Falling Hotel Prices, Good News For Business Travellers

Falling Hotel Prices - EXEC

The unprecedented increase in the numbers of hotel rooms in the middle segment is causing a downward pressure on room rates. This is great for business travellers. But given the fact that many more hotels are launching in the next few months and years, are hotels optimistic of holding on to the bottom line? Will rates continue to slide?

The good news is the hospitality industry is growing at an exponential rate. This means more hotels and therefore the assurance that there will always be an affordable room available even in the last minute, a basic need for business travellers.

But although hotels are reporting high average occupancy rates, it appears that capacity has shot ahead of demand and hotels in India no longer enjoy ARRs (average room rates) that are comparable with international room rates and market realities (more hotels, more competition) mean hotels must work harder to retain business; read, reduce rates.

The oversupply phenomenon was waiting to happen, thanks to the developmental plans that were drawn up as way back as in 2007, one of the golden years for the hotel industry. And FHRAI president Kamlesh Barot reveals that another 181,000 rooms are set to open up over the next five years.

Barot explained, “Oversupply is predominantly there only in certain markets like Bangalore, Pune and Mumbai. Till 2010, the number of rooms available in the star categories was 128,771 and around 25 lakh rooms that didn’t fall under any category. Of the 181,000 rooms set to enter the market, approximately 60 percent are being constructed. A significant number of these hotels are expected to be affiliated with global brands and be of international quality and service offerings.”

ARR: Downward Bound

An average room rate for a five-star deluxe room was around Rs 11,200 a day in 2007-08. The rate slid to Rs 9267 last year, according to HVS data. Vikas Kapai, GM, Hilton Mumbai International Airport said that the current ARR today stands even lower at Rs 8100. He added, “I think as far as the top segment goes, there is enough demand. The demand has been growing proportionally with the increasing supply, and will continue to grow. A stable growth in the capacity should not impact the top line of a hotel significantly. The location of the new supply will also play a significant role in the demand and supply dynamics.”

More Passengers, More Guests

Where there are passengers, there are hotel guests, and where there are guests, there are happy hotels. However, there are some rather flighty issues to take into consideration, as it so happens that the most important factors affecting the profits of hotel are airlines and where they fly. Sudip Kumar Maity, resident manager, Kenilworth Hotel, said, “When airlines don’t do well, it certainly affects hotel business in the city. In addition, if there is no move made to add new international carriers, MICE and leisure movement will be affected. For Kolkata, I am thankful that the new terminal will be commissioned soon, to attract more low budget domestic carriers and more international carriers, this year.”

Slash To Survive

While hotel chains are working overtime on big expansion plans, hoteliers also fear lack of any significant upside in room rates on existing properties over the next few years. Experts also predict that with so much new supply coming up, it will take another two years before room rates start moving up. Barot added, “There has to be rate correction across hotels, because of competition from big brands, as well as convenient options in the mid-market segment. Hotel rates will now have to be more aligned with global industry benchmarks.” Rubal Chaudhry, GM, Hilton New Delhi Janakpuri, revealed, “Rate slashing has become unavoidable in many cases, and yes, at our hotel, there has been a price correction of about Rs 1500.”

However, Rajib Roy Choudhury, GM of The Sonnet Kolkata, said, “Slashing rates is not the best way to stay ahead of the competition; you may dilute your brand value. We generally quote rates to corporates after we have understood their room requirement for the year. Dynamic Rate Management helps us stay ahead of competitors, and, of course, various value additions are imperative in getting repeat customers.”

Breaking Even

The big-wigs in the market seem not to be as affected by the oversupply phenomenon as the smaller players. Vinod Valson, GM, Vivanta by Taj Bangalore, explained, “Currently, our occupancy rate is 80 percent round the year, with the ARR being Rs 8000. We go by the best available rate for the day depending on the pick up. That, plus the fact that we’ve been around for 26 years, means that 55 to 58 occupied rooms per day is break-even for us. I personally believe that competition is healthy and keeps everyone on their toes. Thus far, there has been enough market to keep all players happy.” Roy Choudhury, agreed but added, “The break-even concept is a very dynamic one. We adhere to the dynamic rate management process and revenue management procedures, thereby ensuring a break-even on the fast track.”

Focussed on REVPAR

Every major establishment has set up strategies to help in the fire-fighting process, without having to slash rates drastically. Maity, said, “The market is definitely more competitive, and inventories are going up. But, if corporate and MICE businesses do not grow proportionately, bigger brands will be compelled to slash rates and participate in BAR (best available rate). The ARR game will then convert to Revenue Per Available Room (REVPAR) and Revenue Per Occupied Room (REVPOR). As of now, we haven’t slashed rates, but are trying to maintain a healthy REVPAR.”

Business Hotels Stay Positive

In these times of equilibration, it’s all about doing away with the trappings of luxury, and what bigger master in the no-frills-attached game than the business hotel? In business hotels, occupancy is about 70 percent on any day. Roy Choudhury agreed, “Our current occupancy rate is 70 percent. Being a niche business hotel, we do not go through much of a low season but occupancy soars during conventions, marriages and other major events, when our occupancy could rise to 85 percent with several sold out dates in the month.”

According to Manoj Madhukar, GM of Best Western Maryland, Zeerakpur, “Through different seasons, the average is 70 percent. Break-even is 45 percent. In fact, though we have only 47 rooms now, the desired capacity stands at 100.”

Rubal Chaudhry, Hilton GM said, “Our hotel has 228 rooms. Our usual occupancy is 65 percent.”

There was a marginal rise in hotel room prices in India, which went up by 2 per cent on an average in the second half of 2011 compared to the same period last year, while globally the rates rose by 4 per cent, according to a survey.

Segment Snapshot

Hilton Mumbai International Airport

Vivanta by Taj, MG Road

  • Present capacity 167 rooms
  • Want to add – 800 rooms (across the chain)
  • Occupancy rates- 80%
  • Average Room Rate – Rs 8000
  • Break-even occupancy- 33%

Best Western Maryland, Zeerakpur

  • Present capacity- 47
  • Want to add – 100 rooms
  • Occupancy rates: 70 %
  • Average Room Rate – Rs 3100
  • Break-even occupancy- 45%

The Sonnet Kolkata

  • Present capacity- 67
  • Want to add – 0 rooms
  • Occupancy rates- 70 %
  • Average Room Rate – Rs 5025
  • Break-even occupancy- 70%

Kenilworth Hotel

  • Present capacity – 95 rooms
  • Want to add – 0 rooms
  • Occupancy rates- 70%
  • Average Room Rate – Rs 5300
  • Break-even occupancy- 50%

 

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