Hotels Try to Adapt to Hard Times

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Marriott Hotel.

Boom times for hoteliers pretty much ended a year ago. But the industry went into a real dive this past fall with occupancy rates dropping 6.5% in October and another 10% to 12% in November, estimates Smith Travel Research. "It's like someone has taken the punch bowl away," says Peter Yesawich, CEO of Y Partnership, and a travel industry consultant.

Hotels are struggling to attract patrons with everything from free breakfast to quirky promotions like an adults-only couples weekend at a resort in Bermuda, complete with counseling by sex therapists. There are more upgrades, more freebies — and more top hotels quietly offering their rooms at lower rates on Priceline.com. (See 10 places to find holiday cheer.)

Part of the industry's current problem is an oversupply of rooms. Sheraton, for example, is opening up 54 hotels this year, at a rate of one every three weeks, financed in the days when the economy was roaring and money was cheap. As the room glut deepens, hotel builders are slamming on the brakes — there is a 75% increase in projects being stopped. But demand is falling quickly too. "There's [been] nothing like this in history, in terms of falling demand" says Bjorn Hanson an industry analyst with New York University's hotel school. With the strengthening dollar, hotels are losing the European traveler; slumping corporate profits mean conventions are seeing fewer attendees; and as the job picture worsens, family vacation travel is down.

When times get tough airlines can ground planes and cut routes, but hotels don't have that option. You can close wings, or certain floors, Hansen points out, "but the problem is, in markets like Miami" — which just saw the re-opening of the 1,504 room Fontainebleau in November — "you can't shut down air conditioning because you'll have mold and mildew."

So hotels are looking at other options: one is to cut services — closing gyms, shutting business centers earlier and no more 24-hour room service. Of course, this is easier for mid-price hotels to cut than luxury hotels, where customers expect a certain level of service.

One option most are rejecting is reducing the overall room rates, because hotels feel they got burned doing that in 2001. "They found that the math doesn't work," says Yesawich; "you have to book too many more rooms to make up the lost revenue." What they are doing this time around is offering promotions and upgrades: Fairmont is offering third night free and $100 gift cards.

Discreet discounts, on the other hand, are all the rage. Priceline, for example is expanding its roster of top-flight inns. "Hotels that we've wanted for a long time, like five-star hotels, are coming in," says Chris Soder, president of North American travel. Yesawich explains that hotels are taking a portion of their inventory, maybe 20 to 50 rooms, and selectively discounting them in this opaque way. "Even a modest rate is better than no rate at all."

To keep the business traveler, hotels are bargaining with corporate travel managers, offering lower room rates than in the past, "I'm hearing that they're doing better in negotiating with hotel pricing," says Caleb Tiller of the National Business Travel Association. He estimates that there will only be a 1% to 4% increase in room rates — "very small compared with years past," he says. Corporate managers are also in a good position to negotiate with hotels for add-ons, like free WiFi, gym use and breakfast.

Tiller says that business travel will slow but not disappear altogether. "It's more mixed that people think," he says. "We're hearing that pharma and agra companies are actually increasing their travel budget." Companies, while not cutting out travel, are looking for ways to tighten their belt. "Instead of sending 10 people, they'll send 7 to a convention, for fewer days." Instead of sending managers to meet with colleagues, "they'll be spending that money on sending salespeople to meet with their clients." If those salespeople are smart, they'll haggle for freebies and upgrades.

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