ANALYSIS: 17 November 2008

Hotel deals moving corporates' way

Three months can be a long time in the hotel industry. Back in August, hotel chains fondly envisaged the rise in rates they would persuade corporates to swallow in the then forthcoming autumn negotiations. Less than three months later, those hopes have been brutally dashed.

Jason Harris

While at the end of the summer analysts talked guardedly of a shift in power to the corporates, now at the end of autumn, they speak freely of corporates gaining the upper hand.

It is not hard to see the reasons for this as the Western world has been pummelled both by a banking crisis and the onset of recession. But there have been, in the last six weeks, increasing signs that something significant was happening.

At the end of October, the HotStats from TRI Hospitality Consulting suggested the hotel market in Europe was "rapidly deteriorating."  A few days later in early November, STR Global reported a "sharp slowdown" in European hotels' performance. Of the 17 cities surveyed, only two, Berlin and Helsinki, reported a rise in revenue per available room (revPAR). The rest showed a decline with Prague (25%), Rome (20%) and Dublin (19%) leading the way.

Andrew Cosslett, ceo of InterContinental Hotel Group (IHG) ended any doubt when, in announcing a profitable third quarter last week, he spoke of a "sharp deterioration" in the market in October.

Jason Harris, senior director for hotel solutions at BCD Travel, cited a growing number of corporates enforcing either a travel ban or allowing only essential travel. "It was first the financial institutions which were reducing their travel, then retail. But now it is across the board," he said. It had lead, he said, to a "significant decline" in volume for hotels.

"There is a fear factor here. Corporates did not know where it was all going or when it was going to stop. So they have adopted damage limitation strategies at least until the end of the year.

"Obviously in return, hotels have had to adopt their own damage limitation strategies. They have seen a decline in occupancy and companies are now making their bookings very late so for hotels it has become difficult to determine what is happening.

"Key markets like London were still strong until a few weeks ago with fairly high occupancy but most of the chains are now re-forecasting their financial situation for this year," he said.

It is this drop off in business, right in the midst of the autumn negotiation, which has propelled a shift in the balance of power from the hotels to the corporates.

Jennifer Charlton

Jennifer Charlton, vp global hotels for Carlson Wagonlit Travel, said the decline had been happening for some time but added: "We have seen a number of hoteliers starting to flap in the last couple of weeks."

Ms Charlton said hotels were now "revising their budgets downwards recognising that this year is not going to be like it was in the last few years."  At the same time, corporates, sensing the shift, are both tightening their own budgets and "pushing the hotels hard."

Prashanth Kuchibhotla, American Express Business Travel's director - advisory services EMEA, has also seen occupancy falling and demand softening. "The hotels are trying to hold out, trying to keep the revPAR as high as possible. There is some flexibility in their approach but they are holding out to keep the price up."

The "flexibility" he spoke of was hotels offering free WiFI, free breakfasts and free parking in return for keeping their rates up or even enforcing a slight rise to cover costs. "It is easy to throw in such things as the cost to them is minimal," he said. But it does not always work as such deals had to be hotel-specific.

But Mr Kuchibhotla stressed that this situation was not happening everywhere. He quoted the case of Zurich, a world finance centre where business from New York and London had dropped off but was still strong from Middle East states like Dubai.  

And while hotels in New York and London were beginning to suffer, those in India, where there is a long time shortage of hotel rooms and an ever growing demand, occupancy was still high. As ABTN reported last week, in some hotels in Bangalore it is 90%.

But that figure is a slightly distant dream to business hotels in New York and London. Their hopes on higher rates have also fallen. "What they were thinking of a few months ago in August is definitely reduced judging from what is emerging in the agreements that have so far materialised," Ms Charlton said.

She was also sceptical about corporates being ready to accept deals on added extras like free breakfasts. The travellers themselves liked it but it was a gain hard to measure for the company.

More crucially, the company negotiators have set their sights on a cut in rates or at the least a freeze. "The hotels are desperately trying to maintain their revPAR. They are prepared to accept less occupancy if they can maintain their rates," she said.

Mr Harris takes a similar reading. "A lot of corporates are saying ‘We want to extend our agreement on the same terms as last year' and a lot of hoteliers are feeling that that is okay," he said.

The same rate as last year seems a reasonable deal for, as Ms Charlton points out, they have had an incredibly good last year and a half and even if occupancy is down, it is down from 90% to 75%. Nor, she adds, have rates sunk like they did in 2000-2001 when they hit the floor and nor are any hotels being forced to close floors.

The situation can be over-dramatised. But there has been a change in the last few weeks as Mr Harris, Ms Charlton and Mr Kuchibhotla acknowledge. None would hazard a guess as to where it might all end. The one certainty is that hotels are in for some tough negotiations in the next month or so with their newly confident corporate customers.