Interview subject: Jan Freitag, VP of global development, STR
Interviewer: Jeff Higley, editorial director, HotelNewsNow.com
Interview site: STR offices, Hendersonville, Tennessee
Interview date: 22 December 2010
Jan Freitag: Thank you, Jeff. I’d like to give you a bit more color, so to speak, on the commentary that Mark just gave that was a lot more numbers-focused. There are a couple of clouds on the horizon or issues, maybe, we would like to point out for the audience as we get into 2011—for 2011. No. 1 is that we’re seeing demand rebound. I don’t think there’s any doubt about it. And Mark has said, demand numbers through November have been pretty strong and have been steadily building. 2010 is so much better than 2009, and we’re still going to see demand increases in 2011.
That said, we’re interested in figuring out what does the group piece of that look like. Is group demand really coming back as strong as we need it to be in order to give hoteliers the base occupancy that they need to build their transient average daily rate? That said, we are also a little bit concerned about group ADR in ’11. As you know, as has been well-established based on our data and just as hoteliers have seen across the nation, group ADR is based on transient ADR, meaning it’s being negotiated today for six months out, 12 months out maybe. What we’re seeing unfortunately, is that as the transient rate deteriorated in 2009 and still sort of has in 2010, that if hoteliers take that as the negotiation base for 2011, ’12 and maybe ’13, what we’re afraid of is that we’re loading our group room rate on a level that’s really not good, and especially as we get into those years, ’11 and ’12, we will look at the transient rate, and we’ll look at that difference between transient and group and we’ll say, ‘Wow. We left some real money on the table here.’ I understand that sales directors and general managers get a lot of pressure from owners and owners are saying, ‘Build me the book of business into the future in ’11, ’12, ’13 or so.’ Unfortunately, booking windows have been crunched. So there’s very little visibility into the future. Hoteliers today—I don’t want to say they’re taking any business—but they’re taking a lot of business today for the future at a rate that maybe could be higher if they just trusted that the STR data is indeed correct and that we’re seeing demand return. So you don’t have anything on the books today, your owner is saying, ‘Book whatever you’ve got,’ and unfortunately, a lot of sales directors, we think are taking that advice, so to speak, and are booking. If they would wait a little bit longer, we feel that there’s going to be more business, and they’ll be better off just not taking anything at any price but waiting it out a little bit. … We’re afraid that hoteliers are taking group rooms that are highly discounted today for a future date and would be better off just waiting a little bit longer. Now it’s very easy for me to say this sitting in Hendersonville because I don’t have the pressure of an owner behind me. That said, we fee that the demand patterns that we’re seeing are supporting a little bit more ballsy attitude into ’11, into 2012.
A slightly different topic that I would like to bring up is flash sales. We’ve seen a proliferation of online tools that allow uses, in the wake of Groupon, come and get sales from hotels that are 50%, 60%, ridiculous, I mean absolutely ridiculous discount. They’re supposedly members only. It turns out anybody can be a member. You just have to sign up. So they’re not out there on the OTAs. They’re out there, and all you need to do is sign up. So companies like Jetsetter, Rue La La, Off & Away, Bon Voyage I think is another one, those companies are out negotiating, normally with higher end hoteliers, and say ‘Hey, I give you users that may have not stayed with you before.’ We’re just questioning a little bit what that does to the user’s perception of the luxury ADR. I think it is another nail in the coffin of the room rate. We’re really just educating our customers, saying, ‘You know what? Look at the OTAs, look somewhere else. It’s not the best price. Whatever you’re seeing, there could be another discount.’ And these flash sales then, that are very, very short in duration, for the users, force the traveler to come to these websites, look at them, and then hopefully make a purchase decision, but at a huge, huge, huge discount. Obviously the inventory that these people have control over is not very high, but we’re just afraid of the signaling effect, that again we’re telling our customers that A) don’t come to our website, go to a different website, and B) you might not get the best price from us, look somewhere else.
Jeff Higley: This is a top-down recovery … Can you comment on the outlook for the luxury segment?
Freitag: The good news is there’s not a whole lot of supply coming into the market and definitely not on the high end. If you’re a luxury operator today, you’re good. There’s not a whole lot of competition into the market. And if you’re looking at the bellwether markets, for example New York City, there seems to be absolutely no problem recovering rate at all. Demand is back, and room rate at the upper end is back as well, which is great. Are the room rate growth rates sustainable? Certainly not. We’re coming off of 2009, so I think for 2010, 2011 maybe we’re going to start seeing some pretty heavy growth rates, and then that’s going to taper off as rooms are going to get really expensive again, and travel managers will look and say, ‘I used to be able to afford this luxury room in 2009, but no longer. You travelers out there, it’s upper upscale again, it’s upper midscale, what have you.’ So that’s the good news. I think that there’s little good supply, there’s tremendous demand coming back, so room rates are following in the upper end of the market as we’re seeing already.
I’ll talk a little bit about our spa data. Our sample size is roughly 60 or so high-end, so luxury, and upper-upscale spas, and what we’re seeing there is, yeah, people are coming back. We’re just seeing that the average treatment duration seems to be going down. So the dollar amount per treatment is going down with that. So it looks like a trend of, people are spending less per treatment. Well, it turns out that they’re also not getting as long of a treatment. And it’s a little analogous to golf, where people just don’t have four hours anymore. I heard anecdotally that some golf courses are being broken up in to three, executive six-hole courses. And that’s a little bit happening on the spa side as well, that the four-hour, half-day, full-day treatment extravaganza that we saw in 2007, 2008, nobody has time for that anymore. So people want half hour, 40 minutes, 50 minutes, what have you, and you see that actually if you go to the airport. You have these very, very small, quick in, quick out stores that allow you to have a little bit of a breakaway from the reality of the craziness in the airport in this case.
But we’re seeing that happening in the upper end of the market as well, that the luxury traveler is saying, ‘Yes, I want the experience, but I can’t afford time wise the experience, so give me something that’s faster, at the same quality level obviously.’
Higley: What impact is the airline industry having on the hotel industry? How do you see that developing as we go forward into 2011?
Freitag: Two comments on the airlines. No. 1, we’re highly, highly dependent on the airlift—some markets more than others. San Diego, Las Vegas are prime examples. If you can’t get there, you’re not going to go there. Of course Las Vegas has some drive-to market from California, but really if the airlines don’t get you there, airlines will not make the trip out there. It’s too hard. And those trips have to be affordable. Now the airlines have been blessed with very high load factors, so they’ve actually taken more planes out of the desert, back into inventory, which eases that a little bit. So it’s going to be interesting to see how that as the general economy recovers, how the airline industry demand ticks up as well. Load factors of planes are going to be high—hopefully not always overbooking to the extent that they’re overbooking, not that high, but yes they’re always going to be high. The question is does continued consolidation—I’m thinking Continental and United, specifically—have an impact on plane tickets? The naysayers are saying, ‘Absolutely. You’ll see it on day No. 1.’ I think the verdict is still out on that. What I’m very concerned about is that the airline industry is teaching the hotel industry to charge for everything. The airlines have done an absolutely phenomenal job. I think through the third quarter, they captured like (US)$4.1 billion dollars or something like that … of just those fees, mostly bag fees, showing that yes, the customer doesn’t like it, but they’re paying for it. Is that a sign for the hotel industry to say, ‘Great. We’re charging you for the water, the wireless and everything that we’re giving the customer just as a wrapped-on price, do we charge extra for that just to keep those room rates low because everybody’s just looking at those room rates.’ While I’m not a big fan of it, I do fly so I do it as I have to, but I think it’s not a great business model because you don’t tell the customer everything that they’re in for, and I think it makes for an unhappy customer experience.
Higley: Summing up all of the trends that we’ve talked about, what is the trend of trends? …
Freitag: … I think what’s important to note is that the economy is not getting a whole lot better, but it’s not getting any worse. And that bodes well for the business traveler, and especially for the leisure traveler. People who said, ‘I didn’t travel at all in 2009 because I didn’t know if I was going to have a job tomorrow,’ while now they know they’re going to have a job—they may not get promoted, they may not get a salary raise, but at least they’re saying, ‘I’m sort of stable, so let me go out and take that vacation again.’ If I had to summarize it … we’re looking at pent-up demand for travel, pent-up demand for renovations, which we haven’t done in 2008, 2009, and pent-up pricing power for the hotels, so rates are going to go up.