'Schizophrenic' Economy, Distribution Mix Skews Hotel Rate Growth Potential

Las Vegas - Analysts and consultants urged InterContinental Hotels Group owners attending the company's Americas Investors and Leadership Conference here to "trust the data" in pushing up hotel rates and to question conventional wisdom as to the value to the bottom line of online travel agencies. [more]

Reaffirming what top hotel executives have said during third-quarter earnings calls, STR senior vice president of global development Jan Freitag assured the group that "the top-line data says [the industry] is very strong. The winners coming out of this great recession were surprisingly at the upper end, not something that we quite expected. The business traveler is on the road, and the group traveler is back."

With occupancy in those upper tiers at about 70 percent in the United States, and little development happening in those tiers for the next few years, the situation seems ripe for hotels to drive up rates. Even though economic uncertainty persists, hoteliers say, to this point, it is not affecting their results, leading to a "schizophrenic theme," in the words of Tourism Economics managing director.

For example, while consumer confidence is at an all-time low, actual consumer expenditures are at an all-time high, he said. "There's pessimism regardless of the strength," according to Sacks.

During Starwood Hotels & Resorts' third-quarter conference call, president and CEO Frits van Paasschen summarized the divide as two separate economies. Despite high unemployment overall, unemployment among college-educated U.S. workers is about 4 percent, debt levels are low among affluent households and S&P 500 companies this year expect profit growth of about 13 percent, he said.

"Imagine a scenario, Economy A, the land of the haves, will full employment, record-low interest rates, corporations flush with cash and prospects for global growth," van Paasschen said. "This pretty much sums up the high-end hotel business in the U.S., if not the rest of the world."

The hotel distribution mix also continues to stunt rate growth. Hotel marketing consultant Cindy Estis Green said current average daily rate increases are less about hotels pushing up rates and more about them changing their mix of business by getting more transient business travelers and group business and fewer leisure travelers booking special deals through online travel agencies.

Tom Corcoran, chairman of Felcor Lodging Trust, minced no words on the hotel/OTA relationship, although he said that some OTAs have a place in distribution strategy. "We have been pretty stupid in allowing OTAs to take control of our inventory," he said, adding that those who are turning to opaque sites to boost business are "absolute idiots."

"Maybe what [owners] ought to be doing is investing in things that have a higher ROI, investing in sales people that can actually drive revenue, and stop relying on the opaque and some of the OTAs to drive your business at horrible net margins," Corcoran said.

Hotel criticism of OTAs is nothing new. With only a few exceptions, however, hotels generally have not taken hard lines against them comparable to recent activity on the airline side. Part of that is because hotels are much more fragmented than airlines, but hoteliers also cling to what has become known as the "billboard effect." Based on research by Cornell University, that refers to the idea that hotels need the OTAs for visibility, and for each booking on an OTA, a hotel will get nine bookings through its branded website.

Green said more recent research has shown that relationship to be much lower, however, with really only about 1.5 bookings per OTA booking.

"We dug deeper and realized that consumers look at seven or eight travel websites before booking, so which one gets credit?" she asked. "There are many billboards out there, and we don't know which ones drive the bookings. This will take a lot more study."

The current economy is a good time for hotels to review terms and usage of OTAs in an effort to boost rates, Green said. "It's our inventory, and we can cut off the blood supply if we don't want certain channels for that hotel," she continued. "We have an opportunity right now to take advantage of that, and we would be crazy not to."