Travel managers from small and midsize companies expect the trend toward multi-year hotel agreements to continue for the 2005 bid season, even though the lodging market appears to be gaining strength. Yet, some buyers—noting opposition from hotels—expect suppliers to attempt some long-deferred rate increases.
Buyers first reported that hotels were more receptive to multi-year agreements during the 2004 bid season, as the hotels—viewing multi-year deals as a way to ensure they have a base of business on the books going into 2005—enabled buyers to lock in favorable rates in key markets.
"Most of the deals we've moved to are for two years," said Kevin Maguire, travel manager of Tokyo Electron America. "In fact, we're trying to get away from one-year deals as much as we can. From our standpoint, the economy still is soft enough to make it advantageous to try to lock in better rates. It's something we've especially tried to do at our high volume hotels."
Maguire said he could envision his entire hotel program being comprised of two-year deals. "From a realistic standpoint, however, we don't see enough hotels agreeing to it. Once sufficient demand returns, buyers will have no choice but to go with one-year agreements. So the present situation is really an opportunity that's going to be short-lived."
Seeing a rise in demand for hotel rooms, buyers see such agreements, which typically last for two years, as an opportunity to drive savings. Because they tend to have lower room night volumes, buyers with small and midsize hotel programs have the most to gain.
Partly due to the increased interest in multi-year deals, the National Business Travel Association hotel committee has revised the electronic request for proposals format for this year's negotiations, which features a new client-specific module that contains all the pricing information
(BTN, Feb. 9)."Buyers can do two-year bids a lot easier using it," said committee member Davina Fellows, who is also hotel/car rental manager for Wal-Mart in Bentonville, Ark. "You can request the static information elsewhere in the RFP and then do two client-specific modules simultaneously, one for this year and one for the following year."
Savings actually are twofold, pointed out ING Americas' Kari Knoll Kesler. About 50 percent of ING's 2004 hotel agreements are for two years. "We're a big proponent of them. We believe we've locked in good rates and then benefit again from administrative savings," said Kesler, who is ING sourcing specialist for travel, meetings and promotions, based in Minneapolis. "Buyers invest all of these resources negotiating a new hotel program each year. If they moved to a two-year program, they don't have nearly the same administrative costs. How much in savings is that alone worth?"
Bill Davidson, manager of corporate travel and meeting services at International Sematech in Austin, Texas, is in the second year of his program's two-year agreements at select hotels. "The hotels only represent about 10 percent of properties we work with, but they're the ones with the most room nights, so it made sense to go for two-year deals."
Davidson said he likely would try to renew the deals he has in place for 2005 and 2006. "But the market may well have kicked back up by then, at which point the hotels might be less inclined to go along. They see demand coming back as well as we do and may be more reluctant to enter into multi-year deals than they were a year-and-a-half ago."
Buyers considering the value of such deals need to proceed market by market, according to Yasuo Sonoda, travel manager at Macromedia in San Francisco. "In New York, occupancies are high and little new inventory is coming online, so you'd want to lock in rates. The opposite would be true in Boston or San Francisco, for example," he said.
Hotels choose not to participate in multi-year agreements based on local market conditions. Companies moving into an area can create more demand. Similarly, there may have been drops in supply, or increases in group bookings can put pressure on transient room availability. PricewaterhouseCoopers' Bjorn Hanson this month confirmed the lodging industry's sense that a rebound is underway.
Hanson, head of the consulting firm's hospitality industry practice, predicted that lodging demand will increase 4.5 percent this year, compared with 2003. The year actually had an auspicious beginning with U.S. hotel occupancies and average daily rates in January up 4 percent and 1.7 percent, respectively, year over year.
"The ship has changed direction quite a bit," noted Jesse Suglia, national sales manager for business travel for Omni Hotels in Boston. "Multi-year deals began to take root for 2004, and we expect more requests as we head into negotiations for 2005. Buyers are looking for rates the second year to remain flat or rise minimally. It's up to each supplier, though, to look at their particular situation and decide on a case-by-case basis what's reasonable."
In offering two-year deals, hotels can stack the deck in their favor. "The caution for buyers looking for a two-year flat rate is that the hotel might inflate the rate for both years," said Heidi Sanderson, senior hotel procurement consultant for Eclipse Advisors in Richmond, Va. "By contrast, you might be able to get a better rate for one year and then a slight increase in year two."
In a worst-case scenario, buyers get rebuffed outright. "We'd love to lock in rates, but hotels don't want to commit for two years," said Colleen Guhin, global travel manager at On Semiconductor in Phoenix, citing the time saving advantages in addition to the economic benefits.
Unbeknownst to buyers, a hotel already may have multi-year deals on the books. "Hotels may want the security of knowing they have some baseline business. Even if it's not an optimum rate, it's still revenue," said Kim Maschoff, senior consultant at Consulting Strategies in Downers Grove, Ill. "They're not going to fill their hotel with these agreements, however, because they're not necessarily that remunerative. Making the call is where the skill of the hotel revenue manager comes in."
Buyers typically reserve the right to review any agreement on a regular basis—and renegotiate, if they so choose. "Our multi-year airline and car rental agreements have opt-out clauses, so we'd insist they be in any comparable hotel deal," said Patricia Carlin, travel manager at Sybase in Dublin, Calif.
At Tokyo Electron America, the review provision takes place six months into the deal. "If rates drop dramatically in a given market, for example, we have the right to try to get a more advantageous deal," Maguire said.
Hotels typically do not have the same prerogative. "Even if the market picks up and hotels can command higher rates, they still aren't able to come back and raise rates. It doesn't usually happen," Kesler said. "It's just the nature of the buyer-supplier relationship. They have to wait until the next negotiation."
Despite the appeal of being able to lock in attractive rates, other buyers are uncertain, given the changes going on with hotel pricing generally.
"Part of our reluctance with multi-year agreements has to do with what we're hearing about floating rates," said Rick Wakida, global travel manager at Openwave in San Francisco. "Consortia rates, for example, seem to be moving from a fixed move to something more dynamic. It hasn't quite been resolved yet, so we don't know how pervasive a practice it's going to become and what the effect will be on buyers with small or midsize programs. Depending on how it goes, we wouldn't want to be locked in."