PKF Hospitality Research revised downward its 2009 U.S. hotel forecast, first released a month ago, citing "the gravitational pull on the national economy resulting from the extraordinary financial events currently playing out on Wall Street and in Washington." The unusual adjustment in such closely watched figures does not help the cause of hoteliers trying to hold the line on 2009 rates in ongoing corporate negotiations.
For 2009, PKF now expects year-over-year industry revenue per available room and profit declines of 4.3 percent and 7.9 percent, respectively, as opposed to previously predicted dips of 3.2 percent and 2.5 percent, respectively. Other adjusted figures include a projected increase in supply of 3 percent, a decrease in demand of 1.5 percent and flat average daily rates. PKF also predicted a reduction in occupancy of 4.4 percent to 58.3 percent, for what would be "the lowest level of occupancy posted in the past 20 years."
Meanwhile, a relatively heated discussion between banking and finance industry travel buyers and lodging representatives at last week's New York City Business Travel Association conference illustrated a divide on rate agreements amidst what some participants called a prolonged negotiating season.
Travel buyers have long waited to see the pendulum swing in their favor during hotel rate negotiations and according to most analysts, the shift is apparent for 2009. The point of contention is by how much. Anticipating a complete turnaround, some buyers are demanding flat or decreased rates, whereas hoteliers are aiming to maintain what some call "rate integrity," according to commentary during two panel discussions at the event.
"For all of those years that we had significant rate increases, we paid those. We paid the premiums, but now we are at a point where clearly everyone is cutting back and we understand that you still need revenue and so forth, but many large corporations have instituted a rate cap," said Bonnie Darkey, corporate travel manager for Lazard LLC. "It is important to develop a long-term relationship where there is flexibility, and revenue mangers realize they are not going to get the type of rate increases, if any, this year. We are pretty much holding to flat rates or reductions. I am not accepting [increases] and in very few instances am I accepting additional charges for 2009."
"We put rate caps on each city and made it clear before the initial bid that if you aren't within that cap, we won't come back a second time," said Lasse Leskinen, U.S. travel manager at BNP Paribas. "We won't even ask you to lower the price; you are out the first step of the way."
Attempting to weather an uncertain economic downturn, travel buyers argued that suppliers are not sympathetic toward their needs to cut their travel expenses. Hoteliers fired back that the buyers should not expect hotels to incur additional costs by offering value-added incentives.
"I have always been quite clear on what my expectations are, and this year I expect that since I have over performed for these hoteliers ... as a partner [they're] going to see that and come to the table and be creative and flexible," said Marcella Olivier, travel manager for Babcock and Brown. "I can't understand what the inflexibility is on things that are really very clear to us now. As buyers, for years we have been listening to 'We can't do Internet.' " Not blending Web access into the base rate, she said, "is unacceptable."
Exasperated, Loews Regency Hotel New York City director of business travel Susan Carlin replied, "I think you need to understand the hotel side. We are a business and these things aren't free. Internet, when we give it to you complimentary, is not free for us; we are paying for it. When we give you local phone calls, we're paying for it and when we give you complimentary breakfast, we're paying for it. Now you are asking for both: you are asking for lower rates and you are asking for all of these things for free. So where are we covering the cost?"
"I'm not one to hopscotch," said Olivier. "I am one to be very loyal as long as we are getting what we need. It goes beyond our favorable relationship; are our business travelers getting what they need and is there a cost savings? Now we are moving to mid-tier properties where business travelers are still getting what they want and guess what, they are also getting free Internet and they are not paying $50 a night for parking."
"Next year, a lot of our preferred hotels will not be in the program anymore because they aren't offering any additional discounts like the free Internet and so forth," said one buyer in the audience. "A comment to hoteliers is that many of your colleagues already arrange free Internet and they do it without us even asking for it."
Countering these demands, TPG Hospitality New York area director of sales and marketing Daniel Silva said, "I really haven't see a big push for value-adds like free Internet and free breakfast this year. I am seeing it a little bit but not really."
'Disconnect' On Rates?
Despite the financial buyers' comments, an InterContinental Hotels Group official asserted that all brands would experience rate increases in 2009. "Revenue per available room [growth] is negative in [luxury tiers] not because demand has dropped, but because supply has increased," said IHG vice president of performance strategy and planning Isaac Collazo. "So in fact, you are seeing more demand and this is what tells us that business has been holding up on the business travel side of the equation. When you look around on the demand side, the decline is not nationwide, yet there are parts of the country where they are actually doing OK and growing."
But fellow panelist and BidStork president Joseph Friedman argued that the hoteliers seem to be somewhat disconnected from hotel market realities. "I think I am reading a different report because the Smith Travel Research numbers that I have right here says that luxury is down most significantly in terms of occupancy and revenue per available room," said Friedman.
Smith Travel Research and PKF Hospitality Research agree that demand is down--relative to supply--for the lodging industry nationwide. STR expects 2008 U.S. hotel occupancy to decline 3 percent year over year, and another 3.5 percent to 59.1 percent in 2009, "the lowest level since 2003." For 2010 STR forecasted a further decline in occupancy to 58.7 percent.
However, the U.S. lodging industry will achieve record-setting average daily rates, according to STR: a 3.4 percent annual increase during full-year 2008 to $107.44, and a 1 percent increase for 2009 to an "all-time industry best" of $108.53.
Corporate and contract rates account for approximately 20 percent of occupied room nights and almost 30 percent of the U.S. lodging industry revenue, according to Bjorn Hanson, associate professor of hospitality and management at New York University.
"This year, most corporate travel managers are including in their negotiation strategies for 2009 a plan to recover what some are calling 'subsidy' of hotel average rates in 2008 because of what have become 'high' rates negotiated in 2007 for 2008," Hanson wrote in a recent press release.
Hanson predicted that the 2009 season would be unlike any that corporate travel buyers have seen since 2003. Nevertheless, he predicted that corporate rates in 2009 would rise by 1.5 percent to 2 percent, with a group rate increase of about 2 percent.
Evolution Of The Cycle
Feburary 2008: Global Hotel Rates, Demand Continue To Rise
March 2008: U.S. Lodging Downturn Looms, But Buyer Beware
May 2008: Buyers Optimistic On '09 Hotel Rate Weakness
June 2008: For Now, Hotels Steer Rate Negotiations, But There's Room at the Wheel for Savvy Buyers
June 2008: Hotels Renegotiating Rates To Preserve Corporate Business
August 2008: Hotel Rate Growth Mixed Amid Slowing Business Travel
October 2008: Hotels Stand Firm On Negotiations, But Analysts See Loosening
October 2008: Analysts Forecast Further Lodging Demand Erosion