REPORT FROM THE U.S.—Looking to cut travel expenses for the federal government, the U.S. General Services Administration is re-evaluating its methodology to calculate federal per-diem rates. And the changes could have a widespread impact on the hotel industry.
The GSA is looking at a number of potential options that would result in per-diem decreases in most markets. While the agency maintains it is looking to responsibly trim budget costs just as any corporation would, some hoteliers fear dramatic per-diem decreases would cripple business and come with a bevy of unintended consequences.
“The GSA staff is definitely evaluating change to the per-diem methodology. It appears that change will be implemented and in place by October,” said Mark Carrier, president of Washington, D.C.-based B. F. Saul Company Hospitality Group, which owns and operates full-service and select-service hotels, many of which are located in or around Washington, D.C. “In business-class and high-demand markets, a significant change will have a major impact.”
Multiple sources said the GSA expects to announce its changes in methodology within three weeks. A team of two GSA employees is assigned to oversee per-diem calculation, and the organization already requested new data sets from STR, which it will use to research its options in changing the methodology. STR is the parent company of HotelNewsNow.com and has been supplying hotel data, mainly average daily rate, to the GSA since 2003.
According to sources, the following options are on the table:
- Freeze the current per-diem rates and keep them the same for fiscal year 2013.
- Eliminate a 25% flexibility federal employees have when they can’t find a room at the per-diem rate.
- Change the methodology by which the GSA calculates the per-diem rate by eliminating upper-upscale hotels from the equation.
Carrier said freezing rates is unlikely because the government wants fluctuation to remain based on market data. Changing the methodology is most likely, he said.
Dan Cruz, a spokesman for the GSA, declined an interview but provided the following statement: "No determination has been made yet on new per-diem rates. The GSA is reviewing per-diem rates for fiscal year 2013. The GSA will implement the directives in the Office of Management and Budget memorandum concerning agency travel and conferences. This includes decreasing spending on agency travel in fiscal year 2013 by 30% compared to fiscal year 2010. We will continue to engage our industry partners as we undertake this review of per-diem rates."
In a presentation to members of the hotel industry prepared by the GSA, an example of the new methodology showed the federal standard per-diem rate decreasing from $136 to $107.
“I think the government is looking for ways to cut costs in all categories of spending, so it makes sense they would cut the travel budget,” said Erik Hansen, director of domestic policy for the U.S. Travel Association. “We have an alternative view on whether cutting per diems is an effective way to do that.”
Mark Crisci is co-president of K Partners Hospitality Group, which develops, owns and operates midscale through upper-upscale hotels in the Southern and Western regions of the U.S., many in tertiary cities near military bases that serve a large number of per-diem travelers. Crisci said hotel performance in the group’s portfolio would not be sustainable if per-diem rates were discounted much more.
“In a time where government is imposing so many things on small businesses, when they’re making it more expensive for us to do business, to come back around and rig this and provide downward pressure on rate is ridiculous,” he said.
The GSA reached out to members of the hotel industry in late June to discuss potential changes to its methodology, and hoteliers immediately raised concerns with the American Hotel & Lodging Association, suggesting the new methodology could result in per-diem decreases of 20% to 30% in some markets.
The AH&LA consequently met with the GSA on 26 June and expressed concerns over detrimental effects to the hotel industry. “It was a very good discussion; the GSA members were receptive to our concerns,” said Shawn McBurney, senior VP of governmental affairs at AH&LA.
The GSA at present receives ADR data from STR on more than 12,000 U.S. hotels from April to March in each of the following chain scales: midscale, upper-midscale, upscale, upper-upscale and luxury. Luxury properties are not included in the methodology unless they are priced lower than the highest midscale property in that respective market.
The GSA analyzes that data, determines the average price of a hotel, subtracts 5% for what it considers an average group-volume discount, and then notifies Congress of the fiscal year per-diem rate change.
Hoteliers can file appeals to their respective per-diem rates, though the appeals process must be initiated by a federal agency.
One proposed revision to its per-diem calculation would eliminate upper-upscale hotel data from the mix, bumping down the average rate.
“The problem with a methodology like that is it’s based on semantics,” McBurney said. “That top level isn’t luxury. A lot of people unfamiliar with the classifications don’t understand that. An upper-upscale hotel is your standard full-service Marriott. That’s 85% of the hotels in (Washington) D.C.
“If you take those rates out of the calculations, you’ve got an artificially depressed rate,” he added.
“The issue of the nomenclature is in fact important,” Carrier added. “Calling it upper-upscale makes it easy to eliminate. The names of those sets don’t reflect what’s in them. The idea of a corporate traveler staying in an upper-upscale hotel makes it seem like they’re staying in some lavish property, but really they’re just business-class hotels.
“Elimination of upper-upscale hotels would take out a significant portion of the inventory of most business-class locations.”
Carrier suggested a fourth option: increasing the volume discount from 5% to a higher level to reflect the GSA purchasing volume. He said it would solve the problem of cutting travel costs without creating an artificially depressed rate, and he has recommended this to the GSA.
McBurney said the GSA will meet with the AH&LA again before making a final decision, which is expected in no more than three weeks.
Crisci, of K Partners, said he’s lost confidence in the U.S. governmental authority—particularly organizations including the GSA and Department of Defense—because he said they’re making decisions without truly understanding the ramifications.
He said K Partners has been very proactive in military markets, recognizing a need for newer branded lodging facilities with interior corridors and more modern Internet access.
“We’ve evolved our offerings, the bases have evolved, and they’re bringing in well-paid, high-caliber people accustomed to staying at a certain lodging facility,” he said.
Crisci has been very active in lobbying the GSA to raise the per-diem rates. Lowering the per-diem rates even further could leave K Partners no alternative other than shutting out government travelers altogether and not offering the per-diem rate.
“We’ve had to implement policies at some of our hotels where we don’t offer the per-diem at all, or it’s very much restricted. We just can’t make any money on it,” he said. “With the cost to develop, the cost to brand, the cost to take care of the guest, you just can’t make money at $77 per night.
“I don’t think anyone at the GSA truly understands how the lodging market is segmented today,” he continued. “We’re not trying to get $200 to $300 out of these guys, we’re just asking for a fair rate.”
Effects on price
While some hoteliers would suggest they base their pricing decisions on market demand and not one specific group of travelers, markets that cater to government travel certainly take per-diem rates into consideration when pricing their inventory.
Carrier said federal per-diem rates play a large role in pricing rooms in the Washington, D.C., market.
“In Washington, travelers on the federal per-diem make up a significant part of the market. That price becomes a market-making price,” he said. “They are the only consumer we do business with that can name their own price.”
“Anyone in these markets who doesn’t factor (per-diem rates) in either missed something or is not being completely transparent,” Crisci added. “The issue in D.C. is that if you don’t offer (rooms at the per-diem rate) there are 100 others that will. The GSA knows that.”
Sources said it is not only federal employees who travel on the GSA’s set per-diem rate. Many private-sector companies and government-contracted workers use the federal per-diem as a standard for their corporate travel as well.
Carrier said if the methodology results in large-scale per-diem decreases, government travelers will be limited to only essential travel. “They won’t be able to be close to where they need to do business,” he said.
“The concern is we may have a major partner in our business that is impacted in where and when they can travel and what price they’re willing to pay,” Hansen said.
Annual per-diem rates are typically announced in August and go into effect 1 October, the beginning of the federal government’s fiscal year. Per-diem rates will be announced in August this year even if a new methodology was adopted.
The GSA’s per-diem-methodology discussion comes just three months after the organization was hit with accusations of lavish spending during a 2010 conference off the Las Vegas Strip, which resulted in the resignation of its chief and two of her top deputies. While the industry lobbyist organizations interviewed for this story were reluctant to link a revised per-diem methodology with the recent scandal, Crisci pointed directly to a correlation.
“We all saw pictures of that moron sitting in a bathtub overlooking The Strip,” he said. “When I see that sort of waste and we’re watching every dollar we spend to take as best care of our employees as we can … are you kidding me? The same people who had zero accountability, zero respect for dollars, are now beating up the guys who are just trying to make a decent living.”