REPORT FROM THE U.S.—While the U.S. hotel industry’s recovery throughout much of 2011 was led by strong increases in demand, many data collectors predict recovery efforts moving forward and throughout 2012 will be led by increases in room rates. However, there are plenty of unanswered questions and unknown factors that will determine hoteliers’ pricing power in the near term, experts say.
Looking back to December, hotels closed out 2011 with strong year-over-year rate increases, according to both Pegasus Solutions, which provides transaction processing and electronic services to the hotel industry, and STR, parent company of HotelNewsNow.com. The overall U.S. hotel industry in December reported a 3.4% increase in average daily rate, according to STR.
Despite December being a typically slow time for business travel, corporate rates in North America, driven primarily by activity in the United States, rose 5.4% over the prior year, according to data collected by Pegasus. On the leisure side, North America’s ADR rose by a near-record 6.3% over the prior year, Pegasus numbers showed.
“Leisure rates were the show stealer in December,” said Julie Parodi, senior director of strategic planning and analysis for Pegasus and editor of The Pegasus View. “Rates performed extraordinarily well for both sectors, especially when one considers the uneasy global economic environment.”
And when data collectors released their most recent 2012 forecasts last week, it was clear they expect December’s surprising rate spikes to continue into 2012.
STR forecast the U.S. hotel industry’s ADR to be up 3.8% to US$105.45; PKF Consulting projected ADR growth of 4.7%; and PricewaterhouseCoopers forecast ADR growth at a whopping 5.1% in 2012.
“In the face of a still-uncertain economic environment, the outlook for improved pricing in the lodging sector reflects the ongoing recovery of business travel, as well as gains in corporate events and other group business,” Scott Berman, principal of PwC’s hospitality and leisure division, said in a news release. “Increased confidence from occupancy gains, particularly in the higher-priced segments of the industry, is expected to allow hotels to achieve valuable increases in room rates.
“The steepest portion of the demand recovery is behind us with operators’ focus on room rate becoming increasingly more important."
Looking forward
Pegasus’ Parodi said December’s greater degree of elevated rate growth for the leisure sector is not expected to hold. However, rate growth over the prior year is expected to continue for both the business and leisure sector.
Examining forward-looking data for bookings made through December for stays January through April via the business-focused global distribution systems channel, Parodi said corporate rates continue to grow over the prior year.
“The data shows that corporate travel demand and companies’ use of travel to drive profit will continue to sustain moderate but steady rate growth,” she said.
Forward-looking data for the leisure sector through what Pegasus calls the “alternative distribution systems” also shows rates continuing to grow through April, only at a more subdued and uneven pace than the corporate sector.
“Rates appear to soften in March, without the assistance of a widely recognized holiday,” Parodi said. “However, April shows potential for leisure rates to return to slow growth once more for Easter and spring vacations.”
Pricing factors
Chris Crenshaw, VP of strategic development at STR, said there are a number of factors contributing to upward and downward pressure on rates.
Corporate negotiations between hotels and travel buyers have been occurring since June 2011 and went into effect in January of this year. How those negotiations affected corporate rates will begin showing up in STR’s ADR collection data, he said.
“It will be interesting to see,” Crenshaw said. “(Throughout 2011) I heard hotels saying they felt more confident raising corporate rates, and I also heard buyers say they weren’t going to budge much.”
Crenshaw also noted that looking at pricing trends at the macro level is much different than at the property level. He said the industry closed 2011 with occupancy of more than 60% (60.1%, according to STR), which he said is a common “magic number” spurring confidence to raise rates.
However, 60% occupancy doesn’t mean much at the property level, he said.
“At the property level, hoteliers don’t feel confident raising rates until occupancy is somewhere around 80% to 85%,” he said.
Another factor contributing to the upward pressure on rate is what Crenshaw called the “revenue manager’s ego.” Revenue managers, he said, know hotel staffs have been trimmed as far as they can be and there’s no more cost cutting left to do. “So the only real profit growth will come from raising rates,” he said.
Contributions from online travel agents have both negative and positive effects on measuring rate growth, Crenshaw said. OTA channels have seen rate growth larger than other channels, but it is hard to tell, as an industry, what is driving that growth. Crenshaw said it could be coming from higher price points, from smaller margins or from a mix between opaque, merchant and retail business models.
Also, Crenshaw said customers are paying higher average rates than what is reported to STR because, in the case of OTAs, hotels report the rate they sell to the OTA not the rate at which the OTA sells the room to the traveler.
Pegasus’ Parodi said the growing understanding by hoteliers of revenue-management principles and the effect rate strategy has on profit will lead to more confident pricing power in 2012. Bargain-basement prices, she said, will demean the perceived value of the hotel and make it all the more difficult to raise rates to where they should be without appearing that hoteliers are falsely inflating rates.
“An advanced and comprehensive price strategy will most often encompass several distribution channels,” she said. “Effective, multichannel price strategies can be much easier to implement, take less time to update, uphold rate parity and ultimately be more effective by utilizing the latest in channel management technology.”
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