Hotels losing fight to retain rates
When the recession hit hotels with its full force late last year, there was one thing on which owners and managers were determined: rates would not be lowered. They would take a hit on occupancy, they would offer extras as part of the price - but they would not drop their average daily rates.
Eight months on, the growing evidence from hotel consultants and analysts is that hotels, under intense pressure form corporates, are losing the battle. TRI Hospitality Consulting reported a fall in rates in Amsterdam and Prague of more than 20% in May. PKF said room rates in London fell by 7.3% in May compared to the same month in 2008.
One expert predicted to ABTN that by next summer, rates would be 30% less than they were in summer 2008. Even this may prove optimistic.
Few hotels have even remotely forgotten the after effects of 9/11 when rates not only plummeted but were prey to the intervention of sharp-eyed online hotel booking agencies which played havoc with prices.
Some chains felt they had even lost control of their rates to these agencies with one marketing manager of a prominent chain famously calling out "I want my product back." It took hotels years to get back to the pre-9/11 rate levels. In the aftermath of such mayhem, it was understandable that hoteliers resolved never to let this happen again.
But that resolved has crumbled in the face of a severe and continuing drop in business travel. One Amsterdam hotelier told ABTN this week that he usually gets 3,000 bed nights a year from Siemens. This year it will be 200. This is a catastrophic drop. Another in Munich said that this year the transient travellers were just not coming.
It is not a problem of occupancy. Consultants are finding that some cities are reporting a slight rise in the number of guests. But they are almost all leisure, lured by slashed rates and attractive weekend deals. In a way this is exacerbating the problem with travel managers reasoning that if occasional visitors can secure good reductions why can't regular visitors get the same treatment.
Surveys by hotel consultants over the last few weeks will have made unhappy reading for the hoteliers. STR Global reported that in May daily rates fell 12.5% compared with the same month in2008, the steepest drop in the world. Of 40 European cities surveyed, only four showed a rise in average daily rate.
For the month of April, STR Global reported that rates in Dusseldorf had fallen 46.5% compared with the previous year. This week the consultants said that the German hotel industry faced a gloomy two years with rates predicted to fall for the next 24 months. It said it expected Dusseldorf, Cologne and Hamburg to be worst hit with rates dropping by 19-22% this year and by 1-3% in 2010.
The picture across the Atlantic is little different with STR saying rates had fallen by 9.8% in May compared to May 2008. Inevitably it has led to hotel chains reporting losses or severe drops in revenue.
Needless to say this has led to deft manoeuvring by both hotel chains and corporates to get themselves the best deal. Jason Harris, senior director for hotel relations at BCD Travel, said: "The trends are still uncertain but hotels are doing what they can to keep rates as high as they possibly can.
"But because the market is not showing any signs of recovery, the corporates are seeking to re-negotiate. The hotels are looking to work with corporates who will move volume to them."
But he said the rate was still softening in "most markets" with corporates aiming to take advantage of this. "Some corporates are still negotiating on 2009 prices when we are almost beginning the first discussions for 2010."
Hotels are also using the situation to push in more dynamic pricing, using an offer of Best Available Rate (BAR) as an enticement to corporates. And while corporate are responding to this because guaranteed BAR alleviates the need for constant re-negotiation, they are also protecting themselves by demanding a rate cap just in case prices shoot up. If hoteliers have not forgotten 9/11, corporates remember the height of the boom when rooms were at a premium in cities like New York.
But as Mr Harris said this is still a very challenging market and rates are still dropping, regardless of the manoeuvrings. Some five-star hotels were until recently prepared to sacrifice occupancy levels in order to keep their rates high. "Most have now re-thought this strategy. I don't know anyone that is still doing this," he said. In America analysts have talked of "near panic rate cutting."
So where is it all leading? Hoteliers may want to stop reading now.
An article in Bloomberg last month quoted Mark Woodworth, president of PKF Hospitality Research as saying: "We don't see national average room rates getting back to 2008 levels until sometime in 2012 or even 2013.
"There were rate declines in 2001 and 2002, but until this year that was the only other time that happened in this industry in some 20 plus years."
Mr Harris is no more optimistic. Getting rates back to 2008 levels is going to take time and is dependant on factors as yet unknown. How quickly will the economy bounce back? Will the recovery start in mid-2010, as some predict and if so, how far will rates have dropped by next summer?
Mr Harris said he thought rates could go down by as much as 30% by 2010 in some key cities compared with 2008. Four years to get back to those levels maybe a realistic analysis. But it sounds a long way off," he said.
There is also another factor beginning to cloud the horizon. During the boom years, hoteliers planned more and more hotel, just like the airlines ordered more and more aircraft. New hotels are opening every week and this is set to continue for at least a year, even if in the slightly longer term the pipeline is shrinking.
If hoteliers are having trouble filling their current properties at prices they want, how will they cope if the stock goes on increasing.
When supply outstrips demand, economists say prices should fall. That is hardly a prospect a hotelier would welcome.