Buyers Have Edge At Hotel Season Start

Business travel buyers preparing to start hotel negotiations in the next few months for 2003 rates likely will find themselves in their best negotiating position since the mid-1990s. Reflecting current market conditions, many buyers have moved up their bid season calendars so requests for proposals are returned and rate negotiations can begin earlier.

At Credit Suisse First Boston, for example, RFPs are due back by Aug. 16, a month earlier than last year. "This leaves from then until Oct. 31 for negotiations and there won't be any extensions," said Erin Barth, vice president of global travel.

Previously, hotels would not have committed to rates until they had more history on an account's room night volumes based on present year experience. This year, however, hotels are more likely to look for whatever marketshare projections they can lock into place. With negotiated rates accepted earlier in the cycle, buyers also can be assured that rates will be loaded into the global distribution systems in a timely way.

"What's likely to happen in this rate negotiation season is almost the free market ideal," said Bjorn Hanson, global industry leader for the hospitality and leisure practice at PricewaterhouseCoopers. "Everyone says they expect business conditions to improve, but they're not better yet. So this will be a good fair market negotiation. Buyers who know how to negotiate in this kind of environment will be very successful for their employers. And those who don't are going to pay much higher rates. This is where really experienced corporate travel managers are going to earn their salary."

The lack of consensus as to when business travel will rebound is complicating hotels' forecasting. "We're tracking occupancies and room rates closely, but there's no clear indication as to when the situation will turn around," said Jonathan Tisch, chairman and CEO of Loews Hotels.

Leisure travel has resumed to a limited degree, but not enough to lift the industry's fortunes overall. Projections that a turnaround in business travel would occur in the second quarter proved overly optimistic. Some analysts now believe a rebound won't take place until the end of 2002 or early-2003.

Unlike other downturns, hotels in the key U.S. gateway cities—the destinations most frequented by business travelers—have performed worse than hotels overall. In addition, the performance of upscale, upper upscale and deluxe hotels has lagged significantly behind midprice hotels, especially midprice hotels that don't offer food and beverage. Typically, corporate buyers have a preponderance of upscale and upper upscale properties in their programs.

"We have hotels in 10 of the top U.S. markets, so there's no question we've been affected," said William Fatt, chairman and CEO of Fairmont Hotels & Resorts. "But our emphasis remains on growing the brand for the long term." Both Tisch and Fatt spoke at a hospitality investment conference last month sponsored by New York University.

Nationwide, the tracking firm Smith Travel Research has identified 15 markets—Atlanta, Boston, Chicago, Dallas, Detroit, Honolulu, Las Vegas, Los Angeles, Miami, New York, Orlando, Phoenix, San Francisco, San Jose and Washington, D.C.—that are especially troubled. Combined, they represent 24.1 percent of the total U.S. room supply.

"These really are the markets that have been hurt the worst throughout the downturn," said Randy Smith, STR president. "When you look at their performance versus the rest of the country, you see a dramatically different picture. Supply for the two groups, April year-to-date, has pretty much increased the same. But demand is down 7.7 percent for the 15 markets, but only down 0.5 percent for the rest of the United States."

Similarly, Smith noted that occupancy was down 9.3 percent for the top markets, but only down 2.3 percent for the remainder of the country. Average daily rate for the 15 markets fell 8.2 percent, compared with 1.6 percent for the rest of the United States.

The contrast was most striking for revenue per available room, a key indicator of hotel profitability. "RevPAR was down 16.7 percent in those 15 markets, whereas it was down only 3.8 percent for the rest of the country," Smith said.

In light of the continuing slump in business travel, PwC's Hanson last month revised downward the industry performance projections for the full year that he made as recently as March. He now sees RevPAR falling slightly in 2002 by 0.7 percent, over the prior year, as opposed to increasing by a more robust 3 percent.

Both PwC and STR estimated that occupancy rates nationwide for 2002 would end up around 60 percent, with STR projecting a slightly more optimistic rate of 60.2 percent. To put this in perspective, occupancy rates hit a high of 64.9 percent in 1994.

Given the erosion in RevPAR, analysts expect hotels to be less profitable this year. In fact, the average U.S. hotel already suffered a significant (19.4 percent) decline in profits in 2001, according to statistics released last month by the Hospitality Research Group, a unit of PKF Consulting. "The downturn represents the first decline in hotel profitability since 1991 and the largest single-year drop recorded since 1938," said Mark Woodworth, HRG executive managing director.

For 2002, Woodworth projects that the average U.S. hotel will suffer a sobering 11 percent decline in operating profits. He based his estimate on flat occupancy, together with a 4.6 percent drop in average daily rates for the year.

Hanson noted that hotels, faced with a further decline in profits, were likely to continue their aggressive cutting costs. Of concern to buyers is that many of these cost-cutting measures, such as reduced bellman and concierge service, directly affect their travelers.

Adding to the lodging industry's uncertainty, analysts are not confident a recovery is on the horizon. CIBC World Markets analyst Paul Keung acknowledged that "markets that are more dependent on the business traveler will take longer to recover because of the slower recovery of the business sector."

None of the industry indicators monitored by UBS Warburg indicate that a rebound in business travel is likely in the near future. "Changes in lodging revenues are highly dependent on business travel spending, which is dependent on changes in corporate profits," said the firm's analyst Keith Mills. "If corporate profits decline, companies will likely reduce operating expenses, including those related to business travel."