Buyers Fear Steeper Rate Hikes, Though Hotels Pledge Rationality

With the 2007 corporate rate negotiation season not far off, sentiment is mixed as to whether rates will ascend dramatically or be similar to the level of increase travel buyers contended with for 2006. Some hotel executives maintain that increases will be tolerable, while buyers and analysts both continue to be wary of even higher rate hikes.

Hotel executives gathered earlier this month at the 28th annual New York University International Hospitality Industry Investment Conference said they wouldn't leverage their strong position to bleed travel buyers—too much.

"Rate increases will be reasonable," said Matt Hart, president and COO of Hilton Hotels Corp. "We're not out to price-gouge." Loews president and COO Jack Adler said that the current cycle dictated rate increases, but stressed that both hoteliers and buyers expect them. "Buyers understand that rates have moved up," said Loews' Adler, "but we understand that its cyclical, and we have long-standing relationships with companies."

Yet, with average daily rates 6 percent higher than they were one year ago, according to Randy Smith, CEO of Smith Travel Research, hotel executives again find themselves in an enviable negotiating position. Smith said that increases in monthly demand were directly responsible for driving rates up, further cushioning supplier stances.

Bjorn Hanson, head of PricewaterhouseCoopers' hospitality and leisure practice, remains skeptical that corporate rates will stay static. "As the hotel companies look forward to 2007, they're saying, 'If we were able to accomplish 6.4 percent increases in 2006, what can we get in 2007?' " Hanson said. "The corporate rate increases for 2006 were more like 5.25 percent, although it was a big range depending on city, season and day of week." Hanson added that corporate rate increases in such cities as New York reached 12 percent.

As rate negotiations approach, it is possible that travel buyers will implore suppliers to step off the throttle and propose more digestible increases. "As we look forward, the buyers will come in and say, 'We went along with that 5.25 percent increase for 2006. That was your big bump and you shouldn't expect that from us again,' " Hanson said. "Conversely, the hoteliers are going to say, 'We never thought we'd achieve the 6.4 percent, so we undernegotiated with you. You got a good deal, therefore this year your rate should be bigger.' "

Ultimately, Hanson predicted that travel buyers would end up absorbing rate hikes that were along the same line as last year. While 5.25 percent may not seem that steep, Hanson submitted that it is double the rate of inflation. Heidi Sanderson, senior hotel procurement consultant for American Express Advisory Services, agreed with PwC's forecast. "I do think we'll expect to see more of the same," she said.

Buyers' displeasure with the current trends in rate negotiations is borne out of the market downturn that afflicted the hotel industry after 9/11. Shortly thereafter, buyers found themselves practically able to name their price. However, during this time, buyers generally did not resort to pummeling suppliers on rate and they did so to help stave off financial ruin for the hotel industry. Now that the market has shifted back to the seller, they feel that they are not receiving reciprocity.

"The buyers didn't negotiate as hard as they could have," said Hanson, "but when times shifted, the hoteliers forgot this. Buyers did a good job and part of doing a good job is making sure that the hotels survive. When times changed though, buyers didn't receive the same treatment."

Part of the problem is systemic of the industry as a whole, specifically the seller's side. A strong relationship between a seller and a buyer is a key driver during negotiations. However, turnover rate on the supplier's side is double that of the buyer, so once negotiations come around again, a buyer may be dealing with an altogether new supplier who may not know a lot about that particular account.

With the cards stacked against buyers, Hanson advocated some rather unorthodox strategies that he never before prescribed. "Buyers should be ready to walk," he said. "My experience is that buyers don't want to do this, but in the face of rate increases of 15 percent sometimes, these are different circumstances."

Sam Schisler, co-chair of the National Business Travel Association hotel committee and global hotel program manager for clothing manufacturer Limited Brands Inc., is convinced that hotels would raise rates, but he wasn't overly infuriated by it. "You have to understand where the industry came from and look at the entire picture," he said. "It may look like you are taking a 7 percent or 11 percent increase in rate, but for three years during the downturn you didn't take any. If you balance it out, you're within about a 4 percent increase, which in a good economy is an average increase. We're only now getting to 2000 levels."

Although Schisler agreed that a 5.25 percent bump was imminent and understandable, he said that he did worry about increasing rates, like any other corporate travel buyer. He said that preparation and on-hand data made him fret a bit less. "Data is key," he said. "When it comes to keeping rates down during negotiations, the basics are the key. Know your top cities, know your spend in every detail from booking patterns to length of stays to common arrival dates. Knowing your data can help you tremendously when it comes to your rates."

One hotel company that may allow buyers to breathe more easily come negotiation time is Carlson Hotels Worldwide, whose brands include Radisson, Country Inns & Suites and Park Inn. The company's president of the Americas, Yvonne La Penotiere, said 2007 would be a tough season for negotiations, but rates, especially for its Radisson brand, would not be as aggressive as some of Carlson's competitors. "We've been trying to rebuild the Radisson brand over the past two to three years, and don't feel that the brand is yet in the position where we can drive rate real hard."

La Penotiere added that many of Carlson's biggest clients consider rate their number-one priority, but beyond that they look to add value to their programs by negotiating for such added amenities and services as last-room availability. "That's where we can add value. A nice balance between, 'Well, we need a little more rate, but we'll give you some value-added things to offset that.' "

While the value of a program as a whole may supersede rate, PwC's Hanson said that pressure from owners to raise rates will drive up the cost of such ancillary charges as meeting room rental rates, menu prices and business center services.

However, one amenity that soon may become as standard as a USA Today at the door each morning is high-speed Internet access, which may alleviate the headache of buyers negotiating for the service. High-speed Internet increasingly is becoming a primary need for business travelers and while many select-service properties offer it for free, most upscale and deluxe hotels do not.

Raymond Bickson, managing director and CEO of Taj Hotels Resorts & Palaces, conceded that logging on soon would become free. "High-speed Internet is becoming the same as having a bed and a bathroom," he said.