Mr. Kistner

Hotel Market Reports

Road to Recovery: The hard lessons learned from the hotel industry's climb out of the downturn

By Mike Kistner, President, Chief Executive Officer & Chairman of the Board, Pegasus Solutions

At the 2009 American Lodging Investment Summit (ALIS), the overriding sentiment seemed to be relief, relief that we had survived the devastating downturn that hit in September 2008. Never before had we clung so tightly to the numbers to understand our fate – the depth of the downturn, the damage to demand, incredibly shrinking rates. Six months later, we began tracking data from billions of monthly hotel shopping transactions to track industry performance, and ultimately, help the “survivors” understand the road to recovery. Like the major lesson in rate-cutting we all learned post-September 11, 2001, the last three years have taught us some incredibly valuable lessons.

Looking at bookings volume, average daily rates (ADR), revenue, length of stay and booking lead times for approximately 90,000 hotels worldwide, the most recent industry numbers have, for the most part, portended positive growth for both the global distribution systems (GDS) and alternative distribution systems (ADS) channels. Both segments continue to experience increases over 2010 for the next several months, but ours is a market forever at the whim of world events, whether they be financial, political, geographical or social.

Lesson 1: Protect your rates

In July 2009, the overall pace of decline had slowed somewhat since early 2009, but the industry was still in a difficult position compared to the same period in 2008. Year-to-date, there had been a global decline in both channels for reservations, length of stay, ADR and net revenues, with the most dramatic declines occurring at the start of 2009.

The negative influence of depressed ADRs is easing today for many hotels, and has begun to round the bend for others. Whether trying to fan flickering hopes of ADR growth or basking in the warm glow of rising rates, the key to altering the state of the rate to more favorable conditions is to harness the power of strategic pricing.

Better pricing isn’t simply about offering the lowest ADR your hotel property can afford, which is what often happens in a downturn. Any salesperson worth their salt knows that price points are simply a tool. They can be used to differentiate your product and maximize your value proposition. We need to consider each consumer as an individual, not a target market, and realize that each has an idea of what they’re willing to pay.

For example, an online consumer and one walking through your front door are going through very divergent purchasing processes. The same room often could, and typically should, be offered at appropriately different prices. A common misnomer is the idea that you must abandon rate parity to do so. Additionally, this field of thought suggests the goals of ADR growth and driving business to your homepage can’t be accomplished while utilizing third-party channels. In truth, rate parity and a multi-channel distribution strategy are vital for maximizing profit.

Lesson 2: Cater to corporate

By December 2009 the first year-on-year increases in net revenue for each channel occurred. Shortly thereafter in February 2010, all three measures of reservations, rate and revenue showed positive growth. However encouraging, these results came with the reminder that, as an industry, we were working to get back to and surpass 2007 levels, rather than simply meet 2008 levels. At the time, net leisure reservations compared to 2007 had actually risen by over +5%, but ADRs, at levels nearly -30% lower than November 2007, depressed net revenue by about -25%.

By February 2010, ADR showed growth for the corporate market, eking out an increase of +1% over February 2009. The first claim of a business travel recovery was made as the slight increase, combined with a bookings increase of +3.6%, resulted in a net revenue rise of +3.0%. Bookings soon climbed to reach an average monthly growth pace of over +20% in April 2010, with ADR growing by an average of +6%. However, this didn't mean hoteliers could sit back and wait for business travelers to come. They had to actively engage every means to bring them there, and travel management companies (TMCs) were one of the most valuable resources for doing so.

Perhaps the most prized advantage TMCs hold is their ability to act as extended sales forces for hotels. They not only influence buying decisions of corporations, but make hotel RFP recommendations and point-of-sale bookings. With advancements in technology, TMCs have the ability to differentiate hotels and their offerings, and can even provide companies with methods to tier and control booking options for better management of travel spend.

TMCs succeed in filling gaps no other source can. In fact, corporations partner with TMCs so that when their travel needs fall outside the scope of negotiated contracts, they still get business accommodations at good value. That is one reason why, although TMCs excel in booking business to major cities, they are also valuable for hotels located in secondary and tertiary cities. Similarly, TMCs don’t only benefit large corporations. Small- to medium-sized companies, that may not have the depth or amount of travel to justify a bespoke RFP or the buying power to get the best rates, can leverage the strength of TMCs and their networks to help even the playing field.

Furthermore, TMCs provide global reach with relationships across a multitude of markets. There’s no longer such a thing as a local company. To establish and grow your corporate customer base, you must extend beyond your sphere of influence by partnering with TMCs. TMCs are most effective, however, if they are treated as true partners by being provided price protection and unique knowledge of your hotel, packages and surrounding area.

Lesson 3: Invest in tomorrow

December 2010 closed with leisure hotel revenue up nearly +10%. Despite widespread weather disruptions, the ADS beat it’s year-to-date revenue growth rate by +0.5%, and GDS revenue increased almost +40%. Hotel companies and developers had again started the year at ALIS in San Diego, this time predicting the market would turn the corner in 2010. Instead, we saw it begin a persuasive climb back.

By May 2011, ADRs for leisure markets had stopped declining, and were instead delivering slow but steady increases at an average pace of about +1.5%, rising to a global average increase of +4.8%. The rising rates were a product of both growing and pent-up demand, and were accompanied by longer booking lead times, which reflected growing consumer confidence. While consumers were willing to book at higher rates further in advance, they were keeping stays short.

This year, we saw more trips taken during the summer leisure season than in 2010, which had itself been a busier season than 2009. What hotels were ready to seize this business? The ones who had been content to survive, or those that had used the lull in business to re-evaluate business drivers – the brand website, distribution strategy, guest rooms, sales and marketing programs, etc.? While shoppers returned in summer 2011, they returned with limited resources. They shopped more aggressively before committing and expected more value from their travel experience.

Think back on the other major technology “movements” of the last three years – social media, tablet PCs and mobile. The returning 2011 travelers aren’t coming back with 2008 expectations. They’re returning with more savvy shopping behavior, more advanced tools and more peer input. Hotels that sacrificed precious budget during the downturn to upgrade also upgraded their chances of winning the returning business.

Lesson 4: It made us stronger

The most surprising lesson may be realizing our own strength as an industry. Following the major global financial crisis, many of us would expect our recovery to be tenuous and vulnerable to new disruptions – Hurricane Irene, the U.S. credit downgrade, the Japan earthquake – which is not to say there are no negative effects from these events. But, there are overriding factors that are feeding and continuing our recovery. Businesses are, in general, still seeing earnings and cash flow improve. Corporations, that recall the competitive need for travel in support of sales, marketing and revenue growth, are still dispatching sales teams. Hiring is occurring, albeit at a slower rate than desired, and highly valued consumer getaways are still taking place. Compromises are not translating into cancelled trips, rather into more value for the vacation.

Today, we’ve survived 2008, 2009, 2010, and are close to completing 2011. As readers of Hotel Business Review, we have taken an active interest in understanding what we can do to continue to endure, to drive demand, maintain rates and deliver for both the corporate and leisure markets. As such, we currently face a more positive outlook at ALIS 2012. Despite external forces at play, leisure ADR is growing faster than its year-to-date pace, This suggests bookings are not growing at the cost of hotel rates, as they have in recent years. Additionally, the powerful and important corporate market continues to lead recovery with substantial booking increases accompanied by steadfast rate growth.

Am I proud of how our industry is climbing out of this most recent and devastating downturn? Absolutely. However, we cannot let our hubris overshadow the hard-learned lessons of the last three years that have made us smarter, stronger and more capable. Hindsight is only 20-20 when we take the time to look back, learn and apply.

Mike Kistner is Chairman, President and Chief Executive of Pegasus Solutions. He joined Pegasus from Best Western, where he was CIO and SVP of distribution. Mr. Kistner holds a BS from Northern State University, Aberdeen, S.D., and a MS in Information Systems from Colorado State University. He is the past Chairman and current member of the e-commerce committee of the AH&LA. From 2000 to 2005, he served as Chairman of the Open Travel Alliance (OTA) and has been recognized as one of the leading CIOs in the hospitality industry. Mr. Kistner can be contacted at 480-624-6450 or mike.kistner@pegs.com Extended Bio...

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