Analysis: Business travel rise spurs hotels to seek rate hikes

NEW YORK (Reuters) - A surge in business travel has emboldened top U.S. hotel companies to try to raise rates for corporate clients next year after two straight years of cutting them deals.

If Marriott International (MAR.N), Starwood Hotels & Resorts (HOT.N) and their peers can leverage higher occupancy rates into modest price increases that stick, the whole sector could see its earnings outlook rise.

But the fortunes of hotel companies hinge on a U.S. economic recovery whose slowness has stoked concerns about U.S. business activity in coming months.

Furthermore, business travelers are likely to push back against rate increases and demand free Internet, complimentary breakfasts and other perks that come at a cost to hotels.

"If things slow down, I don't think too many companies are going to sign up for 10 percent rate increases," Deutsche Bank analyst Chris Woronka said.

Each fall, hotel operators and companies negotiate room rates and availability for the following year in a process that can last two to three months.

For the past two years, the hard stance taken by companies on expenses has forced hotels to drop rates to fill empty rooms. Last month, Starwood said its negotiated corporate rates have fallen 20 percent since 2008.

Last year, Boeing Co (BA.N) saw "significant" rate savings compared with 2008, said Lisa Bliss, procurement agent of hotel programs for the airplane maker. Rates fell further in 2010.

So far this year, the number of trips by Boeing employees has increased, reflecting a global pickup in business travel that has not gone unnoticed by hotel operators.

But Bliss pointed out that many new hotel rooms have been added in cities where Boeing employees frequently travel.

"As a company that books a large volume of room nights, that excess supply is a factor that we will leverage," Bliss wrote in an e-mail to Reuters.

She added the company valued its partnerships with chain and independent hotels, "especially those that include 'value adds' such as free Internet, free breakfast and other amenities."

CLINCHING FREE BREAKFAST

Corporate demand is clearly on the upswing. Starwood said hotel occupancy in the middle of the week, when business travelers tend to book rooms, rose in the second quarter. Marriott said its corporate room nights for its flagship brand rose 16 percent in that same time period.

Expectations of stronger business demand have already pushed the Dow Jones U.S. hotels index .DJUSLG up about 27 percent this year, after a 70 percent jump in 2009.

Now the question that remains is how much can hotel operators pump up room rates.

Starwood is now looking to raise room rates by a "high single-digit" percentage. But Bliss's outlook suggests companies remain wary about their travel budgets and confirms experts' views that corporate clients will be looking to squeeze more value from hotels.

Free parking, breakfast, Internet and gym access will likely be regular features in contracts that companies hammer out with hotel operators this year, experts said.

"2009 was all about base rate," said Christa Manning, director of research for American Express Business Travel. This year, she said, "it will be more about amenities."

Analysts now expect Marriott to report a per-share profit between $1.21 and $1.56 in 2011, according to StarMine data. The range for Starwood is $1.24 to $1.64 per share.

For 2010, analysts expect Marriott to report earnings between $1.00 and $1.16 per share, while Starwood is projected to post per-share earnings between 90 cents and $1.15.

"If operators are successful in getting that high single-digit rate increase, I think that would increase our estimates," Robert W. Baird & Co analyst Andrew Wittmann said.

But that's a big "if," some analysts said.

"Tell me where consumer confidence is going to be in September or where corporate budgets will be," Woronka said. "A lot can change in two, three months."

(Reporting by Deepa Seetharaman; Editing by Steve Orlofsky)