A month after terrorist attacks dealt a blow to the United States, the hotel industry is struggling to cope with steep drops in occupancy rates and room revenues. Some travel has resumed, but the industry still is assessing when business travelers may feel comfortable enough to resume flying in significant numbers and, hence, require hotel accommodations. At the same time, hotel sales executives are weighing the near-term effect of the crisis on the negotiations for 2002 rates.
Given travelers' reticence to fly, all but the most critical trips were postponed or canceled and hotel rooms went unused.
"We haven't asked people not to travel, we're considering it a personal decision," said Bill Davidson, manager of corporate travel and meeting services for Sematech International in Austin, Texas. "We wouldn't insist that people travel if they didn't feel comfortable taking that step."
Like others in the business travel industry, buyers are uncertain when normal levels of travel will return. Considering the cutbacks in travel budgets that already had occurred this year as the result of the slowing economy, buyers already were using fewer hotel rooms than anticipated. Post-Sept. 11, buyers face further uncertainty as to the number of room nights they'll need.
"We were already in a cost-cutting mode before this happened, so I haven't seen any drastic changes," said Colleen Guhin, global travel manager for On Semiconductor in Phoenix. "But, undoubtedly, it will now take longer for business travel to recover to where it was. In other words, I wouldn't look for any immediate increase right now."
Already reeling from the economic downturn, hotel companies were more disposed to negotiate meaningfully on rates than in any year since 1997. At the core of rate negotiations, however, is a room night estimate that buyers make in return for consideration on rate. If travel demand doesn't rebound from the present emergency and volume commitments made for 2001 aren't met, hotel companies will be under less pressure to offer conducive rates for 2002.
The severity of the situation facing the lodging industry is unmistakable. For the week of Sept. 16 to Sept. 22, for example, Smith Travel Research reported that hotel occupancies across the country were 52.3 percent, 25.9 percent lower than the same week a year earlier. As they have been since February, the deluxe and upper upscale chains were the hardest hit. Occupancy rates in this segment were 38.9 percent, down a staggering 52.8 percent over the prior year. Yet, no industry segment escaped unscathed, according to Mark Lomanno, Smith Travel president. Upscale chains saw occupancies for the week fall 31.4 percent, while midprice chains that offer food and beverage saw occupancies slide almost 25 percent.
The revenue picture was even more sobering. For the same week, Smith Travel's analysis of revenue per available room—a key indicator of hotel profitability—showed a 37.3 percent drop across the country.
"We saw a 40 percent decrease in short-term reservations in the first couple of weeks following the attacks," said Michael Fegley, vice president of worldwide sales for Radisson Hotels & Resorts. "Some companies were simply asking their employees not to travel."
In the days since, however, Fegley said Radisson has seen some gradual improvement. "Reservations demand is still down, but the situation seems to be stabilizing for reservations," he said. "We see things starting to turn around in October and then reservations strengthening further for November and December."
Faced with dramatic declines, hotel companies prudently moved to curtail their costs. Starwood Hotels & Resorts Worldwide, for example, announced a 23 percent reduction in its North American workforce. This included approximately 2,000 managers, plus another 10,000 employees who have direct, day-to-day contact with travelers, including front-desk clerks, bellmen and chambermaids. Starwood said approximately 12,000 jobs were being eliminated.
Similarly, Lodgian, which owns or manages 106 hotels in 32 states and Canada, many of which fly the Marriott, Hilton or Six Continents flag, said it was cutting approximately 30 percent of its payroll, the equivalent of 1,600 jobs. "The current operating environment and resulting lost revenues left us no choice but to react decisively," said Lodgian CEO Thomas Arasi.
News of such cutbacks elicited a mixed reaction. On the one hand, the cuts demonstrate the hotels' willingness to contain costs, which, in turn, means less pressure to raise rates. "I'm sympathetic and our travelers are sympathetic to the situation the hotels find themselves in," Guhin said. "They've got to do what they've got to do in order to survive."
On the other hand, however, buyers justifiably wonder how deeply hotels can cut their support staffs and still maintain the level of guest service business travelers have come to rely on. "With lower occupancy, fewer rooms are being occupied, so a function such as housekeeping, for example, could be reduced without any loss of service, though it's always unfortunate when people lose their jobs," Sematech's Davidson said. "At the same time, there are certain amenities you clearly expect to be in place at full-service hotels, regardless of the situation, such as the business center and the concierge."
Radisson's Fegley acknowledged, "The lodging industry was looking at one of its worst years in a long time before the terrorist attacks. Some companies have been asking their employees not to travel for other than purely security reasons. It's really been a combination of safety and expense concerns."
Davidson noted the "phenomenal number" of hotel sales executives who have approached him since Sept. 11 to try to gain inclusion in his hotel program for the remainder of 2001—and gain an upper hand for 2002. "We had already redone deals with our existing suppliers and have every intention of honoring those deals," he said.
The question of meeting volume commitments remains problematic. "We look at it on a customer-by-customer basis," Fegley said. "There's no blanket policy. In many cases, we know volumes will be down. After all, travel spend was already down before Sept. 11. But we look at other things as well, such as the possibility of increasing market share overall."
With buyers grappling with the issue of volume estimates, industry consultants said that going forward the mandates built into a buyer's program would be more important than ever. "Considering the great uncertainty in the market, hotels are seeking to work with buyers who have a history of being able to deliver on volume commitments," said Julie Hylton, director of hotel management for American Express Consulting.
Hotels want to be assured that a company's policy contains imperatives. "If your policy only recommends preferred hotels—as opposed to requiring that those properties be booked—you have less leverage at the bargaining table," said David Witham, vice president of hotel and car relations worldwide for Carlson Wagonlit Travel. "It was true before, but it's even more true now."
Buyers will get the message and communicate it back to their senior management, according to Davidson. "If companies are in jeopardy of losing their favorable rates, it's certainly an incentive to strengthening the travel policy," he said.
Above all, hotel companies want to be able to demonstrate they are increasing market share for their brands in a given destination. "Whatever the volume projections you're comfortable with, if you can show you're able to take market share away from the competition, you're in a good position," Witham said.
Buyers need to remember that hotel sales executives are just as uncertain as they are about this year's negotiations. "Many are young, have never lived through a down market and don't know how to react," said Cheri Shanks, manager of the corporate hotel program at TQ3 Maritz Travel Solutions.