educate senior management on the expectations because that is where we get in trouble in negotiating," said Kelly. "Senior management sends down guidance to the travel team, but that guidance is sometimes in competition to what's actually happening in the market."

"Hopefully, they can go back to senior management and put a positive spin on their negotiation process," Kelly continued. "They can say they negotiated a 10 percent increase in New York, but show senior management that the increase is well under the industry's growth percentage. Show them that their negotiations are market driven."

One way travel buyers can keep increases at bay is by convincing suppliers of their ability to move marketshare. "It's not so much showing the figures," said Hilton's Lodrige-Kover, "it's showing whether they can move share. The greatest value that a customer brings to any company is the consolidation of their business and whether they can deliver when they say, 'I have 3,000 room nights for this hotel.' We're setting our pricing and looking at that."

Ensuring room nights has become even more difficult for travel buyers as availability continues to dwindle due to heightening demand and properties converting rooms into condos. Much of the problem is occurring in top destination cities where business travel is concentrated, and it is making travel buying that much harder. "In a lot of markets, availability is becoming just as important as rate," said Hyatt's Kelly. He said it helps determine with which customers hotels negotiate. "If a hotel cannot obtain the year-over-year rate percentage increases that they need in order to remain competitive, then they may be forced to not negotiate at all," he said. "The premise is that when you're in a market of high demand, more negotiated business is not always better."

As an extreme counteraction to lessening availability, some buyers have looked into room allotments or blocks to fill their needs. "Buyers will consider room blocks if availability is a major issue, which will be in the high-demand markets," said Maria Chevalier, vice president of hotel relations at BCD Travel's Travel Procurement Solutions division. "Some companies have done it in areas where they struggle with not having availability."

Choice's Chippindale said that her company welcomes less availability. "Because availability is tight, we are expecting more interest in our brands because we have the distribution," she said. Choice boasts over 5,000 hotels in its system. "We're expecting greater interest from travel managers, looking to expand the number of hotels in their preferred travel program."

While availability is indeed tight, another adverse trend affecting travel buyers is the proliferation of room rates in secondary and tertiary cities. Properties in these outlying areas used to be counted upon as manageable, but that is steadily tipping the other way. According to Smith Travel Research, average daily rates in all markets outside of the top 25 destinations climbed 5 percent year to date. Further, with squeezed availability in the top markets, the increase in rooms being sold in secondary and tertiary markets is outpacing the top markets, as many buyers are migrating toward these areas.

"It's not just New York and Chicago anymore," said Hyatt's Kelly. "There are a lot of secondary and tertiary markets that are seeing demand spike as well." Added BCD's Chevalier: "Anyway you slice and dice it, demand is back. Across the board, secondary and tertiary markets are doing as well as primary markets and luxury, all the way down to economy, is doing well."

Another obstacle leading to tighter availability is that most business travel is concentrated on Tuesday and Wednesday nights. Smith Travel Research clocked occupancy on these nights at around 80 percent. "It forces hotels to make tough decisions on whether to negotiate based on the amount of increase we can get for the negotiated rate," said Kelly.

And when availability is the topic, last-room availability talk usually follows. "LRA is going to be the biggest problem because of the availability issue," said Hilton's Lodrige-Kover. "Everyone wants LRA on Tuesdays and Wednesdays," she said. "If demand is so high and the only time you need those rooms is on one of those days, then you're probably going to command a higher price."

Limited Brands contracts for last-room availability, but Schisler said that you have to look at whether LRA is right for you. "You have to balance out your data to know how many hotels you are going to put in for LRA and how many not," he said. "LRA is important, but depends on the program you have."

Choice Hotels' rates are all contracted on LRA, which Chippindale said is one of the reasons why Choice is easier with which to negotiate.

The grind of 2006 negotiations created protracted talks, marked by an alarming amount of rebids and renegotiation. Buyers and suppliers expect the same for the 2007 season, prompting some suppliers to offer a fix.

"My solution is offering dynamic pricing," said Lodrige-Kover, a term that buyers often shudder at, which proposes a floating-rate model in lieu of the industry standard fixed rate. "We need to do something about this long, arduous process," she added. Hyatt too is all for a dynamic pricing model, Kelly said, as the hotel company continues to push the process with a specific number of companies.

During this month's National Business Travel Association convention, results of a dynamic pricing pilot program that included the participation of Accenture will be divulged. The pilot showed that a company on a dynamic pricing model for seven months absorbed only a minimal cash difference when compared with a fixed-price environment. "What it does is save a lot of time," Kelly said.