More than six months past the conventional end of the annual hotel negotiating season, many corporate travel managers are continuing to make hotel deals. Some have come up with innovative ways to drive further savings, including negotiating multi-year agreements to lock in lower rates, negotiating a percentage deal off consortia rates as opposed to a flat rate and moving bookings from traditional hotels to less expensive corporate apartments.
Internal corporate cost pressures and hospitality providers who have become more hospitable in hopes of increasing marketshare are the mothers of these inventions. A more fluid model—in which buyers now keep weighing their negotiating options, and act accordingly, throughout the year—has emerged in place of the established January-December pattern.
"For most of our hotel program, we already had traded down from full service to midprice hotels, so when we decided to trade down further in certain markets, corporate apartments made a lot of sense," said Kevin Maguire, travel manager of Tokyo Electron America, based in Austin, Texas.
By midyear, the corporate housing option accounted for almost one-third of Tokyo Electron's total room night volume.
"Two years ago, we only would have used corporate apartments for true extended stay bookings, which we define as 30 days or more," Maguire said. "Now, corporate housing providers in many locations have gone to day-in, day-out programs designed for transient bookings. Consequently, we can apply the same rate, if we move travelers in and out just like we would at a transient hotel."
He acknowledged that for some travelers the transition from traditional hotel room to furnished apartment has been problematic.
"It's not the usual hotel experience, but much more residential," Maguire said. "In 60 percent of the cases, it works. In the other 40 percent, people aren't used to it and, therefore, not comfortable. As budgets tighten, they get more acclimated. If budgets were freer, you'd still have some resistance."
Buyers' estimation of multi-year agreements in recent years has been mixed. When the hotel market was booming in 1999 and 2000, buyers might have been eager to lock in rates, but hotels, well aware rates were escalating, were hesitant. However, once rates started to plummet in 2001 and 2002, multi-year agreements became much more appealing to buyers—assuming rates had hit bottom or near bottom.
For Bill Davidson, manager of corporate travel and meeting services at International Sematech in Austin, Texas, that moment came during the past few months.
"A number of our agreements now are for two years," he said. "Because rates have become so conducive, it clearly was to our benefit to do a multi-year deal," he said. "The questions were, if in a down economy, would rates go lower or had the market bottomed out and rates were going to start going up? Our sense was that the timing now was right. Locking in when rates are at the bottom, of course, is the ideal."
Davidson said he was careful not to work this way with any properties where the hotel program didn't have a history.
"We only negotiated these deals with properties where we had a successful relationship in place," he said. It gave him a safety valve. "We were strong enough partners that if the market did change drastically one way or the other, we'd have that relationship to fall back on. In other words, if rates dropped significantly lower, there would be room for renegotiation."
On the other hand, if rates jumped, Davidson would have engineered a much better deal. "Bottom line, we do sense that the market is turning up," he said. "It can be hard to discern sometimes, but we think it's there."
As it happens, hotel industry executives, based on their chains' May-June performance, expressed cautious optimism about the prospects for a rebound at a hospitality investment conference this month
(BTN, June 9). The question remained, however, whether such an upturn would be sustainable.
Rick Wakida, global travel manager at Openwave Systems in Redwood City, Calif., has benefited from the market conditions in another way.
"Everybody benchmarks against the consortia and mega-agency rates before beginning to negotiate their corporate rate, but they shouldn't settle for a flat rate below the consortia," he said. "Rather, they should negotiate a percentage discount off the consortia rate. We found that hotels early in the year had lowered their consortia rates in response to market conditions at that time but hadn't applied the discount we were entitled to. Consequently, we worked with the preferred hotels to make sure the negotiated rate was adjusted downward in the global distribution system."
Unfortunately, the system at many hotels isn't automated, so buyers have to request that their rates be adjusted manually.
Like Sematech's Davidson, Wakida's sense was that the hotel industry was getting stronger. "Based on the volumes we're seeing, things seemed to be stabilizing a bit in May and June," he said. "Yet, hotels continue to call to express interest in our business. Rates quoted are either flat or a slight decrease." Wakida cited one caveat, however. "The market might have bottomed out and even begun gradually going up, but another outbreak of war or bad news concerning severe acute respiratory virus will derail any progress we've seen."
Two surveys of corporate travel managers this spring conducted by Wall Street lodging industry analysts confirmed the sense that the corporate market was still unsettled, thereby creating opportunities for creative-minded travel managers to devise cost-saving scenarios.
Smith Barney analyst Michael Rietbrock, for example, last month polled approximately 200 corporate travel managers. He found that one-third of these travel managers' companies are considering tightening travel policies. The percentage, however, had been higher in a survey Smith Barney conducted earlier in the year.
In a similar May survey, even though fewer travel managers participated, UBS Warburg analyst Keith Mills found respondents expected business travel spending to decline an average of 1 percent for the year. They expected average room rates for the year to fall about 2.5 percent, though the number of stays was projected to increase 1.5 percent.
Given the contraction in travel that occurred in anticipation of the war with Iraq, any gains in the second half of the year would be offset by weakness in the first half.
A third lodging analyst, Paul Keung of CIBC World Markets, was more sobering. Based on conversations last month with travel managers, Keung said he expected business travel to remain depressed through the end of the year.
"Although anecdotal evidence suggests booking volumes picked up in the first few weeks of May," he said, "we believe they are still below last year's levels."