Hoteliers Rule The Roost: Buyers Revamping Programs To Offset Cost hikes

Many buyers have revamped their hotel programs to keep costs down as hoteliers in 2006 negotiations hiked room rates and in some cases turned away business, even as business travel continued to increase. The strength of the seller's market also has prolonged negotiations, affecting the accuracy and timeliness by which rates are being loaded in the global distribution systems.

"Conceptually, most travel buyers have negotiated pricing that is higher than the previous year. Of course there are city-level anomalies but, given the marketplace and what's happening in the top business destinations, it's definitely a supplier's market," said Ruth Philpott, director of hotel procurement for American Express Business Travel. "Negotiated rates have risen primarily—and most notably—in the top-tier cities, like New York, Washington and London, where capacity is constrained and demand is pretty high."

Cynthia Gillen, national director of procurement and travel for BDO Seidman LLP, adapted to the market and tailored her hotel program to comply. "What we've done is streamline our hotel program and negotiate direct rates with fewer hotels for 2006 than we did in 2005 for annual rate structures on a core negotiated program," she said. "We chose to negotiate where we felt like we could get considerable leverage in price and where we had consistent volume."

"Our company's travel is determined by client service needs, and many key cities change quarter by quarter," she said, adding she had negotiated full-year rates in fewer cities this year than last year because the market was much stronger, which cuts down on negotiating leverage. "We've gone in and negotiated set rates in our key market cities. For the cities in between, rather than negotiate an annual rate, we negotiate a short-term rate. We have moved some of our hotel program management initiatives toward focusing on short-term benefits and negotiating a rate one month out that will be in effect for two or three months. It's how we are controlling costs."

Another maneuver buyers have used to keep costs at bay is changing the hotels in their program. "Typically, in a seller's market, when availability is tight, buyers are forced to expand into other areas," said American Express' Philpott. "If you look to downgrade property types that would only be successful if the culture of the company supported that environment." Gillen looked not to trade down, but to broaden her opportunities. "One of the things that happens with having fewer cities with lockdown rate commitments means we can use a middle-market hotel in a particular city. Rather than having only one or two options to choose from that's in a preferred program, we can do price comparisons with maybe five or six options."

Government defense contractor Lockheed Martin took a different approach for 2006. "Our travelers recognize that we have a policy for supporting our approved hotel suppliers," said Richard Wooten, Lockheed Martin's director of corporate travel. "We have about a 78 percent usage of our approved properties by our travelers. This helps us in working with our suppliers because they understand that they are getting our business." Wooten employs a reverse auction method in key cities. He has used this technique for the past four years and said that it remains successful. "We were able to drive the bids at or below government per diem rates, which is good because we are a government contractor."

Wooten reported that room rates were not substantially higher across the board, although they had to drop a handful of hotels from their program when they weren't able to reach a reasonable price. Wooten said that most if not all of Lockheed's rates are loaded in the GDSs and that he is now in the process of rate auditing. He expects a comprehensive audit to be complete by the end of April.

Although other such amenities as free parking, high-speed Internet, complimentary breakfast and last-room availability all factor into negotiations, rate remains the most salient. "On the front end of this year's negotiations, hotel programs looked very similar, but once negotiating began we started to see changes," said Kevin Kelly, executive director of sales for Hyatt Hotels. "Added-value amenities, promises of increased compliance and fewer preferred properties to drive volume were often major points of consideration. In the end, rate seemed to be the driving concern." Kelly also noted that not since the late 1990s had LRA been scrutinized to the extent that it was this year. He said for accounts unable to fulfill the expectations set forth in negotiations, perks like LRA were removed.

Last-room availability is important when demand is high and room availability constrained.

"Most buyers know that they need to include LRA in their contract terms, otherwise they won't have as much assurance that their prices will be available at the time of booking. It may be more of a premium contract term and some buyers—even know they want it—have been forced to accept prices without it," said American Express' Philpott. She said buyers with marketplace leverage and long-term supplier relationships were able to continue to negotiate for complimentary breakfast, transportation and high-speed Internet.

Denise Lodrige-Kover, vice president of business travel sales and strategic partnership accounts for Hilton Corp., warned that rate shouldn't be the overriding deal breaker during negotiations. "We understand our customers' decisions of streamlining their costs in their travel programs," she said. "We try to look at ways of streamlining, consolidating and lowering costs through process improvements between us, so that we're not focused solely on the rate in order to hold our customers accountable for the costs that they have to cut. Those that are commodity oriented and focused on nothing but rate are losing opportunities. Right now the hotels are in a position to leave money on the table."

Problems with the practice of loading rates still remain. BDO Seidman's Gillen said negotiated rates took longer to load and, in some instances, were pulled from the GDSs even though they were still valid.

"We negotiated several multi-year agreements and we had experiences where those rates were dropped at the first of the year out of the GDSs, even though it was still an active contract," she said. "In negotiating a multi-year contract, we thought we'd eliminated the GDS load headache for a year—this wasn't the case."

The intended Jan. 1 target date on which most companies strive to have rates loaded was in many cases unattainable, as buyers scrambled to achieve the best rate possible or, in some instances, failed to accept the final rate quoted by a certain hotel company.

As the first quarter begins to close, some hoteliers still have not loaded rates. "The negotiated rates are loaded onto the GDSs if the customer has given us their decision," according to Hilton's Lodrige-Kover. "There are more than we would like that have not given us their decision on whether they have accepted or not."

For Eric Peter, manager of travel services at healthcare products manufacturer Johnson & Johnson, it is a problem that needs to be rectified. He had to do five separate rate audits from mid-December 2005 through February 2006 to ensure accuracy.

"There needs to be a better solution than there is today," he said, adding that tapping into technology could be the solution. "Coming up with a solution to mitigate the problem of corporations paying more than they negotiated because the rate was loaded incorrectly would be one of the most significant advances the travel industry has seen in years," Peter said, adding that incorrect rates potentially could cost large corporations hundreds of millions of dollars above negotiated rates.

As negotiations become more involved, the customary window of negotiation has clouded, where in some instances one-time dealings have given way to year-round talks for hoteliers, and even for buyers.

Said Hyatt's Kelly: "Seems like the RFP season is a year-round event as some customers have moved to a mid-year cycle." Trumpeting the effectiveness of online booking systems as instantaneous information sources, Gillen said, "You can control and move volume and inventory that way, so the importance of having a once-a-year negotiating window is no longer there if you are looking to obtain discounts."