1. LHR LAUSANNE HOSPITALITY RESEARCH The travel & hospitality industry in economic crisis. Macy Marvel, Sofia, 1 October 2009

2. 2 Outline of the presentation The hotel & tourism sector in crisis Bankruptcies and foreclosures Airline cutbacks Revenue management Cost management

3. 3 Hotels.com price index down 17% in H1 2009

4. 4 Prices are back to 2004 levels..

5. 5

6. 6 Bankruptcies & foreclosures Two major chains go under... –Golden Tulip – bought by Starwood Capital –Extended Stay of America – 680 hotels Numerous luxury properties –St. Regis San Diego, Four Seasons SF, etc. 25 hotels in Norway since October 2008 300 hotels at risk in Bulgaria? –Prices down 25% –Tourist revenues down 30% in 2009

7. 7 Air travel contraction Growth rates, % 20062007200820092006200720082009 Traffic volumes (tkp) Capacity (atk) Global 5.3 -1.2-7.84.15.02.0-6.0 Regions North America 2.73.5-2.5-7.50.53.2-1.7-7.5 Europe 4.92.11.3-6.53.93.52.6-5.3 Asia- Pacific 7.57.8-1.6-6.86.76.92.3-4.0 Middle East 11.816.46.11.212.614.58.33.8 Latin America -3.49.90.0-7.81.66.93.4-3.8 Africa7.04.5-4.1-7.81.85.8-3.4-6.0

8. 8 Revenue management More important than ever in a downturn No blanket discounting Targeted offers –weekends in city, off season in resorts Bundle in extras – meals, theatre tickets,etc.

9. 9 ‘Unconstrained’ demand ‘Unconstrained’ demand Demand unconstrained by supply; –Valuable information to be tracked When do we have “fill” nights? When would we be overbooked? Allows us to estimate price sensitivity of different client segments

10. 10 Guest segmentation Not only by nationality, reason for travelling, etc. –Business, MICE, leisure, events, etc. But also by how long will they stay? How much will they consume of ancillary services (F & B, spa, etc.)? How likely are they to come back?

11. 11 Who are my most valuable customers? - Another way to segment hotel guests- Short termLong term High profit “Butterflies”“True Friends” Low profit “Strangers”“Barnacles”

12. 12 “True Friends” Long term relationship potential with high profitability Identified by their reason for coming to the destination, an example: –Business people calling on firms in located in the area of the hotel Practice fair and consistent pricing with them –Communicate actively with them to be able to guarantee space during busy periods –Do not destroy trust by practicing indiscriminate revenue management

13. 13 “Butterflies” What brings you to the area on this trip? What percent of your trips are to this area? High profit potential But reason for staying is based on a short-term situation, an example: –International media covering an important event; Not price sensitive – should pay maximum prices Challenge: don’t invest too much in them

14. 14 “Strangers” Little fit between what the hotel offers and what they actually want; lowest profit potential Very price sensitive, example: –A Chinese tour group Maximise yield with this group Make no investment in relationship and make a profit on every transaction Sell rooms via ‘opaque’ web channel, e.g. Priceline.com or dynamic packaging

15. 15 “Barnacles” Tell me what you want to pay and I will tell you when to come.. Like strangers, there is little fit between what the hotel offers and what they actually want – low profit potential –Example: airline crews Assess their potential spending power –Focus on ‘up-’ and ‘cross-selling’ –Impose strict cost controls Tight controls on booking – high fences

16. 16 But maximum revenue ≠ maximum profit Don’t seek to maximise revenue without regard to cost. Segment your profit and loss statement by revenue earning department Watch out for F & B! –Usually very unprofitable Never sign a management contract based only on a % of revenues for the chain.

17. 17 Can fixed costs be made variable? Hotels have high operating leverage –A high percent of costs are fixed Lower business risk by rendering fixed costs variable –Examples: use temporary agencies for chambermaids –Rent equipment instead of buying As an operator, never sign a fixed lease on a hotel!

18. 18 How much is my marginal cost? Very important to know the marginal cost of a room night. How much more does it cost me to lodge one more guest in a room? This information indicates the very bottom floor for your pricing to price- sensitive (i.e. “strangers”) groups.

19. 19 Economies of scale for marketing Better to outsource your marketing and promotion to a group which has more resources than an individual hotel –To reach national and international markets you need an affiliation –Connection to GDS and travel websites –Special promotions and loyalty programmes Affiliations are more valuable in a downturn