Hotels discover cancellation fees no match for prepayment discounts

When it comes to hotel companies’ recent attempts to tweak consumer behavior by encouraging early, prepaid bookings while discouraging last-minute cancellations, the carrot appears to be working far better than the stick.

Hilton Worldwide and Marriott International are among hotel companies that have tested stricter cancellation policies, charging the guest at least one night’s stay if the reservation is changed or canceled after a certain deadline.

However, hoteliers have found little proof that such policies have curbed guests’ booking behavior.

A strategy that appears to be more effective over the long term is to offer discounts for purchasing early, nonrefundable bookings. This prepay solution is being embraced with increasing frequency by hotel operators under chains such as Marriott, Hilton and InterContinental Hotels Group (IHG), especially at the property level.

As of last week, New York’s Marriott Marquis was offering prepaid, nonrefundable rooms for late-September weekend dates at about a 15% discount. The hotel gives guests a one-day grace period after the booking before enforcing the nonrefundable policy.

Likewise, the Hilton Los Angeles/Universal City was taking about 12% off the standard rate if customers bought nonrefundable, prepaid bookings for late-September stays.

Some independent hotels are being even more aggressive with prepayment discounts. A recent booking query at the Ampersand Hotel, a member of Small Luxury Hotels of the World in London’s South Kensington neighborhood, revealed a discount for nonrefundable, nontransferable bookings of 20%, or about $70 a night.

“Prepaid rates have been around for a long time,” said Marriott vice president John Wolf. “Each hotel sets and loads the rates. We don’t control that.”

As for IHG, spokeswoman Ada Hatzios said, “IHG offers advanced purchase-type rate offers where guests are entitled to a discount compared to the standard rate, based upon availability. Rates vary by hotel, brand and market. It is nonrefundable, requires full or partial prepayment and is charged to your credit card between the time of booking and day of arrival.”

Hilton spokeswoman Blake Rouhani declined to disclose specifics about its hotels’ prepayment policy.

Prepayment discounts appear to be an especially popular way to curry favor among travel professionals while cutting the costs associated with a room sitting empty.

Those costs appear to be going up, most likely because U.S. hotel occupancy reached a record high of almost 66% last year, according to STR, while greater guest use of smartphones for bookings has likely increased the popularity of last-minute bookings.

Travel Leaders Group, which in March instituted a new booking platform called PinSight, has boosted prepaid bookings by about 25% relative to a year earlier, according to Erick Rodriguez, senior vice president of Travel Leaders Group’s hotel division.

“Our agents understand that prepayment does not necessarily mean nonrefundable,” Rodriguez said. “The prepayment rates may have shorter cancellation windows, but they offer flexibility up to a few days prior to arrival.”

Meanwhile, the effectiveness of stricter cancellation fees appears to be less clear.

Arne Sorenson

Marriott International CEO Arne Sorenson addressed his company’s February 2015 change in cancellation policy on a July 28 earnings call with analysts. Marriott, which had previously allowed guests to cancel reservations up until 6 p.m. on the night of arrival without invoking a charge, tightened that policy so that all cancellations made less than 24 hours before the scheduled arrivals generate a fee.

While Marriott’s Wolf said that the change in policy put the company “in line with the rest of the industry,” Sorenson, on the call, said the impact on cancellation frequency has been inconclusive.

“We’re not seeing a material change,” Sorenson said, adding that the cancellation rates are “about the same.”

IHG says its hotels’ cancellation policies are determined more at the property level than by the company.

“It varies by region and brand,” said IHG’s Hatzios. “Most of the more than 5,000 IHG hotels worldwide have the flexibility to adopt a cancellation policy for guaranteed reservations that suits their individual market.”

Meanwhile, during the last two months of 2015, Hilton ran a trial at two dozen hotels in which guests were charged $50 for any cancellation after the reservation was booked. Hilton CEO Christopher Nassetta said in February that guests “hated” the fee.

“We are always testing new initiatives and programs to see what works best for all of our guests and owners,” said Hilton’s Rouhani, who declined to disclose results from the two-month trial.

Travel Leaders Group’s Rodriguez said, “Whenever we negotiate with our hotel partners, our goal is to always include a provision for up to 24-hour cancellations with no prepayment necessary.”

“Should an unavoidable client cancellation occur within 24 hours, we work with our travel agent advisers and the hotels to see how we might be able to get it waived or credited toward a future stay,” Rodriguez said. “One of the biggest benefits of booking one of our hotel partners is that they will offer more flexibility with us.”