Hotel Chains Score Higher Despite Backdrop Of Adversity

The year 2001 turned into a much more challenging year than anyone ever could have imagined, but it was difficult for travel managers and lodging industry executives in distinctly different ways. The slowdown in the U.S. economy caused companies to cut back on their travel budgets, at times, drastically. This, in turn, caused hotel occupancy rates and room revenues to drop precipitously, particularly in the gateway cities. These trends, already clear by midyear, accelerated further in the weeks immediately following Sept. 11, when much business travel simply ground to a halt.

Against this backdrop, Business Travel News' Top U.S. Hotel Chain Survey this year particularly is revealing for what it says about travel managers' preferences for hotels at various price points. Even though travel managers' need for hotel room nights may have diminished as 2001 progressed, the survey shows they remained as sensitive as ever about the quality of the hotels in which they placed their travelers and how they felt they were treated as buyers.

A review of the survey results showed that final scores were up overall this year. Similarly, respondents were more critical in judging such criteria as hotels' corporate rate programs and the ease of booking individual and group travel, precisely because they had less demand for room nights this year and, therefore, were more conscious of hotel companies' willingness to negotiate rates. Across brands and price points, respondents were prepared to penalize hotel companies that they viewed as being "unwilling to deal." Particularly because many travel budgets had been cut during the year, a survey category that took on added relevance this year was a brand's "overall relationship between price and value."

As the situation played out through the year, many buyers found they needed considerably fewer hotel rooms than they had negotiated for, and, consequently, had trouble fulfilling the volume commitments they made to hotels in return for reduced rates. On top of this, the budget cuts many buyers experienced, starting in midyear, made them more receptive than they otherwise might have been to hotels' offers to revisit rates in return for greater market share in a given destination.



Rates Revisited

Revisiting already negotiated rates had been unheard of in recent years, given the strong demand for hotel rooms, particularly on midweek nights of Tuesday and Wednesday. The unexpected change in 2001 took buyers by surprise. "In some cases, the turnaround was so sudden and so extreme, people were caught completely off guard," said Kevin Maguire, travel manager for Tokyo Electron America. "They'd never seen anything like it."

For lodging industry executives, the drops in occupancy rates and room revenues were particularly painful precisely because 2000 had been such a banner year for industry profitability. While declines were felt all across the country in 2001, they were most pronounced in such key gateways as Boston, Chicago, New York and San Francisco, where just months before buyers were scrambling to get the room night coverage they needed. By midyear, the reports of hotels luring buyers with the prospect of significantly reduced rates began surfacing, reports that grew even more persistent in the weeks after Sept. 11, when not only business travel but leisure travel essentially ceased to exist.



The Tide Turns To Buyers

For travel managers, the lodging industry's travails provided some sense of good news: They now would have greater negotiating leverage, assuming they had sufficient mandates in their hotel programs to successfully deliver greater market share to a hotel company in a given destination. "Revisiting rates starting in the second half of the year was unusual enough, but hotels really seemed to be looking to get a foot in the door for 2002 negotiations," said Bill Davidson, manager of corporate travel and meeting services for Sematech International.

While many buyers were quick to speculate that the seller's market they had lived with since the mid-1990s had suddenly turned into a buyer's market, Julie Hylton, director of hotel management for American Express Consulting in Dallas, cautioned that, such speculation was premature. She stressed that hotel companies remained most eager to work with buyers whose programs had strict mandates that required travelers to stay at preferred properties.



Travel Patterns Change

Even though business travel generally contracted in 2001, there were market segments that held their own. Concerned about airline security, many business travelers opted to drive, where that decision made sense. "The majority of our hotels are highway properties or are in small communities where drive traffic is important," said Jim Evans, president and CEO of Best Western International, a membership association of 4,100 midprice hotels. "In the fourth quarter, for example, these hotels did much better than those in urban markets that were dependent on the airports."

Evans saw a significant sea change in business travelers' state of mind at the start of 2002. "The last 90 days of 2001, travelers retreated. They took care of business closer to home or they simply didn't want to be far from their families," he said. "But with the beginning of 2002, senior executives started saying, 'We need to get back out in the marketplace. We need to make sure our best customers are taken care of.' "

In the deluxe and upper upscale categories, many general managers, faced with an unexpected drop in revenues, were tempted to cut back on their usual high level of services and amenities as a way of saving money. Other properties, however, held the line.

"These touches go a long way to making the experience of the hotel as distinctive as it is, so we've been wary of cutting corners in any way," said Thomas Steinhauer, general manager of the Four Seasons Hotel New York. "The expectation of our guest is that they'll find these services and amenities in place as always. After all, it's a very fine line, once you start cutting back—on room service, for example, or something like the fresh flowers in the lobby—as to when you start diminishing the overall experience of being a guest in the hotel."

Likewise, hoteliers at the upper end questioned the wisdom of drastically cutting rates in the short term as a response to the faltering economy, even if owners are happy for the extra revenue. "It's something you needed to think about because travelers who are seeking that deeply discounted rate may not be the best customer for you in the long run," said Jan Chovanec, general manager of the Swissôtel Washington, The Watergate. "In fact, these customers may only be interested in staying with you because they can get a bargain. Once the economy rebounds and rates return to their normal level, these customers will be gone."

In the same way Sept. 11 was the year's defining moment in terms of airline security, the terrorist attacks also—if to a lesser degree—affected hoteliers' and guests' sense of security. In New York, the 817-room Marriott World Trade Center Hotel was destroyed in the attacks and three other downtown properties, totaling 1,528 rooms or suites, were temporarily shuttered. Consequently, New York hotels were particular sensitized to the security question.

"In the first weeks post-Sept. 11, we were much more vigilant than usual, communicating with staff members about mail, packages or luggage that might be suspicious," said Dieter Seelig, general manager of the Warwick New York. "Staff members needed to be watchful, in particular, about any chemical substances they might come across. Our intention was hardly to spy on guests, but rather to just be watchful."

Hotel managers agreed the best security is invisible. "In those first weeks, though, we stationed security more prominently simply to reassure guests," said Scott Dawson, hotel manager at the Inter-Continental New York, The Barclay.

Data supplied by the lodging industry tracking firm, Smith Travel Research of Hendersonville, Tenn., showed just how severely U.S. hotel occupancy and room revenues fell in 2001. Occupancy rates for the year were 60.1 percent, down from 63.7 percent in 2000. Meanwhile, revenue per available room declined 6.9 percent from the prior year. Smith Travel president Mark Lomanno characterized the year as "exceedingly difficult."



Hotels Try To Stimulate Biz

In fact, Smith Travel's monthly analysis provided even more insight as to where the industry's performance was weakest. November, typically a busy month for business travel, in 2001 saw a decrease in occupancies of 8.9 percent, compared with November 2000. Room revenues for the month were down a more sobering 14.7 percent, a reflection of the cuts in room rates many hotels implemented post-Sept. 11 in an attempt to stimulate business.

"Hotels were being hit with a one-two punch," said Jack Corgel, managing director of applied research at the Hospitality Research Group, an affiliate of PKF Consulting in Atlanta. "In addition to the recession, the hotel market is enduring a 'stigma,' brought about by the fear of travel."

When Smith Travel broke out the data by hotel price point, it became clear that the decline wasn't being felt equally across the industry. All price points were down, but deluxe, upper upscale and upscale chains took the brunt of the decline. In November, occupancy rates at the upper upscale chains fell 14.1 percent over the prior year, while room revenues slumped 20.7 percent. At the upscale chains, occupancies for the same month were off by 11.2 percent, with room revenues down 14.9 percent.



Gateway Cities Take A Hit

On a market-by-market basis, the results were no more promising. Of the top 25 U.S. destinations that Smith Travel tracks, occupancy rates for 23 of them fell in November over November 2000. The drop was most precipitous in San Francisco, where occupancies for the month fell 28.8 percent and room revenues skidded 36.3 percent. Other gateways, such as Boston, Chicago and New York, fared better, but still suffered, with occupancies for the month off 23 percent, 15.1 percent and 11.4 percent, respectively.

"In New York, the lodging industry did a good job of getting people back in hotels, relatively speaking, but rates suffered significantly in the process," said Sean Hennessey, PricewaterhouseCoopers director of the hospitality and leisure consulting group in New York. "After Sept. 11, travelers came to the city out of empathy. By November, the number of those travelers had fallen off, leaving the industry by year-end to wonder where new visitors would come from."

Not helping matters for the gateway cities, a relatively large amount of new hotel inventory came online in many of these markets in 2001, according to Lodging Econometrics, a consulting firm in Portsmouth, N.H. Room inventory in San Francisco, for example, jumped 4.3 percent for the year, second only to Boston, where inventory spiked 6 percent.



Project Pipeline Gets Clogged

With financing for new construction difficult to secure, the U.S. hotel pipeline slowed down significantly as the year progressed. "With all of 2001's projected new supply currently under construction—and most of 2002's—recent events should have less of an impact on the near-term supply outlook," said Jason Ader, lodging industry analyst for Bear Stearns & Co. "We may expect to see some smaller, limited service projects tabled or canceled, limiting 2003 supply growth to near 1 percent."

In December, U.S. hotel construction starts decreased 58 percent, compared with December 2000. "This bodes well for future hotel room revenues because less new supply means less competition for existing hotels," said UBS Warburg industry analyst Keith Mills.

Considering the dour economic climate, analysts expected 2001 to be a year that saw further industry consolidation, as cash-strapped owners are forced to put their undervalued assets on the block. But a blockbuster transaction never occurred, despite continuing speculation. As in 2000, the likely acquirer was London-based Six Continents Plc. The names of a string of potential acquisition candidates surfaced through the year, most prominently Starwood Hotels & Resorts Worldwide.



Sell Or Be Sold

Among the hotel company transactions that did occur in 2001, four merited notice: Singapore-based Raffles International acquired Swissôtel Hotels & Resorts in the spring and London-based Le Meridien was sold by the Forte Group to Nomura International Plc in July. Toward year-end, Hilton Hotels Corp. sold its Red Lion chain to WestCoast Hospitality Corp. and Homestead Studio Suites Hotels, a chain of 112 midprice extended stay properties, in November was acquired by an affiliate of The Blackstone Group.