Sisyphean Holiday, Push Those Prices
“Timid salesmen have skinny kids.” -Zig Ziglar
All signs point to hotel price growth that isn’t happening. Articles like CNBC’s “Hotel rates on the rise” are oddly helpful and misleading. The real story is seven paragraphs down when author, Mr. Kiesnoski, writes “ADR in Vegas hotels for March was $100. While that’s a 2.1% rise from February, it’s still down 25% from March 2019.” For the hoteliers wise enough to focus their eyes only on comparisons to 2019, headlines like this may help set traveler expectations that the great deals of 2020 ended in 2020.
Hotel pricing timidity was sadly predictable. A BCD survey taken last June got it right: travel managers predicted that airlines would come out of the pandemic with higher fares while 69% said that hotel rates would be the same or lower. Similarly in its 2021 outlook, STR predicted ADR to drop 22% in 2020 before increasing by just 2% in 2021. While ADR accounts for the impact of mix shift (from high-paying business travelers to lower-paying leisure vacationers), both views are far too accurate. By not restoring 2019 prices, the hotel community is proving the doubters right and ensuring a more painful and prolonged recovery.
Supply change is favorable
One year after hotels had to lock their doors, 1,737 hotels remain closed. The tidal wave of foreclosures that was feared throughout much of last year has flattened at approximately 4.4% of the US market, unchanged since Q4 according to Kalibri Labs data. While the industry seems to have avoided a drastic supply reduction, 9% of asset managers surveyed by HAMA last month indicate that they have already handed the keys back to the lender with 14% of their hotels still likely to close. If HAMA’s survey can be used for extrapolating Kalibri’s data, the market could see an additional 900 closings through 2021, totaling just 6.5% of the US market.
While the luxury tier has been unsurprisingly hit the hardest (in percentage terms at 13%), it is the independent properties that have been hit the most with 585 closures through April, matching the US average at 4.4%.
Engines Firing for Air and Car Pricing
Where hotel supply decreases have been single-digit, car rental inventory has been cut by as much as 30%. When airlines reduce supply, they park aircrafts in a low-humidity desert and wait until demand returns. Car rental companies sold big portions of their fleets in 2020 to raise capital. Hertz sold more than 200,000 cars last year, more than 40% of its US fleet. While finding inventory is a challenge for travelers, car rental companies are thrilled to have the pricing power that comes with reduced supply.
In Hawaii, the shortage has been so severe that travelers have taken to renting U-Haul pick-up trucks. Jonathan Weinberg, the CEO of AutoSlash, compares prices in Maui from $5 a day last March to $300 this year. The car rental market is so lucrative Uber has joined Lyft in offering rental cars with a unique value-add delivering the car to the customer’s door.
In Q1 earnings calls, America’s major airlines reaffirmed a commitment to increasing capacity in a balanced manner while keeping fare structures at 2019 levels. Last year, Alaska Airline President Ben Minicucci cautioned the marketplace of the dangers of price dumping. By increasing supply faster than demand returns, he warned, airlines would cause longer lasting damage than a graceful recovery strategy. After cutting capacity by 75% in Q2 2020, Alaska increased to -65% in Q4. Following its own advice gradually returning seats to inventory expecting to reach -20% of 2019 levels this summer returning to 100% no later than summer of 2022.
American Airlines’ CRO Vasu Raja said that fares are at 90% of last year already and 95%-100% in leisure destinations. Across the major earnings calls it was clear that airlines will have an “average yield” less than 2019 as a result of mix shift from lower business and international travel but that lower prices would not be the reason.
More than in the past, airlines are showing a strategy to use ancillary fees as a means to control inventory. View From the Wing reported that if a passenger arrives at the airport after the check-in cutoff time but within 15 minutes of departure, American can rebook them on the next flight. The Points Guy added that “the destination must stay the same, but agents can now send a passenger to a “co-terminal,” meaning someone traveling to New York, for example, could be put on a flight that arrives at either JFK or LaGuardia airports. Similarly, removing the policy that prevented children under 2-years old from sitting on a lap in the front cabin indicates the tilt toward leisure travelers, with the lack of business travelers, present to complain.
Ancillary fees are gone forever, until they’re back
Industry-wide, change fees netted US air carriers $2.8 billion in 2019. Last summer in the peak of pandemic crisis, airlines attempted to endear themselves to customers (and avoid consumer protection advocates during bailouts) by eliminating many fees. United Airlines went so far as to announce that it would get rid of change fees forever.
In announcing the move last summer, airline execs spared themselves no amount of pandering. “Following previous tough times, airlines made difficult decisions to survive, sometimes at the expense of customer service,” Scott Kirby said. “United Airlines won’t be following that same playbook as we come out of this crisis. Instead, we’re taking a completely different approach and looking at new ways to serve our customers better.” As they always do, Delta and American Airlines followed suit.
A main way that airlines executed the removal of fees last year was by removing the basic economy fare offering altogether. By bringing back that class of ticket, airlines are essentially reintroducing the myriad of fees. With or without change fees, airlines still charge fare differences when changing tickets. By keeping the pricing structure that is geared toward capitalizing on late-booking/high-yield business travelers intact, they will secure additional revenues for changes regardless of the fees themselves.
For hotels, the volume and variety of fees is limited only by an asset manager’s imagination. Unlike Resort Fees, which most leaders in the industry privately admit should be regulated out of existence, legitimate charges are still available to levy. With leisure travel leading the rebound, there are more guests per room than in a group or business travel environment. Per-occupant pricing should follow. Hilton recently began charging more Honors points when members redeem points for stays that include multiple guests per room. The extra occupants are taxing on the physical product and add considerable operational costs to service. Other sensible options include trip insurance, reservation fees on third party sites, and late-cancelation charges.
When most of hospitality’s commercial leaders took the airline-approach, attempting to entice customers by broadcasting their fee reductions, Marriott’s CSMO Julius Robinson delivered it honestly. In a February interview with PhoCusWire, Robinson said “we’ve done things like waive cancellation fees, and while that won’t be forever, we continue to look at it on a regular basis.” It’s time to bring them back.
Keeping up with the Costs
While Cost+ pricing methods are uncommon in the travel industry, it can be a simple way to justify necessary rate increases and maintain profit margins. Consumer prices are 2.6% above one year ago, particularly in the commodities sector. Since last autumn, Chipotle has outperformed its sector due to an aggressive 13% menu increase and been clear that it would be forced to take prices up another 2–3% should a federal minimum wage rise to $15. Similarly in hotels, CoStar reported that C. Patrick Scholes, managing director at Truist Securities, said “While it is difficult to gauge the financial impact labor pressures could have, the concern is that higher wages could outweigh post-COVID operating efficiencies at hotels.”
Macro-Economic Factors May Never be More Supportive
This combination of positive macro-economic indicators is unprecedented, some suggest a risk of overheating.
- Q1 GDP exceeded expectations at +4.3% and is forecasted to surge to +5.5% for the full year
- Consumer confidence soared from 109 in March to 122 in April and consumer spending is +10% YOY
- Consumer Price Index has grown +4.2%
- The Economist Commodity Price Index on May 1st rose +55% with increases in food costs YOY +13.7% MOM
- Inflation is +2.6%
- US Retail Gas Prices are +59.41% YOY
- BLS reports labor costs increase +2.6% YOY and even faster 2.8% MOM in March
- Food prices rose +3.7% and +6.5% for limited service meals, the largest 12-month increase since BLS began collecting data
- The Federal Government is reviewing a bill to lock future per diems at pre-COVID prices through 2022–23
Prove Them Wrong
Labor costs are rising. Prices at the pump are double last year. Flight prices have nearly normalized. Car rental prices are skyrocketing. Ancillary fees are back. Travel industry peers are taking the hotelier’s share of wallet.
In conversations with industry leaders, sentiment is clear: humans are the biggest obstacle to restoring rates to 2019 levels. Other travel industries have the benefit of making system-wide pricing decisions while antitrust law requires hotels to make pricing decisions individually. If American Airlines choses to raise prices 25% across all O/D combinations, it just pushes a few buttons. If IHG wants to do the same, it requires 10,000 RMs, GMs and owners to agree. Too often this fragmentation empowers the weakest competitor in a market to act as an anchor on the rest.
Mindsets and the industry’s dedication to a faulty metric are holding back recovery. When a market has dropped -25% YOY, STR’s RevPAR Index lulls managers into a false sense of success by performing at -24%. On his first earnings call as CEO, Marriott’s Tony Capuano said “I have never seen an environment where RevPAR Index is less relevant.” Some operators promote the excuse that they cannot raise prices until service delivery and physical products are back to 2019 standards. While the physical products have often degraded with little investment and upkeep over the past year, this is not a catch 22. To invest in the hotel, owners need the cash, so price and profitability growth must come first.
Pricing systems compute an output based on today’s demand and competitive inputs. For the last decade, the humans have often resisted letting the systems control pricing, often to suboptimal results. The machines are not designed to overhaul a market or restore a past environment. That responsibility is uniquely human. The necessary step-change must happen now, before a new pricing benchmark is established in travelers’ minds and before economic conditions are less favorable.
In the past two recessions, hotels gave up so much ADR in the immediate year-after that it took 3 and 5 years to get back to even (on a non-inflationary basis). Given that the impact of COVID is 6-times deeper than either of those recessions, immediate and bold action is required to prevent hotels from pricing-themselves into a decade-long recovery.
Across the earnings calls, CEOs consistently indicated that ADR grew above 2019 levels in resorts and in locations where travel restrictions were lifted early leading to surging demand. At least half of hotels across the US must take double-digit price increases purely on a strategic and intelligent leap of faith. Rita Machado shared on hospitality net, Upper Upscale hotels that outpriced their market by 5–10% out of past recessions gained 8% in RevPAR for only a 0.68% loss in relative occupancy. Hotels of all chain scales benefitted greatly from the rate-first approach.
First, slow-moving hotels must realize that any perceived short-term gain will elongate the recovery for all, themselves included. According to an analysis by CoStar, following the 2009 recession 10% of hotels never recovered ADR again. Second, hotels that understand the first point must push forward driving prices regardless of their most invertebrate neighbor. It will be better to drag that anchor for the next month than for the next 5 years.
References:
As reported by View From the Wing
American Airlines updates gate-checked bag, lap infant policies (thepointsguy.com)
$300 a day for a Kia Rio. Why rental cars prices have gone insane — CNN
Uber Now Lets You Rent Cars, And Will Soon Deliver Them — View from the Wing
United Airlines is getting rid of most US change fees — forever — CNN
Marriott on marketing initiatives and the summer rebound | PhocusWire
Here’s why Chipotle may hike its prices (msn.com)
5 Things To Know for April 30 | CoStar
Chipotle has raised prices on its delivery menu by 13% (restaurantbusinessonline.com)
Hotel rates on the rise as travel demand ticks up (cnbc.com)
US Retail Gas Price (ycharts.com)
Consumer Confidence Index® | The Conference Board (conference-board.org)
Some Never Recover: ADR Cycles in the US Hotel Industry | CoStar
