New opportunities open up for buyers negotiating rates with hotels for 2010
Room rates are softening and hotel programs negotiated for 2009 may be out of date
By Susan Avery -- Purchasing, 6/18/2009 2:00:00 AM
If travel buyers have not done so already, they may want to consider reopening negotiations with hotels for rates travelers will pay for the remainder of 2009. Due to the economy, more companies are traveling smarter, room rates are softening and hotel programs buyers negotiated in 2008 for 2009 for properties in certain cities have become out of date.
Typically travel buyers and hoteliers negotiate rates in the fall for the following year, and begin by gathering data and planning as early as June or July. New programs go into effect on January 1.
A year ago, both travel buyers and hotel chains likely had different expectations for 2009. Then, while it appeared the market already was beginning to shift in buyers' favor, demand for rooms in some key cities was still strong and room rates were rising.
But that isn't the case today. In fact, room rates have tumbled even in some cities where they had been rising fastest, like New York, San Francisco, London, Paris and Singapore. In comparison, rates for rooms at properties in some Midwestern cities and Washington, D.C. are holding steady.
In the first quarter, according to Smith Travel Research (STR) which watches the lodging industry, revenue per available room (RevPAR) night, a key metric, fell 17.7%. STR expects the second quarter to continue to be challenging for hotels before the industry slows its slide during the third and fourth quarters. For the year, it expects RevPAR to decline 9.8%.
"On a positive note for the hotel industry, we believe the first two quarters of 2009 will be the trough in this cycle, and we will see some modest improvement in the third quarter followed by measurable gains in the fourth quarter, especially in occupancy," says Mark Lomanno, president of STR in Hendersonville, Tenn.
Travel buyers may find bargains in some unlikely places. As companies travel smarter and control costs by reducing length of stay and staying at properties a tier or two below where they would usually, prices of rooms in deluxe and upscale hotels have fallen. According to the American Express Business Travel Monitor, average domestic booked rate for a deluxe hotel fell to $216 in the first quarter of 2009 from $253 in the fourth quarter of 2008. Likewise, the rate for an upscale hotel dropped from $208 in the fourth quarter to $178 in the first quarter.
RENEGOTIATE NOW. As a result, hoteliers are offering more competitive rates in some markets, and both buyers and suppliers are not benefiting from preferred programs they put in place for 2009, says Bob Brindley, vice president at Advito, the consulting arm of BCD Travel in Atlanta.
Brindley is advising travel buyers to approach the hotels to renegotiate rates. "It is in the hoteliers' best interest to open dialogue and negotiations for the remainder of 2009," he says. "By keeping buyers locked in at rates negotiated for 2009, the hotels will lose business. It's important for the buyer to let hotels react to the market in new negotiations and hopefully come back with better rates for the rest of the year."
He cites the example of a travel buyer who, through negotiations with the hotels for 2009, put together a preferred program that improved the rate his company pays by 5%. "That savings was big because we thought the market was going up by as much as 6%," Brindley says. "But now that the market is down 16%, that 5% doesn't look as good."
Some hotels, seeing that they are losing market share, have gone back to buyers on their own to adjust rates for properties in certain cities, he said.
At CWT Solutions Group in Minneapolis, Neysa Silver, director of hotel consulting, suggests travel buyers not reopen negotiations for their entire programs, but rather select markets or hotels that travelers frequent often.
"Reopening negotiations has to be reciprocal," she says. "Buyers are renegotiating because they've been directed by management to cut travel or costs. This isn't the client saying 'I am going to take advantage.' I think buyers realize they need to focus on the relationship and to ask what is competitive and fair because there will be an upswing in business and then the buyer will be on the other side. It's important to keep that perspective."
Keeping that relationship in mind, DeAnne Dale, vice president for strategic account management and consulting services at Travelocity Business in Dallas, hesitates to recommend travel buyers reopen negotiations with hoteliers based on softening room rates. She recommends buyers run an audit first to determine whether the preferred rates they're paying are truly competitive with market rates. One of her company's largest clients ran such an audit and found that travelers were paying higher rates only 2% of the time, she said.
As room rates soften, Dale says that buyers should be aware that some hotels may cut back on some services to try to keep their costs in line. For instance, they may close a restaurant and serve guests meals in the hotel bar. This can cause issues with tracking and reporting of costs when travelers return to the office to reconcile their expenses.
If buyers choose to renegotiate rates for the rest of this year, the travel management companies (TMCs) caution against pushing the hotels to continue to offer the same prices in 2010. "It's risky for the hotels since they don't know how long the economic downturn is going to last," says Brindley at Advito. "They may not necessarily offer buyers the best rates. But by July or August, we should have a better feel for whether the economy has bottomed out."
PREPARING FOR 2010. In negotiations for 2010, the TMCs don't anticipate too much fluctuation in room rates one way or the other unless something substantial changes. Some hotels are going to want to keep rates where they are, and are not expected to come in with increases. "They are either going to maintain what they have or even be willing to be more competitive," says CWT's Silver.
"It really all comes down to supply and demand," Brindley says. "Eighteen months ago, there weren't enough rooms available and rates were going up because of that. Now, it's just the opposite. Demand isn't there and there's room availability. Hotels trying to manage their P&Ls are trying to fill every room possible. They are willing to cut deals."
Still important too are amenities such as Internet access, breakfast and parking. When hotels are not willing to move on rates, buyers can negotiate amenities to help improve a deal.
To get the best rates possible for 2010, buyers may want to consider pushing up negotiations, which can usually begin as early as September. That's if the hotels will go for it. Many are still trying to understand what's happening in the market, and they are not going to want to over-react to the dip in demand from their corporate customers.
It is important for a travel buyer to understand his or her company's requirement in the new economic environment, i.e., whether the drop in demand is temporary or will persist in 2010. "That will drive how many hotels you need in the program and how many you need to include in your RFP for the coming season," says Silver.
Heading into negotiations with hotels, buyers want to be able to show the suppliers how travelers complied with their preferred programs even if their volume is down. Using a combination of data from their TMC and credit card issuer, they should be able to calculate and show how much compliance there was to the properties and leverage that in negotiations.
"If the hotel offered better rates and travelers used those, it may not have tracked that," says Frank Schnur, vice president, global advisory services, at American Express Business Travel in New York. "A travel management company can track by property and present the information as part of the pre-season process."
Schnur says that companies need to think about compliance to travel policy and preferred suppliers or programs from the perspective of setting expectations, creating accountability and leading by example. "You want senior leadership to lead by example by leveraging the company's preferred suppliers and preferred programs. You set expectations through policies and communications around programs and what you want travelers to do. You create accountability by reporting on compliance and savings resulting from compliance to the business units."
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