Despite dropping occupancy and sliding revenue, the latest numbers from Smith Travel Research show the average daily rate for hotels in North America was up 3% last month.
But that doesn’t mean travelers aren’t getting better deals.
With hotel analysts constantly reminding hotel owners how long it took for their rate structures to recover from post-9/11 fire sales, hoteliers, for now at least, seem to be focused on promotions that reduce a traveler’s bottom line without reducing the base rate that hotels use to negotiate future group, business and tour operator prices.
So far, it seems to be working.
Last month, average daily rates rose 3%, to $107.31 from $104.14 last year, Smith reported last week.
Meantime, occupancy in September fell 5.9%, to 60.6%. Revenue per available room declined 3.1%, to $65.08.
Year-to-date numbers from Smith show ADR up 3.7% while occupancy was down 3%, to 62.9%, and RevPAR was up 0.6%, to $67.58.
In the third quarter, however, RevPAR dropped 1.1%, to $70.40, moving "into negative territory for the first time since Q2 1993, ending a span of five years with positive quarterly RevPAR increases," said Bobby Bowers, STR’s senior vice president of operations.
"We expect a continued difficult operating environment in the final quarter of 2008," he said. "Room supply growth will continue, while demand growth [i.e., room nights sold] likely will remain soft in many markets, driven by slowing economic growth."
In light of the dire statistics and forecasts, it’s no surprise that rate discounts have spread from Las Vegas to New York to Vail, Colo. Still, many hotels are trying first to lure travelers with special packages and extras.
Last summer, gas cards were the promotional item of choice. This winter, resorts such as Vail are offering reimbursements for checked baggage fees charged by airlines.
Hotels are also partnering with retailers and others to offer their guests special discounts when they shop or eat out. And then there are the free breakfasts, free parking and other enticements.
Robert Mandelbaum, director of research information services for PKF Hospitality Research in Atlanta, calls it "an image thing."
"There’s a perception of, 'Hey, look what we are adding to your experience,' as opposed to, 'We are in discounting mode,' " he said.
While that perception is important when hotels have to negotiate future contracts, Tom McCartin, president of the WKP-Spier advertising and marketing agency in New York, said he reminds clients that rate integrity is also key to protecting a hotel's brand.
"You don't want to cheapen your brand," McCartin said. 'And that is one of the biggest pitfalls in an environment like this. This is the time when you build market share. If you can be as aggressive as you can possibly afford to be in terms of attracting new business, you will build market share in down times and reap the rewards in the good times."
But McCartin also cautioned: "You don’t want to build market share that perceives you as a discount property. You want to build a good customer base that refers good customers."
Several studies from Cornell University conducted after the post-9/11 downturn have confirmed what analysts have long told panicky hotel owners and managers: Reduced room rates do not entice new customers. That means hotels that maintain their rates in down times have higher revenues, Cornell researchers have concluded.
David Kong, president and CEO of Best Western, cited the Cornell research in his speech to 3,000 hoteliers at the company’s North American convention in Honolulu last week.
"Let’s ... learn from the past," Kong said. "The worst thing we can do is to panic and discount our rates indiscriminately. … Discounting our rates indiscriminately will likely cause a drop in RevPAR. Cornell University … found hotels that discounted more than 3% actually lost revenue. Let’s not panic and discount unnecessarily."
Bjorn Hanson, an associate professor at New York University’s hospitality school, said corporations, not hotels, will have the upper hand in 2009 rate negotiations for the first time since 2003.
"Many corporate travel managers plan to open their negotiations with overall corporate rate expectations of 2%," he wrote in a forecast released last week. "However, many are negotiating for reductions of 2% to increases of only 1% to 2%. In addition to the focus on rates, negotiating strategies being discussed include waiving charges for some services including telephone access charges, fax charges ... fitness centers, breakfast, local transportation and others."
Hanson said "preliminary indications, highly subject to change, are for the weighted mean increase in corporate rates to be in the range of 1.5% to 2%, with large group rate increases of approximately 2%."
Kong also announced that Best Western this month was spending close to $10 million in advertising and would be "significantly stepping up our advertising spend every month" through next summer.
"In 2008 alone, we will be spending over $43 million in advertising," he said.
McCartin said that was exactly the tactic he advised his clients to take in downturns.
Still, despite the best research or intentions, Mandelbaum and McCartin said that even the most experienced hotel managers might eventually succumb to the temptation to discount.
"It will take awhile for them to get into discount mode, because they are so entrenched in trying to preserve room rates," Mandelbaum said. "Eventually the market might get to the point that it has deteriorated so much that discounting might be necessary. The precursor to wholesale rate cutting is the value-added packages: free this and that. But if the market conditions deteriorate to the point where they may be heading, you could see out-and-out clearance sales, blue light specials."
Mandelbaum said PKF's latest data showed that through August, occupancy was declining but was still at a level roughly equal to the long-term average of 62.8%.
"If it gets below that average … I wouldn’t be surprised if sometime in 2009 hotels turn from value-added to out-and-out discounting," he said.
Las Vegas and some resort areas began discounting this summer. Average daily room rates in Sin City are down 7.75% for the year, to $107 a night.
Rates are also down at Western ski areas for the first time since 2004, according to the latest numbers from Mountain Travel Research Program.
And in recent weeks, travelers have started to see discounting in New York, where hotels previously were considered insulated from the economic downturn, McCartin said. But today, with the global spread of the economic crisis and value of the dollar rising, New York hotels are seeing a drop in international visitors.
"With occupancy off more than 10% just in the month of October," McCartin said, "we are seeing a lot more hoteliers increasing the number of rooms that they give to discounters. They are trying to preserve the rate they publish, but rooms are being sold through a discounter. So they are taking a hit on the room rate."
All that translates to better deals for travelers, he said, "except many of those travelers are fearful for what they can spend. They don’t know how solid their job is."
