Hotels Elevate Rates, Add New Fees

<B>Hotels Elevate Rates, Add New Fees</B>

By Bruce Serlen

As buyers begin negotiations for 2001 U.S. hotel rates, industry consultants predict increases that will be comparable, and in some cases stiffer, than rate hikes seen last year. Estimated increases by three travel industry consulting firms range from 3.1 percent to 6 percent, with a fourth consultant anticipating increases in the area of 8 percent.

In addition, PricewaterhouseCoopers said buyers can expect to start paying more via new or higher fees on conveniences commonly used by business travelers. For example, some hotels are imposing or raising fees for business center services and early departure.

Underlying the trend is the robust health of the U.S. lodging industry overall, with key business travel cities showing particular strength.

Citing heightened demand, American Express Consulting Services this month predicted that average hotel rates for 2001 would increase 4 percent to 6 percent. According to its business travel reservations data, the average booked rate across the country in the second quarter of this year was $129. "Next year, higher demand will push up the average booked rate by up to 6 percent, to nearly $137," said Rusty Carpenter, an American Express vice president.

"Demand will continue to be extremely high in major cities, especially midweek, with sell-out situations increasingly common," said Julie Hylton, American Express' director for hotel management consulting services. Rates in these high-demand markets are helping to drive up the national averages. Yet in certain markets, Hylton said more supply has come on the market recently, which is taking the pressure off rate hikes somewhat. Dallas, Phoenix and Seattle are examples of these destinations. "The convergence of supply and demand is somewhat positive news for buyers in these cases," she said.

PricewaterhouseCoopers said hotels would follow a different strategy in 2001 than this year. "Buyers shouldn't view it as a kind of subterfuge, but hotels will try to get the biggest increases in rate growth they can," said Bjorn Hanson, global industry leader for the hospitality and leisure practice. Occupancy rates had been declining somewhat in 1999 and 2000, but should rise in 2001 before declining again in 2002. "Consequently," Hanson said, "the hotels feel the balance of power shifting back in their favor."

At upper upscale hotels, which frequently are used by business travelers, PwC projects increases of 5 percent. "However, at upscale hotels, which also are popular with business travelers, the increase in rates should be 3.1 percent, which is a bit above inflation," Hanson said, noting that increases at upscale properties would have been higher had it not been for the amount of supply that came online in the past year.

Hanson qualified the numbers, however, based on location: "Rates for upper upscale and upscale properties in the most-in-demand destinations should go up 5.5 percent and 4.5 percent, respectively."

Another criterion to factor into rate projections is premiums being charged for last room availability. "As the strength of the lodging market continues, LRA is definitely becoming a hot button for travel buyers looking for coverage in the key markets," Hanson said. "Understanding this, the hotels will try to negotiate a premium on top of the regular rates in exchange for guaranteeing LRA for their top clients," making the percentage increases even greater.

Also citing hotels' increasingly aggressive negotiating tactics, PKF Consulting projected rate increases of 4 percent to 4.5 percent in 2001. "Last year was the first year since 1993 that, at 2.7 percent, we saw a significant slowdown in rate growth nationally," said Robert Mandelbaum, director of research. "For the first half of 2000, however, rate growth rebounded to about 4.5 percent, a rate we anticipate will continue for the remainder of the year and hold for 2001." Like Hanson, he expected rate increases to be even steeper in key cities.

For Mandelbaum, the aggressive stance is understandable when hotels are experiencing 75 percent to 80 percent occupancy. "Hotels are feeling their power when they're running occupancy rates like these, because they know they can replace the business when they encounter resistance," he said.

At the high end of estimates, Runzheimer International projected rate increases of 8 percent. "Hotels are expected to raise rates routinely, actually about 12 percent, but resistance will be felt," said Rolfe Shellenberger, senior travel consultant. Consequently, increases closer to 8 percent should result.

In destinations where there is an abundance of new supply, Runzheimer expects new properties to undercut the competition as a way of gaining market share.

Facing these stiff rate increases, Runzheimer expects buyers increasingly to consider replacing upper upscale or upscale chains in their hotel programs with midprice brands that have improved their quality. Companies also will be forced to seek out such other cost-effective alternatives as corporate housing and long-term hotel room leases.

In addition to room rate increases, PwC foresees hotels charging new fees for business services in 2001, as well as increasing fees on existing services. High on the list of these alternate sources of revenue growth are extended local call charges and early departure and cancellation fees.

"Hotels' yield management systems have gotten so sophisticated, and been so successful in generating room rate revenue, that hotels are ready to focus on maximizing revenues for the entire property with much the same vigilance," Hanson said.

A hotel's policy, for example, might be not to charge for local calls, but time limits will be built into the system beyond which the traveler is charged, he said. The change reflects the increased usage of computers to access e-mail. "Typically, after 20 minutes, the system will start billing the call as long distance," Hanson said, calling the charges a "potential shocker."

Early departure and cancellation fees, which were rare a few years ago, have now become common. "Questions remain whether in key cities hotels aren't able to fill these rooms without any trouble," Hanson said.

Policies covering these charges already may have been on the books, Mandelbaum said, "But it's only these days that they're starting to be actively enforced.