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Luxury Hotels Under Pressure

Luxury hotels shedding stars

Aug 25, 2009

Luxury-hotel chains, the biggest losers in the lodging industry’s decline, are giving up some of their hard-won stars to save money.

Starwood Hotels & Resorts Worldwide Inc., the U.S. owner of luxury brands including St. Regis and W Hotels, will let some of its properties reduce their level of service -- and number of stars -- until the industry begins to recover, spokeswoman K.C. Kavanagh said. Hilton Hotels Corp. and InterContinental Hotels Group Plc have already cut the ratings for some locations.

“Maintaining stars requires enormous capital investment,” said Stephen Bollenbach, who retired as Hilton’s chief executive officer when Blackstone Group LP bought the company in 2007. “Ratings aren’t based on making good returns on your investment.”

Luxury-hotel operators have struggled to attract customers as the recession deters vacationers and forces companies to slash their travel budgets. That should mean lower rates for high-end business and vacation travelers. It may also mean the loss of some amenities, such as welcome gifts, flowers in your room, complimentary newspapers or 24-hour room service.

Hotel operators need to reduce services to conserve cash. Occupancy rates for luxury hotels worldwide fell to 57 percent in the year through July from 71 percent in the same period a year earlier, a bigger drop than for other types of accommodation, according to Smith Travel Research.

The average daily room rates at the most luxurious hotels around the world dropped 16 percent to $245.13, the Tennessee- based hotel-data company estimates. Prices for mid-range hotels fell about 13 percent to $87.12.

Occupancies, Rates Fall

“Consumers want the best deals that they can get,” said Jeff Higley, a vice president at Smith Travel Research. “Most luxury hotels are facing occupancy shortfalls, they are lowering rates to entice consumers to come in. There rarely has been a better time to stay at a luxury hotel than right now.”

In the U.S., travel guides such as the one provided by the American Automobile Association and the Mobil Travel Guide give star or diamond awards. Internationally, there is no standard classification. Ratings are given in some countries by hotel industry associations.

To qualify for five stars, the highest rating, hotels must provide “an exceptionally distinctive environment offering consistently superlative, personalized service,” according to Mobil Travel Guide, which lays out specific requirements. There should be a welcome gift and “something noteworthy and thoughtful” should be left on the pillow during turndown service, while ice buckets need to be glass, metal or stone and there have to be tongs.

‘Just as Happy’

Room-service customers who order wine by the glass should be presented the bottle as the wine is poured in the room, and bar or lounge customers must be automatically offered “at least two types of premium quality snacks,” according to the guide. If the hotel has a pool, guests arriving for a swim should be escorted to their chairs and offered refreshment.

“A lot of things we all got drunk over can be eliminated and reduced to being less intrusive and hence more economical,” said Lewis Wolff, co-chairman of Martiz, Wolff & Co., owner of luxury hotels including the Ritz in St. Louis, Missouri, a Four Seasons in Toronto and Houston and the Carlyle in New York. “If a five-star hotel was downgraded to a four star, most people would be just as happy.”

Hilton abandoned the 5-star rating for the Hilton Plaza in central Vienna this year and deliberately does without an official rating at another hotel in the city, said Claudia Wittmann, a spokeswoman for the U.S. company. Wittman said the company abandoned the star rating at its hotels in part because of the different standards required in each country.

Intercontinental Vienna

“It’s not uncommon that hotels make the decision that it doesn’t make financial sense to keep the fifth star and to instead reposition the hotel,” said Mark Woodworth, president of PKF Hospitality Research. “Within the next six months, we will likely see owners of very high-end hotels starting to reposition to a lower price point.”

InterContinental also decided not to renew the five-star classification on its only hotel in the Austrian capital, according to Charles Yap, a spokesman for the U.K. company. InterContinental, based near London, operates luxury hotels under its own name and the Crowne Plaza brand. Yap declined to comment on others that may be reduced. Its five-star hotels include the InterContinental Amstel Amsterdam and the InterContinental Grand Stanford Hong Kong.

The InterContinental Carlton Cannes in France received its fifth star this year.

Business Travelers

InterContinental is trying to cut costs at all of its hotels until business travelers, one of the main sources of revenue, return to the market in greater numbers, IHG Chief Executive Officer Andrew Cosslett said in an interview on Aug. 11.

“If you make small savings, such as the amount of food on the buffet or the different types of apples or even taking the pool temperate down one or two degrees, it does make a difference,” he said.

Starwood is also trying to eliminate some of the frills on offer at its luxury hotels.

Adjusting Services

“Given the current economic climate, we may allow an individual property to adjust its services to below the agreed star rating,” said Kavanagh. She declined to name any of the hotels.

The properties would be required to return to a grading system as soon as possible, she said. Starwood, based in White Plains, New York, has seven five-star hotels in the U.S., including the St. Regis at Fifth Avenue and 55th Street in New York. The company’s five-star hotels also include Le Royal Meridien in Mumbai and the St. Regis in Beijing.

Some luxury hotels have to be subsidized for part of the year to meet all the expenses associated with a high star rating, according to Harry Nobles, the founder of Nobles Hospitality Consulting. “A vast amount of these hotels don’t generate all the money they would need to operate on a five-star level,” he said.

Nobles formerly worked as an inspector for the American Automobile Association, which runs the AAA Diamond Rating Process, a hotel and restaurant rating system in North America. He now consults hotels on how to get and keep a desired rating. “Owners often have to go into their own pockets during certain seasons to maintain certain levels,” he said.

Nobles has seen a number of hotels abandon their five-star ratings to save money, but declined to give any examples. “That would be unprofessional,” he said.

Anonymous Inspections

AAA, which awards hotels and restaurants with a diamond rating, performs inspections at luxury properties anonymously, spokeswoman Heather Hunter said. A property’s service is evaluated from the time the reservation is made through check out the next day, Hunter said.

There are currently 103 AAA five-diamond hotels in North America, including in Canada, Mexico and Caribbean, according to Hunter. California is listed as the state with the most five- diamond hotels at 19, followed by Florida with 10, and Georgia with six. AAA will release its latest list of diamond-rated establishments in November.

“We have noticed some cutbacks,” said Hunter. “But many properties are still trying to cut costs without reducing the rating.”

That may prove difficult, according to Nobles, because the slightest drop in service may compromise the high standards a five-diamond rated hotel is required to maintain.

“If you call the concierge at a five-star hotel, the phone needs to be picked up in half a second,” said Nobles. “To make that happen, you have to have a lot of staff.”

Luxury hotels shedding stars
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