Hotel companies and industry analysts last week said they expected to see a drop in demand as a result of this month's terrorist attacks, though it was still too early to speculate how steep that drop would be. Nor were they able to measure with any accuracy the effect of the disaster on corporate negotiated rates for 2002.
Should further hostilities break out in the next few weeks, the industry downturn would be at least comparable to the one experienced during the Persian Gulf War in 1991. Analysts estimated that it took a full year for lodging demand to recover after Operation Desert Storm ended.
The industry already had been struggling with the worst occupancies and room revenues in a decade before the Sept. 11 attack. Starting in February, demand from business travelers has been down compared with 2000 in most of the major U.S. cities. This has reflected the cut in travel budgets at many companies, as they tightened their belts in response to the weakening national economy. The unexpected events are expected to make matters worse.
Regarding negotiated corporate rates for 2002, the terrorist attack couldn't have been more ill-timed for the hotel industry. With rate negotiations starting to get underway this month and next month at many companies, hotels already were dealing with the perception that they had lost the upper hand at the bargaining table. So the terrorist action is an additional setback for them psychologically.
As with other aspects of business travel, the hotel industry takes its lead, in many ways, from the airlines. Declines in business-related air travel typically portend drops in hotel occupancies and, consequently, drops in room revenue. The present situation for the airlines has been described as dire (see story, page 1).
At Hyatt Hotels Corp., for example, a large percentage of reservations on the books for September was canceled within the first week of the attack, according to Ty Helms, vice president of sales, who noted the industry was possibly facing its "most challenging time" ever.
On the group side, the response was a bit more positive. "People started picking up the phone again within three days with plans for meetings for October, November and December," Helms said.
Destination Hotels & Resorts, a smaller company, reported a number of cancellations as well, starting the 11th as airports around the country shut down. "Most of the cancellations were for a two-week period from that date," said Brian Windle, senior vice president of sales and marketing. "We're actively working with travel buyers, as well as other customers. For the next several weeks, our properties are selling room inventories off of our minimum rate categories to capture demand."
Other hotel companies cited similar experiences. Analysts last week said if travelers opt not to travel at all, hotels certainly will be hurt. If, however, travelers choose to drive more often and for longer distances to avoid air travel, demand for hotel rooms actually may increase. Similarly, travelers may combine business trips, opting to stay longer in a destination, which also translates into increased demand for hotels. "Much will depend on travelers' state of mind as we go forward," said Kathleen Duda, president of Marketing Solutions, a New York-based hotel consulting firm. "If travelers are fearful or simply lack confidence in the system, they'll just find reason to avoid all but the most critical business trips."
In the days following the attack, consultants that track industry performance, such as Smith Travel Research, PricewaterhouseCoopers and PKF Consulting, tried to assess exactly how negative the impact of the terrorist attack was apt to be. Smith Travel expects that demand for U.S. hotel rooms for the rest of the year will fall 6 percent, month over month.
"Of the 6 percent drop, 2.2 percent is attributable to the impact of the current economic situation and 3.8 percent to the Sept. 11 tragedy," said Mark Lomanno, Smith Travel Research president.
Smith Travel also reported that revenue per available room—an important measure of hotel profitability—would decline in the 10 percent range per month for September through December. For the entire year, Smith Travel has projected that RevPAR would decline 4.7 percent. The news won't be much better on room rates. Average daily rate growth was expected to drop 2 percent per month for the remainder of the year.
PricewaterhouseCoopers, which had been predicting an improvement in occupancies and RevPAR in 2002, said it now believes any improvement will be more modest than anticipated. "Corporate demand will decline even further than it has already," said Bjorn Hanson, global industry leader for PwC's hospitality and leisure practice.
Hanson cited five reasons for the erosion: business pessimism overall, safety concerns, volatility in the stock market, the cost and inconvenience of increased security and the dislocation being experienced specifically in lower Manhattan.
"We predict RevPAR will end up declining in 2001 between 3.5 percent and 5 percent, which would be the industry's worst performance in 33 years," Hanson said. As for RevPAR growth in 2002, Hanson believes any growth the industry sees won't equal inflation.
PKF Consulting cited another reason why the expected drop in RevPAR will be so severe: the actual timing of the terrorist attack. "September and October are strong months for most business and convention markets," said John Fox, senior vice president of PKF. As Hyatt has experienced, however, many companies may end up delaying group functions into later in the year in light of the special circumstances this fall.
Even before the events of Sept. 11th, two leading lodging industry analysts were offering bleak views of how the hotels would fare in negotiations with buyers for 2002 rates. In light of Sept. 11th—and the inhibiting effect the day's events are likely to have on business travel—the analysts are bound to be even more cautious. They had estimated that negotiated rates likely would decrease by anywhere from 3 percent to 10 percent or, at best, remain flat, compared with 2001.
"My sense is that corporations will clearly have the upper hand in negotiations," said Salomon Smith Barney analyst Michael Rietbrock. "A conservative expectation for the result of the negotiations would be somewhere between flat and down 5 percent." Rietbrock added that this would be "the worst result in history."
In his assessment of the situation, Paul Keung, Rietbrock's counterpart at CIBC World Markets, went so far as to say that in hindsight the strong negotiated rates the industry was able to command in 2000 and 2001 now appeared to be "an aberration." Negotiated rates for 2002 are likely to be reduced at least 3 percent and as much as 10 percent, which would be "a return to 1999 levels," Keung said.
As it happens, final numbers on negotiated rates for 2001 are difficult to assess because of the amount of mid-year renegotiation that reportedly occurred, in some cases initiated by buyers, in other cases by the hotels. For 2001, PricewaterhouseCoopers has estimated that rates will have ended up rising 1.8 percent over 2000 levels.
Even before the terrorist attacks, rate negotiations for 2002 were expected to be more of a level playing field between hotels and buyers than in any year since 1997. Now there's even a greater likelihood of this being the case.
"We see more room in the market for meaningful negotiations this year than any time in the past five years," said director of hotel management for American Express Consulting Julie Hylton. "Accordingly, there's a higher expectation from the corporate side that hotels will be fair. Buyers generally have felt frustrated the past few years because they've felt at the mercy of the hotel companies."
Rather than describe the situation this year as either a buyer's or seller's market, Hylton said the present negotiations would be more two-way. "The pendulum hasn't swung entirely to the buyer's side, but it has moved somewhat in that direction. Might the events of Sept. 11 affect this? Possibly, but it isn't yet clear how much."
Even more in light of Sept. 11th, what will make or break many deals is buyers' willingness—or ability—to move market share in a given city.
"Especially in such key cities as New York, Los Angeles, San Francisco or Chicago, buyers who are able to take their room nights away from competing brands and consolidate that volume with one brand can negotiate a very good deal for themselves," said Cheri Shanks, manager of TQ3 Maritz Travel Solutions' corporate hotel program. "The hotels have been hit, and hit hard, by the slowdown and, going into 2002, it's in the major cities where they're feeling most vulnerable," she said.
Hotels now find that not only the substance but the form of the present negotiations has changed.
"In the past, we'd go back and forth several times with hotel companies as proposed rates got fine-tuned," said David Witham, vice president of hotel and car relations worldwide for Carlson Wagonlit Travel. "With each round, the hotel would come back and sharpen its rates."
By contrast, hotels now are much more likely to accept buyers' responses on the first round. "What we're seeing now is hotel companies so fearful of being closed out that, in some cases, they're agreeing to zero rate increases," Witham said.
This is most often the case with the large global programs. "If you factor in inflation, this means they're really accepting a decrease," he said.