Room Demand Rebound Tips Negotiating Favor To Hotels

It is a foregone conclusion among most travel buyers that hotels will ask them to accept more-than-minimal rate increases for 2005, but remains in question how steep the rate hikes will be. Most industry consultants estimate that such increases will range from 3 percent to 5 percent.

The rebound in the hotel business that began toward the start of 2004 continued to gain traction through the summer, giving hotels for the first time in four years the belief they successfully could hold buyers' feet to the fire. The percentage of proposed rate increases varies, depending on local market conditions and company travel patterns, as well as the number of room nights buyers bring to the table and their histories of delivering projected volume.

Buyers are not happy with the new scenario. In most cases, companies have not loosened the purse strings, so travel budgets still are under close scrutiny. "We're going into negotiations with a stay-flat mentality and taking it from there," said Donna McGovern, hotel program manager for Interpublic Group of Companies in New York. "It's different chain by chain, hotel by hotel, basing their approaches on how much business they got from us in the past year."

Curt Mattos, director of travel services for Charles Schwab in San Francisco, said hotels use to their advantage the perception that rate hikes are inevitable. "It's what sales managers are striving for," he said. "They think the timing is good for increases because they've held the line the past couple of years, but we're holding the line ourselves. Big increases are just not a possibility for us."

McGovern will rely on the chainwide deals she's had in place for the past few years. "We have the most leverage with the chains in our top three cities and expect to use that leverage to help us hold down increases in our secondary cities."

By midyear, U.S. business travel rebounded to the point where PricewaterhouseCoopers this month adjusted its forecast for increases in 2005 negotiated rates to 3.9 percent from 3.5 percent. "Commercial demand returned with such strength that hotels are more aggressive with buyers, which means less discounting," said Bjorn Hanson, global head of PwC's hospitality and leisure practice. "On top of that, the forecast outlook for inflation, which in the short term actually is good for hotels, has gone up to 2.7 percent this month from 2.1 percent in May."

John Fox, senior vice president of PKF Consulting, expects 2005 U.S. negotiated rates to rise 4 percent to 5 percent. "With occupancies and demand firming up, hotels simply are going to be less flexible on rate. In many markets, they've really had to scramble the past few years for whatever they could get," he said. "This isn't to say, however, they'll make up for missed opportunities by gouging. For their part, some corporations have stuck it to hotels as well. It works both ways."

Certain cities see stronger demand than others, so rate increases in these markets likely will be greater than the national average. New York is a prime example. "Demand in Manhattan will be so great our forecast is that the increase will be closer to 6 percent," Hanson said. "We also forecast that occupancy in the city will approach 2000 levels, which means there will be a number of nights of 100 percent occupancy."

Fox also cited New York as the market where rate increases will outstrip the national average by the greatest margin, though others will outperform the average as well. "Boston is coming back. So are San Francisco and Chicago, though from a much lower base," Fox said.

Each of the country's top 25 markets, in fact, will be able to achieve some reasonable level of increase to its average rate. "It might be 2.5 percent to 3 percent, rather than 3.9 percent," PwC's Hanson said.

American Express expects 2005 negotiated rate increases in North America of up to 3 percent, more conservative than either PwC or PKF. Projected increases in Europe range up to 4 percent for upper upscale and deluxe hotels and up to 5 percent in Asia, particularly Japan, for the same class hotel.

In a survey conducted last month by UBS Global Equity Research, responding travel managers said they expected to accept rate increases between 1 percent and 3.6 percent. Of the 121 respondents, those who said their companies in 2005 would continue to use the same class hotels expected rate increases of 1.9 percent.

"Meanwhile, those who expected their companies to start using higher-price hotels were budgeting for rate increases of 3.6 percent," according to William Truelove, UBS lodging industry analyst. "Those who said their companies planned to trade down in price point were preparing to budget only an additional 1 percent."

Michael Rietbrock of Citigroup Smith Barney and Harry Curtis of JPMorgan Chase also predicted corporate rates for 2005 will increase, though they have not specified exact percentages. According to Rietbrock, the increase in corporate transient demand over the summer, which resulted in higher average daily rates, already has helped the lodging industry's annual profitability.

Curtis noted that the increase in transient demand has been accompanied by an uptick in group demand. "Higher-rated groups are replacing lower-paying ones, further building hotels' confidence going into September and October," he said. High-end groups also are more apt to book upper upscale and deluxe hotels, which tend to be in downtown locations.

Buyer resistance to rate increases is understandable, according to Connie Cirillo Freeman, vice president of consulting firm Management Alternatives. However, she cautioned there are risks in not reaching terms with current preferred hotels and consequently requiring extensive changes to the program. "The cost of dislocating travelers can come in the form of decreased compliance. Travelers develop loyalty to existing hotels," she said. "They know they're comfortable there and may well resist widespread changes."