Analysis: Hotels face tough negotiations on corporate rates

20th July 2008 (Last Updated July 20th, 2008 18:30)

The US hotel trade, hit by a slow economy and high fuel prices, now faces tough negotiations over corporate rates. Mark McSherry finds out if the threat to another major source of income has pushed the industry to crisis point.

Analysis: Hotels face tough negotiations on corporate rates

Corporate contracts account for almost 35% of the US hotel sector’s revenue, according to lodging-industry veteran Bjorn Hanson of New York University.

And when annual negotiations over 2009 rates start in September, corporate customers will likely hold a stronger bargaining position for the first time in years, as softer demand puts hotels in a more defensive position.

“The balance of power will have made one of the quickest ever shifts from the sell side to the buy side – it will be the lowest pace of rate increases in about four or five years,” says Hanson.


Business travellers are crucial for hotels because they pay higher room rates, spend more money and provide a more reliable source of revenue than leisure travellers.

“They have an extra level of profitability,” says Hanson.

Room rates in the US have increased by about 4.7% this year, mainly because of corporate rates that were negotiated last autumn when economic expectations were rosier than they are now, says Hanson.

This could make negotiations trickier as companies may try to claw back some of that outlay.

“The buy side will say, ‘You hotels actually got a benefit. We paid you more than we should have for the second half of 2008 and we want some of that back in 2009,'” says Hanson.

“And the hotels will respond, ‘No, no – you want high-speed internet access, free breakfasts and other amenities in your rooms, and you have to pay for them,'” he adds.


US hotel executives have said they expect soaring fuel prices and a broad economic slowdown to hurt the country’s leisure travel industry for the remainder of 2008.

They hope business travellers can shore up the business.

Last week Marriott International, the world’s number-three hotel operator, reported lower quarterly profit, cut its full-year earnings forecast and said it expects weak economic growth and soft US lodging demand to persist into next year.

Earlier this month Goldman Sachs cut its price targets on seven companies in the US lodging sector, citing negative trends in revenue per available room, which is the benchmark of hotel industry health.

The companies cut included Marriott International, Starwood Hotels & Resorts Worldwide, Host Hotels & Resorts and Choice Hotels.


Against such a backdrop, hotel companies may find it tough to negotiate with corporate customers who know their value and are looking to cut costs.

If the US economy slows any further and layoffs mount, already-reduced company travel budgets may be cut even more, removing a crucial crutch for US hotels.

“Hotels will be in a much weaker position to negotiate rates this year than they have been in the past,” says Jeremy Glaser, hotels analyst at research company Morningstar, Inc.

“In an environment where rates are declining, companies will feel they have a lot of clout to demand good deals. I think they will be able to drive a hard bargain,” he says.


A big concern for the hotel sector is its reliance on US airlines, which are slashing routes and capacity as they fight for survival amid unprecedented fuel prices.

Oil prices have roughly doubled in the past year.

At least seven small airlines have filed for bankruptcy or stopped operating in recent months.

Hotel companies still have some competitive positioning – corporate travellers are often brand loyal

Some analysts believe that if oil prices fail to retreat soon, it is only a matter of time before a major airline files for bankruptcy.

Reduced car travel could also hit lodging.

Americans reduced the number of miles they drove for the sixth month straight in April, resulting in the biggest six-month decline since the oil shock of the 1979-80 Iranian revolution, according to the US Transportation Department.

It all points to tougher negotiations for hotel companies on corporate room rates.

“Demand has clearly softened, and after many years of enjoying the upper hand, the pendulum has swung the other way and hotels need customers more than customers need hotels,” says Susquehanna financial analyst Robert LaFleur.

“There are more sellers than buyers,” he says.

Hotel companies, though, are not without their own bargaining chips.

“Hotel companies still have some competitive positioning – corporate travellers are often brand loyal,” says Morningstar’s Glaser.