MEMPHIS, Tennessee—Presidents of three hotel companies who participated in a panel discussion during last week’s Southern Lodging Summit @ Memphis in Tennessee said they believe the industry is poised to take advantage of the pricing power that comes with the record demand of the past 18 months.
“History’s the best teacher,” said Dave Johnson, president and CEO of Plano, Texas-based Aimbridge Hospitality, which owns and/or manages 84 hotels in the United States. “The rate growth we got in 2011 and 2012, it wasn’t from an increase in pricing—it was through a change in the mix of business. We loaded up on lower (rated) business (immediately following the recession). With that being changed, we pushed a lot of that out.”
“Moving into (request for proposal) season, we’re more bullish,” he added. “We’ve got a lot more confidence going in because we got rid of that lower-rated business. I think you’ll see some excellent pricing increases in 2013.”
Mark Carrier, president of B.F. Saul Company Hospitality Group, a Bethesda, Maryland-based operator with 20 hotels in its portfolio, said hoteliers are lamenting the shorter booking window that evolved in the wake of the recession, but that is starting to turn.
“We’re starting to see markets selling out in midweek,” he said. “We have a lot of consumers who now think they can find a hotel room on a short-term basis, and as that changes, it gives us more confidence to raise rates.”
Tim Walker, president of Island Hospitality Management, a Palm Beach, Florida-based management company with nearly 80 hotels in its portfolio, said the key for the industry is regaining share from the negotiated-rate segment.
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Mark Carrier |
“The majority of that business went backward last year,” he said. “You have to work that segment. Next year’s all about (average daily rate).”
Walker said the key is recognizing that travelers in the negotiated-rate business segment are on the road more often than in the past but are staying fewer nights.
Johnson said there’s only one way to get the message that it’s time to be aggressive on rates: “Unless you tell the sales people to raise the rate, they’re never going to raise the rate.”
Profitability levels
The session began with moderator Isaac Collazo, VP of performance planning and strategy for InterContinental Hotels Group, asking the leaders what they thought about the industry’s profitability levels.
Carrier said there’s profitability seeping out of the industry because of its relationships with online travel agencies, while Johnson said he’s been pleasantly surprised that profitability has increased more quickly than anticipated. But it was Walker who reported the most encouraging news.
“This is one of the best years we’ve ever had,” he said, noting the company’s 10.5% growth in revenue per available room. “We just paid the largest quarterly bonus (to employees) that we’ve had in the last three of four years. We’re getting great (gross-operating-profit) margins—up 200 basis points from prior year. Our hotels are in the best shape they’ve ever been.”
Carrier said he’s been surprised by the robust demand growth for the industry—STR reported that trailing 12-month demand was up 3.7% through July—especially when the nation’s floundering gross-domestic-product performance is taken into account. He said that historically, his company’s rates take off when the nation’s occupancy reaches approximately 63%. STR, parent company of HotelNewsNow.com, reported nationwide occupancy through July was 62.3%.
The overall outlook for the leaders is bullish; a low supply growth rate is the silver lining to the recession, Johnson said.
“Historically, with the positive RevPAR growth we’ve had, the supply uptick would be very different—we would see a lot of cranes out there,” he said. “We’re not seeing that.”
Walker said he doesn’t see a softening in demand. “Booking pace is strong,” he said. “It is shorter-term (booking) and they’re staying for shorter periods.”
However, corporate group business remains largely absent from the hotel landscape, Johnson said.
“The last segment to always return is group, especially corporate group,” he said. “But all the association meetings are still happening.”
Johnson, who sits on the board of Meeting Planners International, said he gets the sense that group business is on the comeback trail.
“I’m very confident that segment’s coming back,” he said.
The upcoming election is causing some drop off in business, the leaders said.
“What the election has affected more than anything is hiring and capital spending,” Johnson said. “It’s not necessarily about who is going to win, it’s about the uncertainty that’s out there. The elections for the Senate and House are more important than the presidential election.”
Distribution discussed
Room distribution also was broached by Collazo. The presidents agreed that their modus operandi is to funnel as much business through branded sites as possible.
“We hired two people to make sure we’re maximizing bookings through brands,” Walker said. “OTA business is expensive. I’d be in favor in locking them out.”
But, he admitted, that isn’t always the case.
“In the last three years there’s been a lot of desperation; we had to take that business,” he said.
“The irony is (OTAs) are counter cyclical,” Johnson said. “If you are going to get aggressive with the OTAs, you have to do it when the industry is very healthy because your stick is bigger. … We need to continue to push the brands.”
The Aimbridge president said his company’s year-over-year business with OTAs at mature assets is down 46% because it is focusing more on driving business through other outlets.
The expected move by Expedia to use more of an agency model rather than a merchant model provides some respite for the industry, according to the leaders.
“As you move more to agency model you’ll see an uptick in RevPAR,” Carrier said. “In my own company, (trailing 12-months) through July we’ve seen agency costs basically exploding. It’s a big factor.”
The agency model essentially changes the payment of rooms from a pre-pay scenario that the merchant model uses to a pay-on-site model.
However, there are cons to having Expedia adopt the agency model. Carrier said his biggest fear is for hotels to have to pay brands on the gross booking rate rather than the net rate. And there’s another reason to be worried: “Business travelers largely have not used the merchant or opaque models—they haven’t warmed to it to the degree that they might if it’s a pay at the hotel model.”
“We’ll see a challenge to brand.com because they’ll be able to go after the midweek business model,” Carrier said. “It clears up a few issues, but it creates others.”