Hilton Thinks You Should Pay More For Flexibility

In times of high demand in “supply and demand” type businesses like the hotel and airline industry there are two principal schools of thought. Sure, there are other paths, but from my time in the hotel industry and my experience as a consumer, I’ve seen things fall into one of two paths:

1.  When business is really good (full hotels, full airplanes) it’s a great time to renovate your hotels, improve your physical product and do other things to build a strong bond with your customers. In short, build loyalty.

2.  Make hay while the sun shines.  Charge as much as you can in those times of peak demand. Don’t worry about building loyalty, you expect customers will choose price when the market turns for the worse, so why invest in loyalty now that won’t pay off?

Hilton

I’ve seen both strategies deployed, and it’s very interesting to see how different companies address these peak market conditions. Travel Skills reported on the newest of these attempts yesterday.

Hilton is testing a fee at a small number of undisclosed properties wherein guests would be charged $50 to cancel at any time after they make their reservation.  This on the heels of hotels pushing the cancellation penalty on most hotel reservations from the night of arrival to 24 hours prior.  That’s the most significant change I can recall in quite some time and it coincides with the highest hotel occupancy levels in roughly a decade.  Hilton’s test would definitely be a seismic shift in how hotels handle reservations and cancellations.

Hilton

There’s no question this change is bad for customers if it sticks.  But, is it reasonable?  Most airline tickets are non-refundable.  And, there’s generally a hefty premium for refundable tickets.  Yet, most hotel rates are fully refundable until very close to arrival.  Is it fair that a hotel has to put their faith in the fact that you’ll show up for your reservation.  And, if you don’t, they might realize no revenue for the room.

I had a boss when I was in the hotel business who had a number of theories I didn’t agree with.  But, there was one thing we both agreed on.  Hotels sell a time and place.  If they don’t sell that time and place today, they can’t make it up by selling that “time and place” twice tomorrow.  So, what’s the best balance between hotels and guests?

Southwest is one of the outliers in the airline industry in that they don’t charge cancellation/change fees when a customer has a change of plans.  They do hold the funds in the passenger’s name, but they don’t whack customers for a $200 change fee like the domestic legacy carriers.

Hotels have a variety of rates, including rates that are non-refundable (and generally less than other rates).  They’re trading a lower price with the certainty of filling a room with a customer willing to make that trade.  Alongside that, most hotels honor a AAA rate that in many cases has a price similar to those non-refundable rates but with significantly better cancellation terms.

What sort of impact can hotels expect if they impose fees on frequent travelers whose plans change frequently?  How about on occasional travelers?  Those fees may break the loyalty bond formed between brands and customers such that customers are less loyal in the lean times. And, the hotels will experience lean times again, of that we can be sure.

I don’t believe hotels will ultimately be successful advancing fees like this on customers.  The push to 24-hour cancellation was significant and a sign of the strength hotels have in an era of many heads in beds.  But, I don’t see them pushing the line much further.

What do you think of fees like this?  Where do you think hotels go next?

5 Comments

  1. I remember the first time I booked/stayed in a hotel myself in 2013 (I was 21 then, visiting law schools) I was shocked I could cancel all the way to the date of stay. That said, $50 for any cancelation seems steep. I’d understand a fee closer to the date of stay (e.g. a fee within the week), but not anytime.

    1. TRC, I agree that cancellation policies prior to this year were very generous. I think the current policies (24-hour cancellation) is reasonable for higher rates. Hotels are always free to discount in exchange for a tougher cancellation policy.

  2. This strikes me as having one’s cake and eating it too. I can understand the lost revenue argument if a flex booking is cancelled close to the stay date, but we do pay a premium for this flexibility over prepaid non-flex bookings (on which the property can collect interest, as puny as that may be these days). And most chains have now moved their no-penalty cancellation date even on flex bookings to 24-hours and many to 48-hours in advance. (If this takes hold with hotels, then can rental cars be far behind?)

    I’ve experienced a couple of instances where I’ve had to cancel a hotel after the official cut off due to flights being cancelled or delayed or rerouted and have always been permitted to do this without the penalty (though none have been on fully prepaid rates as I am cautious and somewhat risk adverse so book flex rates, paying for that option).

    1. David, I agree that hotels already charge something of a premium to allow for cancellation. Maybe that should be a bigger premium, but I’m not sure a fee at time of booking is really fair.

  3. Not something I’ve heard Hyatt speaking about trying. Our cancellation policy is reasonable and if there is an emergency or illness, etc. we are quick to be human and waive. There is another philosophy about renovation I’d like to share with you. There is a good argument for renovating during bad times. For one thing, there are less room nights to displace. If you’re only at 60%, you can easily take 20% out of inventory for 6 months without losing any business. If times are great and you’re running a 90% occupancy, not only will revenue be lost but guests will be affected and loyalty may actually suffer. Second, during good times when everyone is renovating, supply and demand makes construction and supply costs sky high. During economic downturns, it’s easier to get bargains on construction costs and get a bigger bang for your buck. Now, who can afford to renovate when times are tough? Hopefully, I won’t find out in the near future 🙂 Happy Thanksgiving, Mr. Pizza!

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