Buyers Expect Room Rates To Rise As Hoteliers Push Dynamic Pricing

Increasing hotel room rates and the specter of dynamic pricing will force corporate travel managers to yet again up their hotel budgets for 2007. For some companies, hotel spend has begun to challenge air as the largest cost component of corporate travel programs.

Corporate travel buyers generally are less than enthusiastic about the prospect of another year of rate hikes. With the execution of requests for proposals well underway, however, they soon will have concrete evidence that they'll need to increase travel budgets to meet mounting hotel costs. "We've felt rate increases over the last five years," said Brenda Miller, purchasing manager of travel services for food and beverage company Nestle. "The hotels are sitting in a position where they can dictate prices, and it's causing hotel expenses to outweigh air spending. It's not all about staying that extra night anymore to save the cost of the ticket. It's about how we can avoid paying for that extra night at the hotel."

Corporate room rate increases are expected to be as low as 5.25 percent, similar to the aggregate rate increase of 2006, according to the estimation of the head of PricewaterhouseCoopers' hospitality & leisure practice, Bjorn Hanson. This increase is more or less what Randy LaBouve, oil and gas company ConocoPhillips' supervisor of international travel & global hotel program, is banking on for his 2007 budget. "We anticipate a slight uptick," he said, "but not much change from last year. We expect only a slight increase in our budget."

Hanson said increases in the gateway cities would reach well into double-digit percentages. Nestle's Miller is budgeting at least a 10 percent to 15 percent increase in hotel spend for 2007 over last year. "Over the last couple of years, we've seen steady increases, even higher than that," she said. "Some of our properties have increased their rates as high as 20 percent." Miller said the company's newfound capability to capture its group spend at some of the bigger hotel chains would help leverage deeper negotiated discounts than it received in year's past.

Hilton Hotels Corp., while not practicing anything dissimilar from the other major chains, is seeking to gain as much in rate as they can for 2007. "The industry is obviously still very healthy," said Denise Lodrige-Kover, Hilton's vice president of business travel sales and strategic partnership accounts. "While there was definitely an increase in rates last year, you'll see the same thing this coming year." Lodrige-Kover said increases would be higher in such cities as Chicago, San Francisco and New York, where demand was high. Consider New York: Last year's rate increases at some hotels in the city reached the dramatic heights of 30 percent over the prior year.

BCD Travel vice president of hotel relations and travel procurement services Maria Chevalier agreed with PwC's Hanson that a near 6 percent starting rate increase was imminent, but she added, "When you talk to companies you have to say, 'That's an average, not a weighted average.' It depends on what cities you are traveling to. The smart ones don't do just a flat 6 percent increase of their hotel budgets."

Chevalier said that budgeting for hotel spending begins with past travel patterns and the nature of the company's business. "If the company's opening an office in Asia, we can't go with the same numbers as before. We need to figure that in our negotiations and budget for it," she said. Another important component of budgeting, according to Chevalier, is noting the approximate number of business trips that will be taken in a given year. "If the number of trips is going to increase by 10 percent, than already you know that hotel increases are going to be more than 6 percent."

Adding only to further stoke the volatile flame of hotel rates is dynamic pricing, which many buyers have been buzzing about angrily during the past few months. One of the major disagreements buyers have with the model is that it makes budgeting even more difficult. If room rates fluctuate throughout the year, than how does a corporate travel buyer set aside a stipulated amount of money for hotels?

"You can't budget for it," according to Nestle's Miller. "It's floating. All we can do is budget for the benchmark increase of 10 percent to 15 percent and anywhere we come below that is savings to the company."

Eric Peter, Johnson & Johnson's manager of travel services, echoed Miller's and other travel buyers' concerns over dynamic pricing during a panel discussion at year's National Business Travel Association conference in Chicago. "Budgeting for dynamic pricing would be nearly impossible," he said.

Yet, as much as travel buyers try to shield themselves from the prospect of dynamic pricing, it is becoming clearer that many hotel chains will further impose the model on corporate buyers.

"From a Hyatt standpoint, we are going to continue the process with specific companies of implementing a dynamic pricing environment," said Kevin Kelly, executive director of sales for Hyatt Hotels & Resorts. Other hoteliers voiced similar aspirations.