Hoteliers try to hold the line on room rates

SAN DIEGO (Reuters) - Demand for both vacation and business travel has fallen off the same cliff as the rest of the economy, but U.S. hotel operators, still wincing from the discounting following the September 11, 2001, attacks, aim to hold the line on rates this time around.

By this logic, more hotel rooms will sit empty, but the overall hit to the bottom line will be less severe.

"In times like this ... it's hard to induce demand," Hilton Hotels Corp Chief Executive Christopher Nassetta said at a lodging conference here this week. "All you are doing by dropping rates and panicking is taking money out of your owners' pockets."

Hilton -- along with rivals like Marriott International Inc (MAR.N), Starwood Hotels & Resorts Worldwide Inc (HOT.N) and InterContinental Hotels Group Plc (IHG.L) -- makes most of its money by collecting fees for operating hotels under its brand names, rather than owning the real estate assets.

Nassetta said Hilton, owned by Blackstone Group (BX.N), had cut its management program fees as part of an effort to help its owner-partners through the coming tough times. The company has also stepped up promotions tied to its frequent guest program.

Although the brand operators are loath to cut posted rates, package deals and cost-free amenities like Internet service and parking are becoming more common.

"We are spending a lot of time on revenue management," said Gilles Pelisson, chief executive of Accor (ACCP.PA), whose brands include Motel 6 and Sofitel. "With large corporate customers, there have been some hard negotiations, but we do not want to drop prices, even to the detriment of occupancy."

Over the past several years, hotels instituted sophisticated revenue management systems that, at least in times of plenty, maximized revenue, even as occupancy began to slide.

Lodging operators have also stopped the aggressive price wars seen earlier in the decade, when third-party Internet travel sites began to take off.

"The big brands have gotten control of distribution," said Adam Weissenberg, vice chairman of U.S. tourism, hospitality and leisure at Deloitte. "They have their own, very good, websites."

GRIM TIDINGS

But hotel revenue began to dip in September as financial markets cratered worldwide.

"People see that and they feel compelled to reduce prices -- but that's a short-term decision that will have long and lasting implications," said Mark Lommano, president of Smith Travel Research.

It wasn't until 2007 that hotel rates returned to the levels seen in 2000, he said.

"We saw (average daily rates) hold up longer this time around," said InterContinental Chief Executive Andrew Cosslett. "In the leisure market, there is an argument for promotions and packages, but it doesn't work for business travel. You are just shooting yourself in the foot to take midweek discounts."

Instead, InterContinental, which operates brands like Holiday Inn and Crowne Plaza, is helping its owners and franchisees by relaxing some of its standards, cutting costs and stepping up sales initiatives.

Still, recent statistics paint an increasingly gloomy picture for the industry.

Revenue per available room, or revpar -- a combination of room rates and occupancy that is a benchmark of industry health -- fell 16.4 percent for the week ended January 17 from a year earlier, according to Smith Travel.

Occupancy for that week dropped about 12 percent, while average daily hotel rates fell 4 percent.

Lommano expects that 2009 revpar will fall by 5.9 percent, but others have more dire forecasts. PricewaterhouseCoopers forecast an 11.2 percent drop.

"We have diverted a lot of resources to advertising and marketing," said Best Western Chief Executive David Kong.

While the privately held company typically does three promotions a year, he said, this year it will do one every month, or basically every day.

"We have to discount discreetly -- pick the right channels," Kong said. "The business traveler is not going to pick a hotel based on a discount."

But each lodging property depends on its neighbor to defend the line on room rates.

"The general business hotel is trying to hold the rate," said Deloitte's Weissenberg. "Will they be successful? It depends on how long (the recession) lasts and if anyone blinks first."

(Edited by Patrick Fitzgibbons and Lisa Von Ahn)