Market Shift Alters Perceptions Of Chains' Performance

Unfortunately for business travel buyers, the rebound in the hotel industry that began haltingly at the end of 2003 gained momentum through 2004. By the time buyers entered negotiations in the fall for 2005 rates, hotel sales representatives were confident that the three-year downtown in occupancy and average daily rate was comfortably behind them and that they held the upper hand. Buyers braced for difficult negotiations, concerned that hotels would seek increases for 2005 that would attempt to make up for all the ground they had lost from 2001 through 2003.

In the midst of this charged atmosphere, Business Travel News asked corporate hotel buyers to select the chains with which they most preferred working in 2004, measuring brands within each lodging tier in terms of facilities, service delivery, corporate rate programs, value for price and a range of other revealing criteria. Market cycles notwithstanding, the annual Top U.S. Hotel Chain Survey reflects business travel buyers' determination to provide travelers with the most appropriate accommodations at the best price.

The turnaround in the market has reversed the performance of the lodging tiers. During the downturn, many midprice hotel chains thrived as buyers sought to trade down to less-expensive options. Capital funding for new development was easiest to obtain for these brands, which typically are based on a modest suburban or highway prototype. In the rebound, by comparison, full-service hotels—upper upscale and deluxe chains in particular—are outperforming the pack. Rather than a highway intersection or off-airport location, these hotels generally are downtown, where business travel typically has been concentrated. In the most desirable locations, development sites are at a premium and barriers to entry steep.

Unlike 2001 to 2003, the most significant gains in revenue per available room in 2004 were in the top 25 markets, said Robert Bowers, vice president of operations for Smith Travel Research. Bowers cited unexpected strength in the meetings market as one of the drivers in the recovery. Large meetings in particular tend to book in top 25 markets. "Growth in group demand helped fuel the industry's gains," he said.

Among the large multi-brand companies, Marriott International for the second year in a row scored particularly high in the voting. Four of its brands—Ritz-Carlton, Marriott Hotels & Resorts, Courtyard and TownePlace Suites—led their respective categories. Hilton Hotels Corp. also had a relatively good year, with two of its brands, Hampton and Homewood Suites, taking first-place honors in their respective categories.

Starwood Hotels & Resorts Worldwide and InterContinental Hotels Group, however, failed to lock in any number-one wins.

For as dominant an industry force as the multi-brand companies have become, survey respondents still recognized quality where they found it. For example, Loews Hotels, a single brand company with a portfolio of 20 properties, narrowly won the coveted upper upscale crown, beating out Starwood's Westin Hotels and Marriott's J.W. Marriott Hotels & Resorts.

Negotiated rates for 2005 increased by an average of 3.9 percent, according to PricewaterhouseCoopers. "It was hotel chains telling buyers, 'We needed your business for a couple of years and had no choice but to go along with minimal rate increases. Now it's time for you to understand that the business has changed,' " said Bjorn Hanson, global head of PwC's hospitality and leisure practice.

The range of rate increases was unusually wide, however, compared with the past few years. "Depending on their leverage, travel patterns and willingness to give back value-adds, certain travel managers were able to negotiate increases in the 2 percent-to-3 percent range," Hanson said. "Others ended up with rate increases that were closer to 7 percent to 8 percent."

Value-adds that buyers have been willing to give back include complimentary breakfast, parking and fitness center privileges. Similarly, Hanson said buyers often can justify a dramatic rate increase to their management, if the hotel agrees to include a value-add the company had previously paid for. High-speed Internet access, which is in high demand by travelers, is a likely amenity to include. The savings hardly balance out the cost of the increase, but works as a face-saving measure. "It makes the increase more palatable," Hanson said.

PwC in September forecasted that negotiated rate increases would be between 3 percent and 5 percent. Buyers who needed room nights midweek in the high-demand cities faced the greatest challenge. "In markets such as New York, demands for double-digit increases were common," said Yasuo Sonoda, travel manager for Macromedia in San Francisco.

With the rebound in demand, buyers are facing serious availability issues for the first time since 2000. "Access is going to be the big issue this year—access to availability and at the negotiated rate," said Lisa Bliss, manager of hotel programs for Boeing Travel Management Co., in Tukwila, Wash. "The challenge for buyers is: How do you build your program to ensure you have the availability you need on peak nights?"

As in 2000, hotels have begun to impose more seasonal rates and minimum length of stay requirements on buyers in an effort to yield higher rates. "The use of blackout dates when negotiated rates don't apply has become more common too," said Cindy Gillen, director of procurement and travel management for BDO Seidman LLP in Chicago.

For the first time this year, PricewaterhouseCoopers identified U.S. cities where hotel rooms will be in greatest demand based on their RevPAR growth. Buyers, therefore, can expect negotiations to be toughest in these markets. In addition to New York, rooms will be scarce in Anaheim, Las Vegas, Los Angeles, Miami, Oahu, Tampa and Washington, D.C. Demand should also be a factor, if to a slightly lesser degree, in Atlanta, Minneapolis, Nashville, Orlando, Phoenix and San Francisco. On the other hand, markets where RevPAR growth is expected to be below the U.S. average include Boston, Denver, Houston, Norfolk, Philadelphia, Seattle and St. Louis. PwC also identified four cities—Chicago, Dallas, Detroit and New Orleans—where, because of overbuilding or other factors, RevPAR growth is expected to be significantly below the U.S. average. Buyers should find hotels least resistant to offering attractive rates in these cities.

The upturn in the overall market has allowed hotel companies to look more closely at buyers' volume projections versus their actual production. "We've begun looking much more critically at our accounts to determine which ones continually provide the most value," said Marietta Baldwin, Starwood senior vice president. "Inevitably, there's going to be more discussion of last room availability provisions. If they're really viable accounts we do provide LRA, but with a lot more detail driving the decision, not just because an account had it in the past. There also are cases where non-LRA is the appropriate way to go—where it's still not necessary—and we make sure accounts understand that."

Loews Hotels meets with corporate accounts on a quarterly basis and provides rate decreases when accounts meet production targets. "You want to reward your best clients for delivering on their promises," said senior vice president of sales and marketing Charlotte St. Martin.

Hotel companies have improved their own tracking technology, which allows them to provide buyers with more accurate data. "Our customer base in 2004 had a better bead than ever before on what they spent on both group and transient," said Robert Dirks, Hilton senior vice president of sales and marketing. "As they got their arms around that data, they were able to better represent to us what their 2005 spend was going to be and where they could drive business."

Market fluctuations are always going to be inevitable, said Colleen Guhin, strategic sourcing manager for travel and telecommunications for ON Semiconductor in Phoenix. Hotel companies, however, still look favorably on accounts they can depend on, where compliance is built into the policy and, consequently, there's a history of delivering on the volumes projected. "The basics of managing a program don't change with changes in the market," Guhin said.

Smith Travel Research is bullish for the industry going into 2005. "Industry room supply increased only 1 percent in 2004 and supply growth is expected to remain moderate through this year," said the hotel data company's president, Mark Lomanno.

"Room rate increases should be the primary driver of RevPAR growth," Lomanno said. "Occupancy improvement should continue, although probably at a somewhat lower pace."

According to PricewaterhouseCoopers, occupancy levels for all U.S. hotels in 2004 rose 2 percent, year over year, to 61.1 percent, having grown only 0.2 percent during 2003. PwC forecast another 1.8 percent growth to 62.9 percent in 2005 before subsiding in 2006 when occupancy growth slips to 1 percent to 63.9 percent. For purposes of comparison, occupancies were 63.3 percent in 2000, the industry's last banner year, rising only 0.4 percent over the previous year.

ADR increased 3.9 percent in 2004, year over year, after achieving only a modest increase of 0.1 percent in 2003. PwC expects ADR to increase in each of the next two years as the recovery continues: 4.3 percent in 2005 and 4.6 percent in 2006. ADR, however, grew even more significantly in the banner year of 2000, when it jumped 5.3 percent.

RevPAR, meanwhile, grew a significant 7.5 percent in 2004 over 2003, according to PwC. It had grown only 0.4 percent in 2003, compared with 2002. PwC expects the rate of growth to moderate slightly to 7.3 percent in 2005 and then to 6.3 percent in 2006. Hotels still are doing better than in 2000, however, when RevPAR growth was 6.1 percent.

Lodging Econometrics, which tracks new hotel construction, in November confirmed that the development pipeline remained in check in 2004. "New supply growth in the 25 largest markets fell to 127 hotels with 16,278 rooms in 2004, down from 147 hotels with 26,227 rooms in 2003, a 42 percent year-over-year room count decline," said president Patrick Ford. "It's the sixth consecutive annual decline from the peak reached in 1998, when 474 new hotels with 57,994 rooms were added."

Ford expects supply side growth in 2005 for the top 25 markets to increase slightly to 139 hotels with 17,049 rooms. While 2006 should see an additional slight increase to 151 hotels with 20,105 rooms, "supply increases in both years are so modest, they are of little consequence," Ford said.

More companies tried to negotiate multi-year deals for 2005 than ended up with them, said PwC's Hanson. Buyers who were successful in getting two or three-year deals, however, should be pleased. "The outlook is that the business will only grow more challenging for buyers through 2005," Hanson said. "If they weren't already able to lock in rates for 2006, they're going to find that those discussions will make the 2005 negotiations seem easy."