With the U.S. hotel industry in 2004 entering the third year of a widespread downturn, buyers once again are expected to hold the upper hand in annual rate negotiations. Indications early in the summer that occupancy rates and room revenues were strengthening gave hotels hope that they might be able to pass along rate increases, but analysts attributed the summer uptick largely to leisure travel. Consequently, the consensus is that negotiated rates mostly will remain flat with 2003 or, in certain cases, decline.
"Generally, we're looking for flat rates, but, in certain markets, including our headquarters city, rates may be down slightly over this year," said Patricia Carlin, travel manager at Sybase in Dublin, Calif. "What's more, we don't anticipate resistance from the hotels. They simply want our business. If we can show we can move marketshare, they're going to be fine."
Keith Berg, corporate travel manager at Becton Dickinson in Franklin Lakes, N.J., agreed being able to shift marketshare was even more of a prerequisite this year. "If you're prepared to deliver this way, the hotels seem prepared to deal," he said. "Just like the airlines and other travel suppliers, hotels want to see gains in share flowing in their direction."
Symptomatic of the present market, Carlin said she was being approached by numerous hotels trying to gain entry into her program. "There's a lot of competition contacting us right now, which puts pressure on our existing hotels to hold the line on any price increases," she said.
To the degree rates decline in 2004, the percentage of decrease is likely to vary with hotel price point, as well as competitive conditions in the local market. According to consultants Eclipse Advisors, the steepest rate decreases buyers will be able to achieve will be 3.9 percent at upscale hotels, followed by 3.4 percent at midprice properties. By contrast, buyers should expect much more modest decreases at either end of the price point spectrum—1.1 percent at deluxe properties and 0.9 percent at economy hotels.
On a city-by-city basis across all price points, Eclipse estimated that the average room rate next year in the country's most expensive market, New York, will be $172. A room in Boston, by contrast, will cost $134; Chicago, $123; Los Angeles, $117; and San Francisco, $146.
Runzheimer International took the opposite position, projecting that corporate spending on lodging in 2004 would increase 5 percent.
"Through 2003, rates have not increased and, in some cities, been dramatically lower. These deals won't fade away, but spending will increase primarily at the midprice hotels," said Phyllis Schumann, who compiles Runzheimer's outlook. In many markets, midprice properties have benefited from buyers trading down from full service options to save money.
For their part, Wall Street analysts this month expressed uncertainty about hotels' ability to command higher prices. "Business travel remains weak, and all eyes are on corporate travel volumes for the second half of this year," said Paul Keung, lodging industry analyst for CIBC World Markets, who agreed that negotiated rates for 2004 were likely to be mostly flat with 2003.
Travel volumes may improve in the fourth quarter, for example, but those gains may do little to help hotels in rate negotiations simply because of timing. Sales managers, after all, are eager to lock in corporate business as early in the season as possible. Rates also need to be finalized by late November or early December, if they are to be loaded into the global distribution systems by year-end.
September typically is spoken of as the start of the high-volume fall business travel season. Though results only were available for the first week, Keith Mills, Keung's counterpart at UBS, saw gains in revenue per available room as auguring well. "RevPAR for upper upscale hotels increased 3.7 percent, and urban hotels rose 3.5 percent for the week, relative to a year ago," UBS' Mills said. "Meanwhile, for the quarter to date, upper upscale and urban RevPAR are up 2.4 percent and 2.9 percent, respectively."
The improvement in the performance of full service, urban hotels is significant as a reminder that downtown locations still are a force to be reckoned with, despite the increasing role that midprice hotels play in many travel buyers' programs.
Harry Curtis, lodging industry analyst at JPMorgan, is less sanguine. Corporate group and individual demand remains the most important and lucrative source of demand for most lodging companies, he noted. Yet, he isn't sure any short-term bump in demand will prove sustainable, meaning hotels will be forced to come up with rate concessions.
"These travelers are usually the last to return," he said. "Corporations need to feel better about profits and revenue growth prospects before travel restrictions are lifted and demand begins to accelerate."
Approaching the fourth quarter, Keung also said he is nervous about the continuing high unemployment numbers. "A jobless recovery tempers our enthusiasm for any steep rebound in corporate travel," he said.
While analysts don't expect revenue per available room to show any increase in growth in 2003, they expect that the second half of the year will be stronger than the first. This suggests to PricewaterhouseCoopers that the industry may have hit its lowest point in terms of RevPAR and has begun a gradual recovery. In fact, in PwC's view, the fall off in demand reached its ebb in the first quarter of this year and the fall off in room rates in the second quarter.
"The volatility in the market now has worked itself out," said Bjorn Hanson, global head of the firm's hospitality and leisure practice, sounding more bullish than the Wall Street analysts. "Consequently, we believe the industry will see sustained improvement for the foreseeable future."
However, improvements from July through December still will be insufficient to show positive RevPAR growth for the year. "Next year, on the other hand, we expect to see real improvement in RevPAR," Hanson said. Accordingly, PwC has projected a jump in RevPAR growth in 2004 of 4.5 percent and 4.2 percent in 2005.
PwC's findings are confirmed by statistics released last month by Standard & Poor's, though hotel and casino equity analyst Tom Graves cautioned that industry profitability remained vulnerable, should business spending unexpectedly contract or major terrorist incidents occur on U.S. soil.
If S&P and PwC's projections are borne out, travel buyers could face a markedly different negotiating environment a year from now, with hotels in a much more demanding mode when it comes to rate negotiations. It's unlikely that the market could shift radically from one favoring buyers so strongly, but the pendulum could begin gradually to move in favor of suppliers.
With this possibility in mind, one buyer makes sure not to push her hotel partners too far against the wall in negotiating deals.
"Everything is cyclical. After you've been through a couple of cycles, you realize how important it is to think long term and have the right relationships in place, particularly with hotels in your headquarters city and other popular destinations," said Terry Sullo, manager of travel and meeting services for Akamai Technologies in Cambridge, Mass.
(BTN, Aug. 25). "That way, when demand returns and hotels again have the upper hand, you'll have that relationship to fall back on."