Firmly in the driver's seat this negotiating season, hoteliers are offering new pricing approaches that move buyers away from fixed annual or seasonal prices in favor of dynamic corporate rates.
Some buyers are wary about any seismic shift in pricing models and shared concerns that dynamic corporate hotel rates would make budgeting more difficult and lead to higher overall expenses.
Regardless of pricing structure, buyers are heading into the toughest hotel negotiating season in years, in a climate created by a strong rebound in business travel and overall occupancy and limited hotel supply growth.
Hilton, Hyatt and Starwood said they were among those working with corporate clients to implement new rate models during the fall negotiating season, claiming flat negotiated rates have become outmoded, as they do not reflect price fluctuations that occur throughout the year.
Hoteliers are exploring bringing the dynamic pricing concept, which travel management companies last year began using to replace fixed consortia rates, to larger corporate accounts. Last year's efforts included decisions by Hilton Hotels Corp. and InterContinental Hotels Group to eliminate fixed consortia rates available through travel management companies
(BTN, Oct. 18, 2004) and Marriott International's and American Express' change from fixed to dynamic pricing in 2003 for 2004 consortia rates
(BTN, Dec. 8, 2003)."Those are coming out into play now and some of the major companies are starting to talk about them," said Sam Schisler, global hotel program manager at Limited Brands and vice chair of the National Business Travel Association hotel committee. "Very much like the airlines with their restructure, the hotel companies are starting to look at what other options are out there besides set negotiated last-room availability rate or non-LRA rate."
"A lot of the traditional pricing models that had existed really are no longer that relevant in the marketplace," said Jim Kilroy, vice president of global agency sales for Starwood. "A lot of those models were based on setting a ceiling rate, such as a the published corporate rate that automatically puts an artificial ceiling on where the price can go in a demand market. Everybody is leaning more towards and looking at more dynamic pricing models."
Denise Lodrige-Kover, Hilton vice president of business travel sales, said such pricing models would not by default favor the hoteliers, as published rates in certain markets and certain seasons can be lower than negotiated rates. As such, she expects fluid pricing in approaching years eventually to supplant fixed rates.
"If you look long-term, down the road that's probably where the industry is heading," said Lodrige-Kover. "We are in a transition. The thing that most people don't realize is that the static rate is becoming antiquated. Hotels really want to have integrity in their pricing and that static rate is an annualized rate. It's going to take care of your high seasons, your low seasons, your shoulder seasons. When it comes to a low season—take June, July and August, perhaps in Phoenix—that negotiated rate can be higher than what the bar rate is."
Among buyers who have reservations about dynamic corporate hotel pricing is Tokyo Electron America manager of corporate travel and fleet services Kevin Maguire, who is beating the autumn rush for the 2006 season and working with several other midmarket firms to leverage volumes for hotel contracts. Maguire said his consortium of one dozen midmarket buyers already has received responses to 2006 requests for proposals from such companies as Best Western and Hilton. "We're going to find it both ways," Maguire said of dynamic versus flat negotiated rate structures. "Floating discounts are kind of new and I'm not real comfortable with them," he added. "I think you have to be really careful on how you set the parameters. If it floats, it can be weighted and hurt more than it helps."
Hyatt executive director of sales Kevin Kelly said the company is beginning preliminary discussions with many large corporate customers, some of whom already are embracing the concept. "For the past few years, many of us were trying to first determine if there is an appetite for this among buyers and also if systems are capable in our organizations to support it. The answer is yes to both for Hyatt," he said. "It is a direction that we are looking at aggressively and it's something we will embrace. It is a negotiation between the customer and us. We've been very thrilled by the interest from a number of big customers with whom we've discussed this."
Although many large hotel companies have embraced—and want buyers to embrace—such pricing schemes, suppliers said they are using the 2006 negotiating season as the testing ground for new dynamic rate models. None of the hotel companies said they are considering doing away with flat negotiated annual or seasonal rates. "For 2006, the percentage of companies using these rates is going to be small, but as more travel managers see the success of it, they will convert," said Hilton's Lodrige-Kover. "If we can help them lower the costs of the RFP, if we can show value, if we can bring business solutions to them, they'll see it. It's going to be those who are willing to step out of the box who will be willing to go that route."
Yet, one travel manager whose company already completed 2006 hotel negotiations gave hope to buyers looking to maintain costs—as well as traditional pricing models.
"I haven't seen the floating rate at any of our preferred properties," said the travel manager, who requested anonymity. "We saw the rates to be flat to a slight increase. Some of our preferred properties were flat or sometimes a decrease. It really depends on the market. If you have a new hotel in the city, then you have better rates all of a sudden."
Whether companies agree to go with new models or opt to maintain traditional rate structures, most buyers, suppliers and analysts agree that 2006 rates will rise. PricewaterhouseCoopers forecasted record high average room rates of $89.97 this year, and the growth is expected to sustain and grow through 2007. "At a growth rate of 4.3 percent, this is the strongest increase since 2000, when the rate was 5.4 percent," the report said.
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. "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."
"I do believe we're going to have higher rate increases than we've had in the past four years or so," said Hilton's Lodrige-Kover, echoing the sentiment of other hoteliers. "In some cities, quite frankly, we're going to be able to get double-digit rate increases and other cities there will be rate increases certainly, but not as high, though."
Contributing to the new highs for many corporate rates are the steadily rising costs of operating a hotel. According to a recent study released by PKF Hospitality Research, operational hotel costs—from labor and property taxes to the cost of food and beverages—have steadily gone up.
"Our costs are increasing as well," Lodrige-Kover said. "We want to take care of our hotels, we want to renovate our hotels, we want to keep our service outstanding and we want to continue to invest in technology. To provide the customer with what they demand of us, the rate increases are just a natural part of what we need."