Falling rates and rising opportunities
Should buyers re-negotiate their corporate hotel agreements?
With the pace of hotel rate cuts accelerating across the world, especially in expensive cities like New York, Dubai and Moscow, travel buyers believe they have a green light to sign new corporate deals. However, before ripping up old agreements, they should consider the long-term consequences as well as the short-term gains.
Falling hotel rates are not recent news. They started to slump in the fourth quarter in most regions. What is news is that the trend is accelerating. BCD Travel’s figures for average daily rates paid by its clients in January and February show significant double-digit decreases in cities across the world.
The country hit hardest is India, where rates in New Delhi, Mumbai, Hyderabad and Chennai are down 40 percent. As is the case globally, the main reason is the economic downturn, but for India there are other contributing factors. One is an adverse reaction to November’s Mumbai terror attacks. Another is a recent spate of new hotel openings that helped correct years of under-capacity.
The reversal in India is notable because it follows five to six years of exceptionally heavy rate increases for business travelers. It is part of a global trend observed by David Mitchell, vice president of Supplier Relations – Americas for BCD Travel. He said the destinations suffering the biggest rate falls are the ones where “pricing had escalated to pretty high levels.”
Nowhere is this truer than in Moscow, generally reported as the most expensive city in the world for accommodation. BCD Travel’s figures show that rates in the Russian capital fell by one-third in the first two months of this year, with a similar drop in London. There were also big falls in Seoul, St Petersburg, Oslo and Stockholm.
According to March 2009 ADR figures from Smith Travel Research, rates in the priciest U.S. cities all show declines compared to 2008 statistics from the same month. For example, New York is down 24.4 percent, Chicago 14.7 percent and Boston 7.8 percent. At 9.6 percent, overall U.S. rates have dropped, but at a slower pace.
It comes as no surprise that in the U.S., the luxury segment has seen greater decreases in occupancy and ADR than other segments. According to Smith Travel Research, the luxury segment has seen a decline in occupancy through March 2009 of 15 percent and a decline in ADR of 17 percent.
The dramatic decreases of recent months have left corporate travel buyers with a dilemma. Most agreements for corporate rates are negotiated once a year, usually in the fourth quarter. But with occupancy levels having fallen so sharply since the beginning of 2009, should they tear up the old agreements and re-negotiate now?
According to Mitchell and his counterpart for Europe, the Middle East and Africa Thomas Stoeckel, the answer is that it may make sense to re-negotiate, but buyers should aim to give their hotel suppliers increased market share in return.
‘”Now may be a good time to re-negotiate,” Stoeckel confirms. “Hotels are under pressure because the number of travelers is very limited. They cannot move their buildings to better-performing markets like an aircraft.” Furthermore, he adds, hotels cannot realistically expect clients to overlook the opportunity to re-negotiate. “Travel managers have to prove themselves within their own organizations. They are being measured in the savings they generate.”
Added Mitchell: “We encourage clients to take the long-term view,” he said. “If they can narrow their choice of suppliers and tighten up company compliance to selected hotels, it will carry a lot more negotiating power and serve them well when the upturn comes.”
Mitchell has one more tip to offer, which is to compare hotels on the basis of total cost, not just room rate. Some properties are offering complimentary services such as free breakfast or Internet access instead of cutting their tariffs.
“Locations that have numerous properties with the same star rating are often very competitive,” he said. “When you include the value adds, it can make a big difference to the final price.”
Advito, the independent consulting arm of BCD Travel, echoes this advice. Advito is working with its clients to reopen negotiations with preferred hotels in high volume markets that have seen significant reductions in average booked rates. To identify targets, they are comparing first quarter market-rate reductions to the original savings achieved during negotiations for the 2009 season. Renegotiation efforts are then focused on properties with the greatest gaps in these numbers. Eliminating these gaps by lowering negotiated rate levels or adding in additional amenities such as free breakfast and Internet access will allow clients to lock in these savings and will benefit the hotels by protecting their market share.
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This entry was posted on Friday, May 15th, 2009 at 3:16 pm and is filed under Corporate Travel. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
