Randy Petersen's Opening Remarks – May, 26 2006

Randy Petersen's Opening Remarks – May, 26 2006

I’m Wondering.

It must be a strange week for me, because out of the blue, I’ve noticed small things that I’m curious about. At the risk of boring you, I’ll point out what I have noticed and my immediate thoughts.

It’s now June, and the changes at the Hilton HHonors award chart are now in effect. With the number of hotels that changed award levels (nearly 800) it seems to me that the economy of room rates is overheating. As it was explained to me, because of the changes in room rates in certain markets and the investment of owners to improve certain properties, there was a need to readjust the number of points required per redemption to fairly reflect the value of the hotel against the points. Seems reasonable to me, but I’m a little confused. As I understand the hotel industry, every time we as travelers stay at a property, that hotel pays a marketing fee to the operator of their loyalty program. For simplicity’s sake, let’s say that is 5 percent. Then, when I choose to redeem an award at that same property, the program operator then reimburses the hotel at, let’s say, 75 percent of the current ADR (average daily rate.) This is the general concept of how hotel programs work with owners and franchisees, unlike the airline industry, where the airlines actually own most of their inventory, except in the case of a redemption to a partner airline.

At the start of this hypothetical situation, let’s say the hotel rate was $100. I stayed there or at similar properties 20 times and earned enough points for a single night’s stay. So, for each of the 20 times I stayed, the hotel owner paid the operator of the loyalty program $5. The program now has $100. When I choose to redeem at that hotel, the program must then reimburse the hotel $75, which is 75 percent of the current ADR of $100. Granted, sometimes I’ll pay $150 to stay there and maybe once and a while $59. But the average is $100.

Flash forward to a heated travel environment and that same hotel now is able to command an ADR of $150 — a 50-percent increase. OK, I stay my 20 times and the hotel owner contributes $150 to the loyalty program operator. When I choose to redeem at that hotel, the program must then reimburse the hotel $112.50.

Now, given this set of logical math, there does not seem to be any reason why hotel programs should be changing hotel reward charts. In fact, in this scenario, the operator of the loyalty program — the hotel company — actually makes out better when rates at hotels rise. But in fairness to the operators of these programs, this really isn’t the real situation, and I realized it half way through writing this. Here’s really what is happening and why we’re seeing the adjustments.

The facts are that all the hotels don’t get an even earn/burn for the ADR to make logical sense. As many of you know, there’s really very special hotels we want to redeem our points for and of course, those are in high-demand areas, which are leading the rise in hotel rates nationally.

So let me play out my hotel award chart changes in another manner.

As in the first hypothetical situation, the hotels I typically earn my points at have an ADR of $100. I stayed at these similar properties 20 times and earned enough points for a single night’s stay. So, for each of the 20 times I stayed, the hotel owner paid the operator of the loyalty program $5 (marketing fee). The program now has $100. When it comes time to redeem my points, I want to stay at a resort, and with travel recovering, the resort ADR is now $250. Per the agreement that the hotel program operator has with the owner of the hotel, they will reimburse the hotel 75 percent of the ADR. In this case, $187.50. Now do you see the problem? The hotel program operator only took in $100 from my 20 stays at the lower-rate hotel, but they now owe another hotel $187.50 for my redemption. It doesn’t take too many of these types of redemptions for a hotel program to need to make a change or two. There’s a rumor mill item in this month’s InsideEdition that purports that Starwood SPG is surveying similar actions and so far other hotel programs have denied any immediate plans for altering their award charts in the face of what seems to be a healthy market for rising hotel rates.

We’ve been so busy talking about the 25th anniversary of frequent flyer programs, let’s not forget that in June 1987, Southwest Airlines launched their original frequent flyer program-Company Club. In June 1991, American Express launched Membership Miles (now called Membership Rewards) and in 1994, Varig launched their Smiles program. Best of the month to each of these programs.

I forgot last month to mention a special Freddie Award that was presented to Air Canada Aeroplan at this year’s event. I cited them an “Industry Impact” for their forward-thinking decision to offer public shares in that program. So far the result has been quite positive for investors and only time will tell if members of such programs suffer when profits are a goal.

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