Hotel Negotiating Tougher: Buyers Revising Strategies For 2006

Travel buyers this month told Business Travel News that tougher hotel rate negotiations for 2005 have made them rethink their approach to negotiations this fall for 2006 rates. Strategies run the gamut from seeking chainwide deals to providing negotiated rates in more markets to better ensuring the equitable application of last room availability provisions.

Previously, for instance, a chainwide deal didn't make a lot of sense for San Jose, Calif.-based Adobe Systems. "In 2005, we began focusing on driving room nights to a couple of chains and it's been successful for us," said Janice Coley, Adobe worldwide travel manager. "Rates in 2005 went up in a number of markets, but we were fortunate to be able to hold the line in our headquarters city because of new supply coming into the market. We understand that hotels are entitled to a reasonable rate increase, but I'd like to keep a lid on price increases as much as possible. There's no way we want to go back to the days when spending was a bit out of control."

Coley in 2005 found the cost of her hotel program rose disproportionately to her air program. "Airline prices have come down so much, while hotel prices have gone up," According to Coley. "As a result, the gap between the percentage of the travel dollar spent on air and the percentage spent on hotel is closing. We haven't had a reduction in our hotel rates since 2001. Approximately 30 percent of the travel dollar is spent on hotel, I'd say, though it varies with the city you're going to."

Travelers still tend to think of air as the big-ticket item. "The surprise in 2005 was that the cost of a three- or four-night hotel stay could be significantly higher than the cost of the airfare," said Bill Davidson, manager of corporate travel and meeting services for International Sematech in Austin, Texas. "The way the market's taking off, that's only going to continue in 2006."

Key business travel cities in 2004 were the first to see occupancy and room rates accelerate. "Demand and stronger pricing in 2005 are spreading into secondary markets and there has been little resistance to double-digit increases in average daily rate," said JP Morgan Chase analyst Harry Curtis at a bank-sponsored lodging conference this month.

Most of the incremental pricing has occurred Monday to Wednesday nights. "This implies the strength is in transient bookings, where demand has not been elastic," Curtis said.

More frustrating in 2005 than specific rate increases has been many hotels' disregard for long-term buyer relationships, said Lorraine Rostanzo, director of global travel and support services for W.R. Grace in Greenville, S.C. "I'm thinking of hotels that have been in our program for a number of years, hotels that we stood by during the downturn," Rostanzo said. "When they had the opportunity, they tried to push through exorbitant rate increases."

Coley, Davidson and Rostanzo expect even higher rate increases for 2006. "What they don't understand is that the hotel business is cyclical," Davidson said. "Then in a couple of years when occupancy and room revenue are down, they'll want to know why we don't value the relationship."

Unlike buyers whose headquarters are in the suburbs, where hotels tend to be midprice and, therefore, have lower rates, Adobe is located in downtown San Jose, where most of the hotel supply is full-service. "Demand for rooms has been going up significantly, which gives the hotels an advantage," Coley said.

The amount of travel at Adobe has increased, rising 10 percent to 15 percent in each of the past two years, so Coley has had more volume to negotiate, which gives her more leverage and makes her program of more interest to the large chains.

"Our strategy in 2005 was to consolidate the number of hotels we negotiate with in our key markets as a way of driving market share," said one buyer based in Montreal. "It started to pay off in 2005 in terms of being offered more attractive rates and we hope to see even greater benefits in 2006," the buyer said.

Any concerns this buyer had about not being able to get rooms on peak nights have been assuaged—as least so far—by having last room availability built into the agreements. "If LRA isn't included in the rate, the hotel's not in the program," she said.

Coley and Rostanzo are divided on the subject. Rostanzo has last room availability built into her agreements in key cities, but a number of hotels, primarily international, this year have not honored the last room availability provision, blocking reservations for the negotiated class of room before the hotel sells out. "If the practice continues in 2006, as I expect, they'll jeopardize their standing in the program," Rostanzo said.

Coley hasn't asked hotels for LRA since 2001. "Prior to that, we absolutely had to have it in our big cities when rooms were that scarce," Coley said. "That might change for 2006 in especially high-demand cities such as New York. It's hard to pay a higher rate just to get LRA."

Bjorn Hanson, head of the hospitality and leisure practice at PricewaterhouseCoopers, has warned buyers to expect 2006 rate negotiations to be more intense than this year.

"Look for a much more difficult environment," Hanson said at Corporate Travel World in March. "Hotels are looking for this to be their biggest rate increase in four years. Some are trying to make it the biggest increase in corporate rates ever."

Consequently, buyers can expect hotels to negotiate strenuously. "They saw the power shift in their favor sometime during the third quarter of 2004 and their training sessions have been geared with this in mind ever since," Hanson said.

Coley has kept her senior management apprised of the shift in pricing, so there'll be no surprises come fall. "They're good at keeping the pulse of the market and I try to keep them informed regularly as well," Coley said.