Investors seem to buying the "high single digit" corporate rate increase story for 2011. Think corporate America is buying?
High single digit corporate rate increases for 2011? That’s what the lodgers are implying and investors seem to be buying. At best, that’s the starting point for lodging companies during their negotiations. Someone needs to ask the corporations on the other side of those negotiations what they think. Actually, we know of at least one very large firm that spends a lot on travel who doesn’t think they should pay one dollar more of rate.
Investors need to understand that it is posturing season. Lodgers, especially Marriott, were very bullish regarding corporate negotiations on their Q2 conference calls. We expect the same and more on the Q3 calls. Marriott and maybe some of the other hotel companies will likely be aggressive in their 2011 RevPAR guidance as well to buttress their negotiating stance that room demand is high.
However, look for less impressive bottom line guidance. For one, higher EPS/EBITDA guidance won’t help their negotiating leverage so why not leave themselves cushion if their aggressive RevPAR guidance is not met? Second, we think CostPOR may be 3-4% higher next year, meaning that rates will need to exceed that level for margins to go higher, as analysts are optimistically projecting. Our private hotel contacts indicated higher cost expectations for next year which don’t appear to be factored into analysts’ projections.
So why do we think corporate negotiations may not be so one sided as implied by hotel management teams? For one, a very large financial institution with a huge number of expected travel room nights up for grabs recently sent out a letter to the hotel companies. If their hotel partners want to keep their "preferred" status (to which over 90% of their room nights get allocated) they won’t be paying more in rates in 2011 than in 2010. They want their current rates rolled over. We’re pretty sure they are not alone. Employees of big companies are the only ones traveling. These big companies have leverage. This will be a fierce battle that will end up in the low to mid single digit rates in our opinion.
Keep in mind that corporate rates are a call option that companies may use if prevailing market rates are above "corporate rates." Contrary to popular belief, companies do not guarantee any room nights in return but rather historical room nights are used as leverage by companies. Providing hotel partners "preferred status" is also a leverage tool used to drive deeper discounts.
Disagree with us? Check out the following analysis by Egencia, Inc. which is Expedia’s corporate travel arm. Egencia projects 2011 corporate rates to increase only 3%. Incidentally, some of our private hotel contacts agree with us that absolute dollar RevPAR has actually been slowing for a couple of months which may put added pressure on the negotiations. We think too many analysts take management’s word as gospel in this department. Keep this in mind during the upcoming conference call (story telling) season.