Transient Hotel Rate Drop Undermining Group Rates

The premium between transient and group hotel rates is shrinking or, in certain markets, vanishing completely, according to industry analysts, which could mean steep drops in group rates on the horizon but also could present difficulties to meeting buyers needing to fill room blocks for already scheduled events.

Smith Travel Research this month reported that transient demand dropped sharply in the final months of 2008, particularly in the luxury tier, while group demand, though also declining, was a bit more steady. It naturally follows that both group demand and rates are slower to adjust during a downturn because of the long booking windows associated with the events, said Bjorn Hanson, an associate professor at New York University's Tisch Center.

The U.S. luxury tier saw about a 13 percent drop in the premium between group and transient rates, from $75 at the beginning of the year to $65 at year-end, according to Smith Travel Research. In the upper upscale tier, that premium dropped 40 percent, from $15 in January 2008 to just $9 in December 2008, the firm reported.

In certain markets—Orlando, for example, which has a heavy reliance on group travel—the transient rate erosion is even more pronounced, said Jan Freitag, vice president of global development for Smith Travel Research.

"For upper upscale hotels, there is no longer a premium," Freitag said. "Group rates are now higher than transient rates."

Those markets could cause problems to meeting buyers who had negotiated events there in a stronger economy, he said. Travelers who see transient rates lower than the negotiated group rates will gravitate toward those, making it harder to fill the necessary rooms contractually required at the group rate.

Part of the discrepancy in those markets could be explained by third-party premiums that are not being reported, making transient rates seem lower than they actually are, Freitag said. At the same time, current average daily hotel rates could be masked by those artificially high group rates, he said.

"It means the average daily rates that we're reporting on the upper end of the market are much worse than they seem," Freitag said.

At this time, group rates are poised to be more of a bargain. "Group rates look strong because a large percent were negotiated six months ago, set in a different environment," NYU's Hanson said. "Group rates that are being negotiated now will be proportionately lower than transient."

Corporate Travel 100 company UnitedHealth Group has taken advantage of the drop in the industry's overall transient and group hotel demand. In negotiations for this year's hotel program, global travel and meetings manager Tamara Gordon included request-for-proposals questions about honoring the transient rate as the highest rate for a group booking and set room-count parameters to ensure the hotel has the capacity to honor that discounted rate.

When the preferred hotel list was compiled, the company's meeting planners were told to use those arrangements when organizing their meetings.

UnitedHealth's transient room rates are 6 percent lower this year versus 2008, so the group arrangement with the transient rate has brought the meetings program savings on top of a broader meetings management initiative.

"Most of our meetings are 25 to 50 people," Gordon said. "Even if they agreed to the 25 rooms, we'll save there because they can't charge us a higher rate just because they are blocking space for a group."

With increasing hotel capacity, some buyers already have formed a path to what next year's negotiation cycle may look like including setting up programs to further leverage transient and meetings spending.

Carlson Wagonlit Travel North America vice president of meetings and events Tony Wagner said some clients are building prepackaged meetings programs in their top transient destinations, which generates additional savings.

On the supplier side, many hotels already have started to ratchet up incentives to boost meetings demand. Omni Hotels in February started a program to waive attrition fees for contracts booked and completed this year. That same month, Hilton Hotels Corp. launched an incentive structure for meeting planners, giving in return for a scale of room night bookings a certain number of such incentives as room rebates, 25 percent allowable attrition and double rewards points for attendees. Dolce Hotels and Resorts, for which meetings are the primary focus, will give discounts for either customized packages or discounted complete meeting package pricing.

Core components of meetings contracts now are being altered to enable companies to continue holding meetings and keeping some level of business with the hotel while limiting attendees.

According to CWT, some organizers have negotiated 45-day cancellation clauses to split the difference between the traditional 30- and 60-day clauses. Wagner said buyers also are increasing their allowable attrition clauses, up from the 10 percent to 15 percent range to the 15 percent to 20 percent range.

"At the beginning of the slowdown, hotels were sticking to their cancellation and attrition penalties for the ability to hit their numbers for the year," said Wagner. "Now, the leverage of the corporate and meeting planning companies has increased and you are seeing people for new meetings be more flexible in managing attrition penalties."

Dolce president and CEO Steven Rudnitsky said he sees meeting planners more focused on their return on investment than ever.

"The good news is our core group of corporate customers who have contributed to our business are continuing to hold sessions and training seminars," Rudnitsky said. "We haven't seen mass cancellations, though we have noticed booking windows are getting shorter."

In the case of smaller meetings that booking window has dropped to just a few weeks, according to HRG North America president of events and meetings management Paul Salvatore. Larger meetings, however, still are being booked at least a year in advance.