Plummeting business is forcing U.S. hotel chains to dangle handsome discounts before travel managers planning 2002 hotel programs. Prospects in Europe are far less easy, both in terms of negotiating prospects and complexity. Instead, U.S. travel managers will have to remember the occasionally overlooked principle that Europe cannot be treated as a homogeneous entity and do their homework on all their major destinations in the region.
"There is softening across many markets, but it is a very checkered demand map now," said Fredrik Korallus, senior vice president of sales and marketing at Radisson SAS Hotels & Resorts.
Broadly speaking, Europe presents better prospects for the hotel buyer than in recent years, but not to the same extent as in the United States. After several years of growth, often at double-digit rates right into the first quarter of this year, demand finally is flattening out. However, rather than actual cuts, that is more likely to mean only a leveling or modest increase in rates for Europe, where the impact of the U.S. downturn is being balanced by continuing strength in the regional economy.
"There are no outstanding candidates among European cities for rates to fall by a significant amount," said Melvin Gold, who is managing director of hotel consultancy services for the accountancy and business advice firm PKF.
The good news for U.S. corporate clients, Korallus said, is that, generally speaking, there is a big decline in demand in traditional markets for U.S. visitors, most notably to London. Yet, even the U.K. capital is not expected to cut rates by more than a couple of percent, if at all, and it could actually bounce back next year, thanks to one-time factors, such as the golden jubilee of Queen Elizabeth II.
To understand why European hotels are expected only to suffer mildly, it is necessary to understand that the brakes are being applied to what has been a very forceful momentum in rates. Figures just published by PKF in its City Survey 2001 showed that the average achieved room rate across the continent rocketed by 11.3 percent in 2000 to e155.27 (US$141.61). Half of the 30 cities surveyed registered double-digit increases. This was fueled by 26 of the cities pushing up occupancy rates, the exceptions being Edinburgh, Helsinki, Oslo and Warsaw. Five destinations—Amsterdam, Barcelona, Copenhagen, London and Zurich—all had occupancy in excess of 80 percent, and, of course, figures were higher midweek.
To give some historical perspective, Berlin had Europe's highest occupancy level in 1990, at 73.2 percent. Today, that figure would only rank it 14th. Further statistics from the American Express European Corporate Travel Index showed the surge continued into the first quarter of this year. Amex divides its index, which is based on published corporate rates, into upper, middle and lower price categories. In the upper tier, rates in the Netherlands were up 13.2 percent in 1Q00, while France was up 12.2 percent and Sweden 11.2 percent. The lower tier was even more dramatic, with the Netherlands up 23.1 percent, Italy 18.3 percent, France 12.4 percent and Germany 11.9 percent.
"It is hard to see that sort of growth turn into a negative. There will be a slowdown, but it will not be strong," said Gold. He predicted that cities with a supply shortage, such as Amsterdam, Rome, Stockholm, Paris and Zurich, will continue to push up rates, although American Express Consulting Services manager Lorraine O'Keefe predicted otherwise for some of them. Citing Rome and Stockholm as examples, O'Keefe said rates already are leveling off as a correction of previously heavy increases. She discerns a cycle of under-priced European cities attracting discretionary spending, such as conferences and leisure travelers, leading to occupancy rising, then rates rising and the city becoming over-priced. Amsterdam, Barcelona, Madrid, Rome and Stockholm all have reached the top of this cycle in the past three years and O'Keefe now expects them to cool off. As well as geographic variations, O'Keefe draws a distinction between market sectors, predicting cheaper rates for corporate clients at upmarket hotels, but a tightening of demand for budget properties.
"We are seeing a movement toward travelers downtrading, so the lower range will enjoy steady rates while the upper and middle ranges will start to come down," she said. Overall, O'Keefe said, "Corporations will be able to negotiate a bit more for 2002," but she does not foresee clients screwing hoteliers into the ground.
With the exception of London, European hotels have been praised during the seller's market of the past few years for showing restraint in negotiations with preferred clients. Now, they are hoping for similar treatment from corporations and O'Keefe said they will get it: "Clients are saying they want to move to long-term relationships. Both they and hotels want to support each other during hard times. I am hearing this from both sides now."
PKF's Gold pointed to the growth of large hotel group portfolios in Europe as one factor behind this trend for balanced, longer-term relationships. Examples this year include Hilton buying Scandic Hotels and Bass acquiring the Posthouse chain in the United Kingdom. "The big hotel companies are increasingly trying to do multi-city deals with corporate clients," he said. "It means you might get a better rate in Amsterdam if you are prepared to give the supplier some business in Milan as well."
Occupancy Drop
Rather than cost issues, Korallus said the major benefit of the softening market for corporate clients will be an improvement in availability. The frequency of "hotel full" signs in European business cities has caused great inconvenience for travelers since the mid-1990s. "Like New York, it is becoming much easier to find a room in such locations as Stockholm, Amsterdam and London, even on Tuesday through Thursday," he said. "This means buyers can drive policies better because travelers will not have to go elsewhere owing to preferred properties being full."
At the end of last year, BTN reported that some European hotels and chains actually were asking clients to cut the number of room nights in their corporate deals (BTN, Nov. 13, 2000). Much has changed.
"Clearly, in a soft market hotels wouldn't turn business away," Korallus said. At the same time, he added, the downturn has been a warning to hoteliers not to rely too heavily on one particular client or market sector. "Hotels whose guests are almost exclusively from telecommunications companies are probably not having a good time," he said, with some understatement.
Gold, Korallus and O'Keefe offered the following guide to pricing trends: London probably has seen the greatest slowing in demand within Europe, owing to a combination of a high pound against euro currencies, inflated rates, particular vulnerability to the U.S. downturn and the foot-and-mouth crisis. Yet, impact on prices remains mild.
"Rises this year have been negligible and may even be negative by year-end," Gold said, whereas Korallus said: "London is, without a doubt, taking the biggest hit, but it still is doing relatively well. Hotels just have to fight a little more for business." Top-tier hotels are suffering the most. Gold expects rates to rise again next year, thanks to the Queen's golden jubilee, the return of visitors who stayed away this year and strong underlying demand.
Meanwhile, Paris and the rest of France is having an excellent year, thanks to a strong domestic market. Rates are expected to continue upward.
Rate growth expected for Frankfurt mostly is due to airport developments, an increase in office space and trade fair business and a lack of new supply.
Several new hotel openings next year in Munich and beyond will be matched by increased demand from the corporate, meetings and leisure markets.
Opinion is split on Amsterdam. This formerly under-priced city has seen Europe's heaviest rate increases on the back of ever-increasing popularity among corporate, meeting and leisure sectors alike. Gold predicted that rates in Amsterdam will continue rising, albeit at a lesser pace. O'Keefe forecast rates to flatten and Korallus also foresaw softening.
For Copenhagen, critics expected the healthy demand will continue the city's recent rate rises. Rates are predicted to flatten in Barcelona and Madrid, perhaps even fall, as the cities' period of hectic growth comes to an end.