In the Times Square hotel submarket, average daily rates (ADR) 31 or more days out from arrival remain largely flat until three days before arrival, at which point the average daily rates start to decline significantly. Hotels experienced a drop in ADR of 19 percent or $56 from reservations booked more than 31 days before arrival to the rate booked the same day, with most of this decline occurring three days before the arrival. Bookings on branded websites dropped the most in this period, on average 30 percent or $95 during this same period, while rates on OTA sites declined almost 24 percent or $68 with just over 13 percent of the 24 percent decline in rates taking place within three days of arrival. In addition, almost 17 percent of total reservations occurred within three days of arrival, which illustrates the high amount of cancellations that also occurred during this period. We have seen this type of pricing behavior in most of the urban markets throughout the country.
This data demonstrates that travelers have been trained to wait for better pricing by booking closer to the day of their arrival as hotels are caught in this discounting trap. Anecdotal evidence supports that travelers are making multiple reservations within a market and using metasearch sites to track pricing. Rates are declining over time rather than increasing as the booking window shortens closer to the arrival date.
Potential Solutions
The major brand redemption programs should be modified with a more gradual or sloped redemption rate to hotel owners, rather than an “all-or-nothing” approach. This would help reduce the behavior that many revenue management teams deploy of discounting short-term rates, which negatively affects all of the brands, as well as hotel owners. The hotel industry is training the customer to wait until the last minute to book their reservation. Current cancellation policies are porous, or effectively non-existent, and give customers the flexibility to control their reservation up to the day before arrival. What would happen if the hotel industry adopted cancellation and change fees that would protect hotel owners from last-minute cancellations? Customers would be retrained to book in advance, helping preserve ADR integrity.
The hotel industry could adopt a change and cancellation policy that would charge customers change fees for any reservation adjustment or cancellation that occurs before arrival. The airline industry has been doing this for years. Moreover, we should recall that the airline industry, as recent as 15 years ago, did not charge for a cancellation or reservation change. When the airline industry first introduced cancellation policies, the initial cancellation fees were minimal, but the fees helped modify customer behavior and train the customer to book in advance, before rates went up. In the hotel industry today, we have trained the customer to wait until their date of travel to book since there is a current trend that last-minute rates will likely be lower, especially in urban markets.
These are the good years for the industry. If we do not change our behavior through implementation of cancellation fees and/or push for alternatives to the brands’ high occupancy redemption threshold practice, the next downturn may be worse than the last cycle; something that no hotel owner, revenue manager, or brand wants.
About the Author
Raymond D. Martz is the chief financial officer for Pebblebrook Hotel Trust and is on AH&LA’s Financial Management Committee.
