Hotels Limit Corp. Access To Inventory

Hotel companies have begun to restrict the amount of volume they accept from corporate accounts, specifically in high-demand cities on the midweek nights when business travel demand is greatest.

Large and small hotel chains alike have adopted the practice of limiting the amount of rooms business travel buyers can book, including Hilton Hotels Corp., Marriott International, Starwood Hotels & Resorts Worldwide, Millennium Hotels and Resorts and Shangri-La Hotels.

As prevailing market rates have risen in gateway cities at peak times and buyers have resisted significant rate increases, hotels have begun to restrict availability at corporate negotiated rates. This practice is expected to spread as the lodging industry rebound continues. The recovery gained traction through 2004 and is forecast to continue through 2006, which would include the bid season for 2007 rates.

"There are situations where we have to say to clients, 'Your volume projection is too high,' " said Maureen Mackey, Hilton managing director for business travel sales. "There is such a thing as too much market share. It depends on the hotel and amount of volume under discussion, but we have said to customers, 'It's too much. We can only take this amount of business.' "

By contrast, hotels during the 2001 to 2003 downturn in most instances were eager for all the market share they could get. "Working to increase market share of an account's overall business only makes sense when it results in incremental profit to the hotel," according to David Townshend, senior vice president of global sales for Marriott. "It's the hotel's job to analyze the various demand generators that are present in its market and make pricing decisions that optimize a profitable share of that demand."

Buyers last week said they were responding to the prospect of less availability in different ways. "LRA has become more crucial," said Cindy Gillen, director of procurement and travel management for BDO Seidman LLP in Chicago. "So far, we've been able to get it, but the question becomes is it worth paying more just to know you have it and, if so, how much more. Meanwhile, blackout dates, where negotiated rates don't apply, are becoming more common as well."

Yasuo Sonoda, travel manager for Macromedia in San Francisco, is rethinking the consolidation approach he used through the downturn. "Over the past few years, we consolidated all our volume in a city, so that we're only in one or two properties," Sonoda said. "If hotels really cut back on our volume, we'll be forced to expand that number, where it makes sense, to make sure we have sufficient backup. You got to have the coverage you need."

Teresa Powell, senior manager of corporate travel services for Health Care Service Corp. in Chicago, opted to switch a higher number of properties than usual this year. "Not only was the rate better, but the hotels seem happy to have our business, so we don't expect availability to be as much of an issue," Powell said. As a precaution, though, all her negotiated rates include LRA.

Though hotels in the past had been willing to provide LRA to their best clients at no extra charge, they sought a premium for it in 2005, if they granted it at all.

LRA has become invaluable in high-demand cities, confirmed Bjorn Hanson, global head of the hospitality and leisure practice at Pricewaterhouse-Coopers. "If buyers had it in their hotel agreements the past year or two, they may have been able to retain it, but we're seeing few new LRA clauses," Hanson said. "LRA has never been popular on the hotel side and it certainly isn't now. It's the one thing the hotel sales managers really want to hold back."

At Starwood, volume limits and LRA in 2005 were brought up at the onset of negotiations, much earlier than in previous years. "For the first time, we had specific data this year to be able to model for clients what their booking pattern and production have been," said senior vice president Marietta Baldwin. "We look at what the compliance mechanisms are built into the program and what internal marketing the client is doing to drive bookings. Given the number of sellouts we're seeing, we ask ourselves if we really want more market share in this particular location from this account. If, in fact, we have too much volume, we work with the customer accordingly."

One advantage for such multi-brand hotel companies as Hilton, Marriott and Starwood is the typical presence of multiple properties in the same general location, if at different price points, to which they can divert excess volume, if necessary.

Smaller hotel companies do not have this prerogative. They were not able to increase rates during the downturn and see the 2004 rebound as a 2005 negotiating opportunity. "In the past three years, in return for buyers reducing the number of hotels in key cities, we've given them attractive rates," said Tony Potter, CEO of Millennium. "As demand returned in 2004, however, they have given us more room nights than originally projected. As a result, we had too much volume at that low rate. It made 2005 negotiations difficult in certain cases because we value the long-term relationship with our clients."

Capping volume became inevitable once the supply and demand picture shifted, said Martin Wachter, chief marketing officer for Shangri-La. "In the traditional model, the more room nights buyers brought, the more negotiating leverage they had," he said. "There was a downside if you had too many room nights, but weren't prepared to pay a rate increase. Wherever demand outpaces supply, buyers' assumptions that the more rooms they occupy, the lower the price, actually should be reversed."

For Hilton, there is also the matter of not disappointing clients. "It's often not even about rate, but just volume," Mackey said. "The last thing we want is to create unrealistic expectations. Travelers follow travel managers' instructions and attempt to book the preferred hotel, only to repeatedly find it's not available on the dates they want to travel. It makes the travel manager look bad, it makes us look bad. "

If hotels can't give buyers what they need, buyers have the option of finding and negotiating with newly opened properties in their key cities. "The market is flexing back out, which means it's really a good time for new hotels in a market that can offer deeply discounted rates because they want to draw trial usage," said Kim Maschoff, hotel program consultant for Consulting Strategies in Downers Grove, Ill. "Buyers will have no choice but to top up with other hotels and not just switch from one established hotel in a market to another."

As supply in the high-demand cities continues to shrink over the next few years, limiting volume is an example of the kinds of moves hotels may make in order to maximize their yield. "We're going to end up with stronger preferred relationships where the priority is not going to be price, but availability," said Andrew Menkes, president and CEO of Partnership Travel Consulting in Princeton, N.J. "If the practice becomes widespread enough, buyers are going to be forced to take more sweeping steps, such as negotiating room blocks, to ensure coverage."