Waking the sleeping economy

Hotels are hoping for a brighter new year as the economy recovers, says David Churchill

Early in January last year Mike Prager, a veteran hotelier with 30 years experience, knew that something was very wrong. Bookings for the 50-plus hotels in the Real Hotel Company's portfolio of mid-market and budget properties (of which he was CEO) had fallen by a third since the start of the year. Given that the hotel group, quoted on London's AIM stockmarket, was already struggling financially in the downturn since the Lehman Brothers collapse, the post-Christmas slide was the final straw. The shares were suspended, administrators were appointed and buyers were sought.

At the time, the demise of the group which operated a number of franchised Choice Hotels as well as the budget Purple Hotels chain, was thought likely to be only the precursor of many such casualties to come. A survey of hotel executives at the prestigious Hotel Investment Forum in Berlin last March, for example, found that many expected up to five hotel chains to collapse during the rest of 2009 as the recession took hold. Other polls produced similar results of gloom and doom for the hospitality sector.

Yet so far they have been proved wrong. Of course, there were a number of mainly small, independent hotels that succumbed to financial pressures last year - such as the 35-room boutique Ellington hotel in Leeds, which closed last spring.

But, in general, the predicted bloodbath among hotels has not happened, and many of those that have gone under have found new owners. The Quality Hotel in Norwich, for example, was recently sold by the Real Hotel Company's administrators to East Anglian hotel operator GS Hotels.

Prager now believes that the collapse of the Real Hotel Company served as a warning to the banks. "I think they panicked by withdrawing our financing and they weren't interested in the rescue deals we were looking at," he recalls. "But when they saw the impact of their actions, the banks changed their mind and became more supportive of hotels in trouble."

Yet the last 12 months have been anything but happy for hoteliers. The recession and the consequent fall in corporate travel has meant that hotels have lost some of the pricing power they enjoyed in the boom years, while those executives still travelling have been forced to look for better value. Travel habits have changed with more emphasis on cutting back on overnight stays, for example, either by early departures or late returns.

Average room rates among British hotels, according to PricewaterhouseCoopers (PwC), were predicted to be down just over eight per cent by the end of 2009 to an average of £77.69 a night, with occupancy levels down 4.3 per cent.

The figures would have been worse for UK hotels - and actually were in the US - but for the advantage of a falling pound against the euro. This encouraged more leisure travel to Britain, helping London in particular last year to be "one of the most resilient cities across the globe", according to Marvin Rust, hospitality managing partner at Deloitte. "For London hotels to achieve over 80 per cent occupancy in the first nine months of last year during one of the most severe economic downturns in history was very impressive," he adds. But for UK regional hoteliers, the currency boost did not have the same impact and occupancy levels and room revenues were down sharply last year, according to Deloitte.

Average room rates in the regions dropped by just under eight per cent to £67 a night on average (compared with £122 in London).

Although 2009 was clearly a tough market, the fall in business in a historical context does not appear to have been significantly worse than the previous downturns in the early 1990s or post 9/11. Yet the way hotels have responded this time round has shown some significant differences.

In the early 1990s hoteliers panicked in the recession that developed under the government of John Major, slashing room rates to attract business. With yield management systems still in their infancy, they calculated that selling rooms at whatever rate they could get was better than nothing. The result was that when recovery came, hotels found they had trouble for some years in returning rates to previous levels.

This time, hotels have been more reluctant to embrace unfettered rate reductions. Rates clearly have been cut, but not by as much as some hotel analysts were predicting. Hotels have sought to secure business through more tactical pricing and offering added value benefi ts (such as breakfasts and parking) while they have also been increasingly aggressive in taking out their own costs without damaging guest services. But only time will really tell whether any of the majors have damaged their brands to such an extent that they cannot recover previous rate levels.

There is, however, a key structural difference at work in the UK hotel market that was not there in the early 1990s. Budget hotels - like their no-frills airline counterparts - were then very much in the minority. But a decade into the 21st century and budget hotels (and low-cost carriers) have become a key element in the business travel marketplace. Yet despite some high-profi le rate cuts by market leaders Premier Inn and Travelodge to generate publicity and sales - echoing the tactics used by Ryanair and Easyjet - rates for budget hotels have held up relatively well in spite of lower occupancies.

But the budget hotels have not had it all their own way. The mid-market hotel sector has, not surprisingly, reacted to the squeeze by itself pushing down hard on rates (and costs) to attract both corporate travellers trading down (from four-star properties), and leisure guests.

"Relative to the full-service sector, the budget hotel market has appeared more resilient, but clearly not immune to the challenging environment," points out David Bailey, TRI Hospitality Consulting deputy managing director.

Hoteliers' reaction to the recession this time has also been different from the early 1990s as a result of the growth of online booking. The hotel industry was, with hindsight, slow to understand the power of the web and in the early years of this decade after the post 9/11 downturn, effectively lost control of some of their distribution to online wholesalers (who bought rooms in bulk and sold at a profit online). This eventually was challenged in 2005 by InterContinental Hotels Group which stopped Expedia (and some others) gaining access to its room stock without first agreeing to let IHG determine the price and marketing.

Since then, the hotel chains have significantly strengthened their grip on inventory when sold by third parties, while boosting their own online distribution. But the issue remains a live one: Expedia was recently involved in a row with Choice Hotels International which saw Choice properties taken off the Expedia site.

"They clearly sensed blood in the water and that now was their time to drive agreements," claimed Choice CEO Steve Joyce. Eventually a compromise was brokered late last year which restored Choice to the Expedia system, although it highlighted the undercurrents of tension between hotels and those who make a living selling rooms online.

Yet such tensions may be eased by economic recovery this year, although few appear to be taking it for granted. "A recovery is likely to be slow with no swift return of the essential corporate travellers or conference guest in 2010," says Liz Hall, head of hotel research at PwC. The major concern, she adds, is just how sustainable the recovery will be - whether, in fact, it will turn into the 'double-dip' recession much debated by economists.

"As business continues to focus on containing costs we expect to see further consolidation of travel policies and no real recovery in the meetings sector," says Hall. PwC forecasts that average rooms rates in the UK will see a 2.2 per cent decline on 2009 levels. "A hotel room in London this year could cost almost £20 less than in 2008," she adds.

Yet, as HRG (Hogg Robinson Group) director of hotel relations Margaret Bowler points out, "it is still too early to predict where rates are going". She told a recent HRG client conference that "while there may be small increases in certain markets, early indications are that rates will be flat to minus five per cent, particularly in the UK.''

She also believes that one of the key points of focus for travel buyers this year "must be for corporates to consolidate their programmes as they may not have the volumes they once did." But it is also important to secure allocation in certain locations as "some nights still fill".

Traditionally, hotels are also 'lagging indicators' of a recession, more resilient in the early stages of a downturn but late to recover as the economy improves, and Real Hotel's Mike Prager suggests lenders may be less willing to hold off on taking tougher action against hotels in trouble if there are signs of a sustainable recovery. "It could actually be a worse year for the survival of many hotels than in the past 12 months," he warns.

At the same time, however, there is expected to be an increase in UK hotel room stock this year as a result of the pre-credit crunch hotel development boom. Many hotel schemes, of course, have been put on hold or abandoned in the downturn as funding evaporated, but others were too far advanced to be held back.

According to STR Global, there are 3,768 hotel rooms under development in London at present. This year, moreover, is due to see the reopening after refurbishment of two major London luxury properties, the Savoy Hotel and Four Seasons on Park Lane.

IHG is also planning to open another London property next year, the 254-room InterContinental London Westminster, as well as "adding another 5,000 rooms in the UK over the next two or three years", according to Kirk Kinsell, IHG president for the EMEA region.

Which all goes to show that, despite fears to the contrary, the hotel cycle remains alive and well as it moves into the next upturn.