The Amazing Race 15, Episode 11 (hotel price forecast)

Prague (Czech Republic) - Las Vegas, NV (USA)

The Amazing Race 15 ended tonight in Las Vegas, thanks to “promotional consideration” from casino complexes that paid CBS to showcase them on the show.

Why are Las Vegas casinos (and the hotels they operate “to give gamblers a place to rest and recover, so that they can gamble more”, as I once heard a casino-hotel pricing executive describe them) so much in need of publicity?

All hotels are hurting, of course, as I discussed during the previous season of The Amazing Race last spring and summer. But Las Vegas is truly one of the bomb craters of the implosion of the lodging industry in the USA, along with other largely fly-in destinations Hawaii (the outer islands more than O’ahu) and Orlando. Because both business and leisure travellers in all budget categories have cut their budgets and are choosing cheaper accommodations than previously, shifting occupancy to lower-priced hotels, the crisis is most severe for owners of luxury hotels at the top of the scale.

Drive-in visitors from Southern California can make up for some of the numbers of people who can no longer afford to fly to Las Vegas, but they are spending less on all aspects of their visits, including crucially how much money per person day they are able (or able to borrow) and willing to lose in the slot machines and at the gambling tables.

Existing hotels in Las Vegas, especially those currently at the high end, are also threatened by new and even more over-the-top hotels, such as the more than 6,000 rooms and almost 1000 condos in the four hotels (the first of which open this week) in the US$8 billion CityCenter complex. Do the math: The developers really did spend more than US$1 million per room — mostly other people’s money, but when it was lent a couple of years ago, who was counting?

Las Vegas (again, followed by Hawaii and then Orlando) is the extreme case of all of this in the USA, as is Dubai (as we saw earlier in this season of the race) in the rest of the world.

Something has to give, and in the calculus of supply and demand, that “something” is the average daily rate (ADR) per room that hotel owners can get away with charging.

I was just in Orlando for the PhoCusWright conference of travel executives, as some of you may have seen from my Twitter messages. Attendance at the conference exceeded the organizers’ expectations, but there were still so many empty rooms at the 5-star conference venue that walk-ins who hadn’t booked ahead reported being offered rooms at half the “early-bird” conference rate.

Near the cheaper hotel where I was staying (I had made the mistake of hedging my bets by booking a couple of months ahead on Hotwire.com), the marquee of a Ramada Inn — not a Motel 6, mind you — on the strip just outside the entrance to Disney World was flashing its offer, “Walk-Ins … $29”. With deals like that, who needs Hotwire? Not only can you travel more cheaply, but you can travel more independently, since there’s less reason to commit in advance to where you’ll be each night in order to be sure of finding an affordable place to sleep. There hasn’t been a better time since just after 11 September 2001 for unplanned travel.

And the good news for travellers is that’s it’s going to get worse for hotel owners (which means better for travellers) before it gets better for them and worse for us.

I was underwhelmed by the “innovations” presented at the PhoCusWright conference, few of which really addressed travellers’ basic needs or most common trip types. The award for innovation went to Amadeus — appropriately challenging those who write off “legacy” CRS/GDS companies who “were practicing cloud computing years before the term was invented” and “were engaged in e-commerce decades before the Internet” with “industrial strength” stable and reliable applications — for a new travel planning tool, but not one that I think will make a difference for most travellers. Most leisure air travel in the USA is to visit friends and family, not hotels or resorts, but I have yet to see a travel planning service optimized for the “VFR” user case.

Perhaps the most telling admission came from Expedia CEO Dara Khosrowshahi: “There’s a lot of really basic [search] stuff that a lot of us aren’t doing yet.” But when I asked him about some of the features they could easily add to improve their search results — weight flights from Oakland as $20 more expensive than those from San Francisco because it costs me more money and time to get there, weight flights that earn American AAdvantage Miles at 2 cents per mile of credit, weight flights that arrive at SFO after the last BART train by $40 for the greater cost of a taxi home, or other similar preferences I could define in my user profile — his only reply was that travellers don’t really know what we want, or what our priorities are. So, presumably, there’s no reason for his travel company to invest in tools to even try to show us the choices according to our stated priorities.

Lame, but typical of the industry. A more honest answer would be that intermediaries like Expedia have chosen to work for suppliers of travel services, not for consumers. They prioritize the options they show us, and the preferences they program their systems to take into account, according to what they think will most effectively sell us the most profitable products and services for them. Our preferences aren’t their priority at all.

The highlight of the conference was a pair of presentations on the economic prospects for the lodging industry by PhoCusWright hospitality industry analysts and their partners from the Cornell Hotel School. In March of this year, they reported on the outlook for hotel and resort owners as dismal but not desperate . By the time of last month’s conference, they had backed away from the “‘not desperate” assessment, although of course, “The desperation isn’t for the consumer, but for asset owners”, according to Bill Carroll of PhoCusWright and Cornell.

It takes 2-3 years from financing to completion of a major hotel, longer for some mega-projects. That means that there are still lots more hotel rooms in the construction pipeline, for which funding was committed shortly before the recession, to add to the current glut.

Gary Loveland, CEO of Harrah’s, noted in his presentation at PhoCusWright that since the recession developers have walked away, gone bankrupt, and/or suspended construction on casino-hotel projects even when they were “a billion dollars pregnant” with sunk costs.

The Trump casinos and hotels in Atlantic City went bankrupt and were sold for about 20% of their previous valuation earlier this year, while completion of the Fontainebleau in Las Vegas (including filling the topped-out shell of a 60-story hotel tower) awaits new financing from whoever buys it at the pending bankruptcy auction. As of now, the high bidder for the Fontainebleau is offering about US$150 million for a project on which more than US$1.5 billion has been spent, or less than 10 cents on the dollar. And as Bill Carroll pointed out at PhoCusWright, “Someone who buys a property for 10 cents on the dollar can rent it for 20 cents on the dollar” and still make money — driving down rates for competing hotels (and possibly driving them into bankruptcy too, in a vicious cycle).

On top of that, many people are selling their vacation houses or condos to cover the mortgages on their primary residences or simply their costs of living, or renting out vacation homes that they can’t afford to use themselves. As consumers exhaust their savings, severance pay, or other assets, that will continue to increase the supply of vacation rentals.

The bottom line according to PhoCusWright is that overall occupancy of hotels and vacation rental accommodations in the USA will remain below 60% for at least 2 years, through 2011.

Room rates in the USA will continue to go down in the coming year, bottoming out in late 2010 but not returning to levels they were at in 2007, just before the crash, until 2013.

Elsewhere in the world, Carroll predicts that hotel rates in the BRIC countries may not decline as much. But especially in China these are already such great value compared to hotels in most of the rest of the world that they will remain a bargain, and increases in rates in local currency in Brazil have been offset by the decline of the Brazilian Real (BRL) against the US dollar (USD).

I’ve previously listed some of my favorite accommodations booking Web sites for different parts of the world, and how they work . “These channels for unloading distressed inventory aren’t as well developed in much of the rest of the world, especially in the Asia-Pacific region,” Carroll says (and I concur). So, “Tour operators and aggregators are in the catbird seat” if they have contracts with hotels that give them access to discounted rates for their clients.

Many tour operators will make bookings for independent travelllers, even if you aren’t on a tour. Many Asia-Pacific hotel discount Web sites are operated as offshoots of tour operators or agencies like this. But to get their rates, you have to prepay the tour operator, and there is really nothing you can do to force a hotel to honor the booking if you show up and the hotel claims never to have heard of you, or the tour operator, or claims that the operator hasn’t paid them for your room or that the voucher you were given is invalid. On the other hand, as long as (1) occupancy is low, (2) there are competing hotels nearby that also have empty rooms, and (3) you are genuinely ready and able to go elsewhere if the price isn’t right, walk-up prices at almost any hotel, anywhere in the world, are negotiable at check-in.

Pain for hotel owners can mean pleasure for travellers, but intermediaries can go either way. Online travel agencies first became profitable on the high markups they could charge on discounted hotel rooms after 11 September 2001. This year at PhoCusWright, I was greatly surprised to see to see hardly any of the bottom-feeder “distressed inventory” business models I expected to dominate the event. Instead, most participants wanted to ignore the present, and focus on the “inevitable” recovery to come.

Time will tell whether or not they’ve got their heads in the sand, but if I were a gambler, I’d be selling short hotel stock, not putting my money on the table in Vegas or investing for any travel industry recovery. The real bottom line is that the window of opportunity for affordable, spontaneous, independent travel without reservations is likely to last for several years — plenty of time to plan for, and take, that big trip you’ve always wanted, if you commit yourself now to do it as soon as you can get organized.

Bon voyage!