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Hotels face tough negotiations on corporate rates

NEW YORK (Reuters) - The U.S. hotel industry, already suffering through a dismal U.S. economy, an airline crisis and record fuel prices, now faces tough negotiations over a major source of its income -- corporate room rates.

A Marriott hotel is pictured in downtown Los Angeles, July 9, 2008. REUTERS/Fred Prouser

Corporate contracts account for almost 35 percent of the U.S. hotel sector’s revenue, according to lodging industry veteran Bjorn Hanson of New York University.

And when annual negotiations over 2009 rates start in September, corporate customers will likely hold a stronger bargaining position for the first time in years as softer demand puts hotels in a more defensive position.

“The balance of power will have done one of the quickest shifts it has done from the sell side to the buy side -- it will be the lowest rate of rate increases in about four or five years,” said Hanson.

Business travelers are crucial for hotels because they pay higher room rates, spend more money, and are a more reliable source of revenue than leisure travelers.

“They have an extra level of profitability,” Hanson said.

Room rates in the United States have increased about 4.7 percent this year, mainly because of corporate rates that were negotiated last autumn when economic expectations were rosier than they are now, he said.

This fact could make negotiations even trickier as companies may try to claw back some of that outlay.

“The buy side is going to be saying, ‘You hotels actually got a benefit. We paid you more than we should have for the second half of 2008 and we want some of that back in 2009,’” said Hanson.

“And the hotels are going to be saying, ‘No, no, no, no -- you want high-speed Internet access and free breakfasts and all these other amenities in your rooms and you have to pay for them,’” he added.

DECLINING

U.S. hotel executives have said they expect soaring fuel prices and a broad economic slowdown to hurt U.S. leisure travel through the rest of 2008. They hope business travelers can somehow shore up the industry.

Last week, Marriott International Inc MAR.N, the world's No. 3 hotel operator, reported lower quarterly profit, cut its full-year earnings forecast and said it expects weak economic growth and soft U.S. lodging demand to persist into next year.

Earlier this month, Goldman Sachs cut its price targets on seven companies in the U.S. lodging sector, citing negative trends in revenue per available room, the benchmark of hotel industry health.

The companies cut included Marriott International, Starwood Hotels & Resorts Worldwide Inc HOT.N, Host Hotels & Resorts Inc HST.N and Choice Hotels International Inc CHH.N.

Against such a backdrop, hotel companies may find it tough to negotiate with corporate customers who know their value and are looking to cut costs.

If the U.S. economy slows any further and layoffs mount, already-reduced company travel budgets may be cut even more, removing a crucial crutch for U.S. hotels.

“They (hotels) are going to be in a much weaker position to negotiate rates this year than they have been in the past,” said Jeremy Glaser, hotels analyst at Morningstar.

“In an environment where rates are declining ... companies are going to feel like they have a lot of clout to demand pretty good deals. I think they are going to be able to really drive a hard bargain,” he said.

TRAVEL WOES

A major concern for the hotel sector is its reliance on U.S. airlines, which are slashing routes and capacity as they fight for survival amid unprecedented fuel prices. Oil prices have roughly doubled in the past year.

At least seven small airlines have filed for bankruptcy or stopped operating in recent months. If oil prices do not retreat soon, some analysts believe it is only a matter of time before a major airline files for bankruptcy.

Reduced car travel could also hit lodging.

Americans reduced the number of miles they drove for the sixth straight month in April, resulting in the biggest six-month decline since the oil shock of the 1979-80 Iranian revolution, according to the U.S. Transportation Department.

It all points to tougher negotiations for hotel companies on corporate room rates.

“Demand has clearly softened, and after many years of enjoying the upper hand ... the pendulum has swung the other way and the hotels need the customers more now than the customers need the hotels,” said Susquehanna Financial analyst Robert LaFleur.

“There are more sellers than buyers,” he said.

Hotel companies, though, are not without their own bargaining chips.

“The hotel companies still have some competitive positioning -- a lot of times, corporate travelers are very brand loyal,” said Morningstar’s Glaser.

Editing by John Wallace

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