Hotel recovery

Author: Lisa Allen

Date: 11/02/2010

Publication: Australian Financial Review

Big rises in room rates are predicted later this year, prompting some companies to seek lengthy contracts.

Federal Tourism Minister Martin Ferguson is the first to admit Australia's business tourism sector was badly hit by the global financial crisis. But the minister now believes, along with the rest of the tourism industry, that the corporate travel sector is starting to show signs of recovery.

"The big hit we took last year was business travel," Ferguson told an industry launch in January. "Once business travel picks up then the big black hole starts to be overcome."

Hoteliers predict big room rate rises later this year and into next. The warnings have provoked some companies to lock in lengthy corporate contracts for the first time in years.

Hotel occupancy rates could average 72 per cent in 2011, resulting in rates exceeding 3 per cent growth in 2010 and 2011.

"Rates are expected to grow strongly until around 2014 before occupancies fall due to new supply,'' the Dransfield Hotel Futures report said.

"Australian hotel revenue has contracted significantly in 2009. The recovery time is, however, short, and varies from city to city. Some cities are likely to exceed prior expectations with strong recovery by 2011,'' the report said.

The chief executive of Melbourne's dowager Hotel Windsor, David Perry, says companies are now wanting to lock in hotel room rates for up to two years at a time, fearing there could be an upsurge in prices as the global financial crisis recedes.

"In the early part of last year we noticed that large Australian companies and foreign multinationals put severe travel restrictions in place,'' Perry says.

"Even though the cost of domestic travel was at an all-time low, we found chief executive officers themselves were approving the economy travel plans of even the most junior staff.

"Those restrictions have started to loosen considerably since September last year. The corporate market is far more robust now than at any time in the past 12 months. We are confident that it will strengthen even further throughout 2010.

"In the past three months, as companies entered annual price negotiations for rooms, the majority of larger multinationals changed behavior and insisted they contract for two years rather than one year, perhaps reflecting their predictions that room rates were bound to rise over the next 24 months.''

Perry says for the past four years companies have always wanted to negotiate one-year room-rate contracts. "They sense the market is swinging back up rapidly. The corporate market has been building up to speed rapidly over the past five months, making up for some of the lost business opportunities in the early part of 2009."

Hotel analyst Dean Dransfield, the managing director of Dransfield Hotels & Resorts, says it comes as no surprise that companies are locking in room rates.

"Some of the hotel occupancies are quite high mid-week in Sydney, Brisbane and Melbourne. We are reverting back to companies purchasing preferred supplies on a contract rate, whereas many have been allowing direct bookings because of the ease of access available from late booking sites.

"There is also recognition from sharper players that prices won't get lower."

While that's the situation locally, Dransfield notes that Asian hotel prices are still cheap compared with before the global financial crisis. He says many Asian countries have been more affected by the crisis and are discounting at a far greater level.

"China had occupancies as low as 40 per cent last year, so late bookings could often see a 50 per cent reduction in rates. These prices are significantly more competitive than they have been in the past couple of years."

He says that using a travel agent will not pay off at present if you are booking hotels months in advance. "We paid $260 through our agent in Australia for one night at a hotel in Guilin, China. While we were there we decided to stay an extra night and booked direct, which only cost us $140. It was far cheaper for us to buy directly than go through our agent."

At Sydney's Observatory Hotel, managing director Patrick Griffin believes room rates will increase in the latter part of 2010.

"They need to increase ... they have to increase,'' says Griffin, who also heads the Australian Hotels Association's accommodation division. He notes that hotel guests have become used to inclusions and to pay for that, room rates must rise.

"There is more of an expectation that hotel rates will become more inclusive, meaning extras such as free parking and free internet. If they are going to include extras they have got to rise from the very low levels they have been sitting at for the past 12 months.

"I am a little concerned that in January we have seen some extraordinarily low rates, such as a five-star international resort in Sydney charging $175 a night for a three-night stay. Sydney takes a lot of time to re-establish high rates.

There is an expectation from customers for services and facilities. These rates are not sustainable if Sydney wants to retain its luxury five-star hotels. Something has got to give and somebody has to pay for it. There is no more cutting of costs. Everybody has been cutting costs over the past 12 months."

Although the outlook is positive for hotels in Australia's capital cities, hoteliers such as Accor reported that its hotel revenue declined 10.1 per cent to $US7.44 billion ($8.48 billion) last year.

Outside the United States, Accor's economy hotels saw the best performance, with revenue declining 6.1 per cent over the year compared with an 11.5 per cent decline in the more up market hotels managed by the French group.

The same can be said of Australia's capital cities. Hoteliers there report that demand for budget serviced apartments and cheaper hotel rooms has flourished since the onset of the global financial crisis.