Europe's Economic Health Foreshadows Heavy Hikes

<B> Europe's Economic Health Foreshadows Heavy Hikes</B>

By Amon Cohen

Where for most people the sound of summer is waves breaking on the beach, for travel managers it is the tapping of fingers on calculator keypads as they busily figure out accommodation budgets for the next year. Hotel contracting time is here again and it looks as if the new millennium is going to open with some steep rate rises in Europe.

No one is prepared to put a figure on it but many major cities look like they are going to impose increases in excess of inflation. The main reasons are that the European economy is by and large doing well, leading to an increase in demand, whereas hotel openings are slowing down, thus keeping a tight lid on supply. The heaviest hikes are likely to be in Amsterdam and Stockholm, according to Radisson SAS senior vice president for marketing and sales Ingvald Fardal. Amsterdam in particular is the hot destination in Europe. It attracts both business and leisure and, according to the newly published EuroCity Survey 1999 by Pannell Kerr Forster, it overtook London in 1998 as the city with the continent's highest occupancy, the first time in five years the U.K. capital has been knocked off the high spot.

The wise travel manager will exhort travelers to book their accommodation early if they are traveling to the major city of the Netherlands. Yet, despite the heavy demand for Amsterdam, its average achieved room rate of US$118 (NLG256) ranked only 13th in the PKF survey, even though rates were 12.1 percent up on the previous year. Expect further heavy rises, therefore, as the city continues to take advantage of its supply/demand inequality.

PKF director of hotel, leisure and tourism services Melvin Gold expects Amsterdam hotels to achieve this not through stiff rack rate rises but through adjustment of the business mix. This started in 1998, when the proportion of guests paying full rate in the city rose from 11.8 percent to 14.0 percent, and corporate discount business (still more profitable than leisure and group guests) grew from 24.4 percent to 27.6 percent.

"Cities like Amsterdam and Rome, which attract both corporate and leisure, can get their rates up by improving their mixture of business," said Gold. "European hotels are much better at yield management than they used to be."

High occupancy rates in Europe are leading to new negotiating strategies, according to Fardal, drawing greater commitments from corporate clients both to the duration and volume of agreements. "In cities where there is a lot of pressure on rates, the solution is to take a long-term view," he said. "Instead of a one-year agreement, you could try for two or even three years." Similarly, Radisson SAS is noticing much more eagerness from travel purchasers to wrap up chainwide deals in an effort to leverage some discounts.

Fardal also pointed out that "price is one element but in a bigger picture." The squeeze on rooms means the issue of availability also plays a substantial role in negotiations. As in the United States, last-room availability at the usual discounted rate is becoming rarer for all but the largest clients, said PKF's Gold, but a sense of pragmatism is emerging on both sides at the negotiating table. " 'Win-win' and 'partnership' are becoming buzz words," he said. "Hoteliers and travel managers are increasingly realizing they need each other and are trying to work long term together. One example is that hoteliers are giving availability even when they can't do much on price."

The year 2000 will have an additional complication in the form of millennium celebrations. The impact this will have on occupancy and room rates is a matter for some debate. Joan Scales, travel manager for The Irish Times, and a board member of the U.K. and Ireland's Institute of Travel Management, thinks it will push occupancy up significantly in major world cities such as London and Paris. "So many people are making 2000 the year they take that special trip," said Scales. "There will be lots of visiting friends and relations, and business in particular. People in the computer industry could be busy too."

Fardal is less sure. "The end of December and beginning of January are normally a soft time for us and the millennium will add some revenue during this period, but I don't think it will have a major impact throughout 2000," he said.

Forecasting The Markets

Fardal has given BTN a detailed country-by-country forecast of what he expects to happen to hotel rates next year in Europe, the Middle East and China. He believes rates will soften in the following countries:

* Russia: Rates have been moving down for some time, but will bottom out next year.

* China: Rates have plummeted 20 to 35 percent this year in Beijing and Shanghai. "There is some way to go before we reach the bottom of the market. I don't see an end to it yet,'' said Fardal

* Jordan and Israel: The market has been weakened by the continuing political instability plus, in Jordan, significant new room supply.

* Turkey: Occupancy has been falling owing to security concerns (the moving of the ACTE conference from Istanbul to Spain is a classic example), but will level out by end of 2000.

The following countries will see rate increases to a greater or lesser extent:

* Belgium: Occupancy and rate have been moving up for the past year and will continue in 2000.

* Austria: Rates are starting to move up again now that central Europe is emerging from an economic downturn

* Germany: Occupancy is up after a lengthy downturn, especially in Berlin, where the German parliament returned this spring. However, rate rises in Berlin will be tempered slightly by considerable amount of hotel openings.

"Germany is having a good year this year relative to the recent past, but it is still not exciting," said PKF's Melvin Gold. "Low inflation makes it difficult to move rates up."

* France: Rate growth is continuing. Paris has the highest average achieved room rate in Europe, according to PKF US$238 per night (FF1,539), and is likely to remain that way. Hotel development in the French capital is expensive, which means supply is unlikely to catch up with heavy demand from both business and leisure markets.

* Switzerland and Italy: Developing strongly in 2000.

* Kuwait: Steady growth is expected.

* Finland: Strong growth in demand is expected for the next two years, which will more than compensate for significant growth in hotel stock.

* Denmark: Strong growth in demand, but the arrival of more international players in Copenhagen, such as Hilton and Marriott, will increase competitiveness.

* Sweden: Very strong demand in Stockholm and little planned new supply means rates will rise significantly and remain high for some time.

* Netherlands: The highest occupancy rates in Europe means prices will rise sharply. The good news for business travelers is that hoteliers are improving their yield management, which will at least provide more availability, even if prices are higher.

* United Kingdom: A marginal drop in occupancy and rates in London this year, compared with exceptional performance from 1995 through '98, will soon be reversed. London is the city expected to benefit most from the millennium effect, partly because it is home to Greenwich Mean Time and partly because several large attractions and events are planned.

"If it doesn't pick up again this fall, it will certainly do so again next year,'' said Fardal. "I don't think rates will increase again this year but they may do so next year.'' Added Gold: "London has been a little down, probably more in terms of occupancy than rate. Prices will grow at the level of inflation (1.3 percent) for the next year.''

* United Arab Emirates: Significant new supply but increased demand will keep rates rising.

* Norway: Economy has been depressed by oil industry slump. Occupancy and rates will remain at present levels.