Happier Hoteliers(1)

Kuala Lumpur hoteliers are smiling again. They have every reason to do so. Business has picked up and performance is exceeding expectations. Room rates are also on the rise, albeit slowly. What is behind the reversal in fortunes? Corinne Wan finds out in the second part of this series.

Malaysian hoteliers, especially those in Kuala Lumpur, are talking more to the media these days. Understandably so. Occupancies are rising and they are happy to shout about it.

Kuala Lumpur, badly bruised during the past two years, has recovered. An informal market survey by TravelWeekly East shows that most city's hotels did better than anticipated in the first quarter of the year.

Average occupancy rate in the luxury market rose by five to eight percent to top 63 percent, a figure not seen for some time. Average room rate rose to RM210 (US$55)-RM260, an increase of about RM20. Both are marked improvements over the same quarter in 1999 when AOR hovered around the 40s and ARR was RM180 to RM200.

Some of the individual performers: Mandarin Oriental Kuala Lumpur's year-to-date AOR is 68 percent while its ARR is RM265. It exceeded its business projection by 25 percent. Shangri-La saw a 43 percent increase in room nights, a 35 percent hike in business and leisure traffic and commands rates of RM210-260. The Ritz-Carlton's AOR rose 15 percent to the high 60s. Rates are between RM260-RM270. Regent has also surpassed its budget in the first four months this year in terms of business, occupancy, F&B and meetings.

When competitors were asked if the entry of the Mandarin Oriental in October 1998 upped the ante on rates, the answer was a swift no. In fact, the reverse took place as some hotels had to drop their rates in response to Mandarin Oriental's "special offer" - a six-month promotional package at RM250. Recalls Peter Weber, general manager of Regent, "Mandarin Oriental added another 643 rooms to the market during difficult economic times. It naturally had to offer attractive rates during the introductory period and other hotels had to adjust their rate strategies accordingly."

Jeff Crowe, group director of marketing of Shangri-La Kuala Lumpur, notes that Mandarin Oriental's year-to-date average rate shows its entry did not push up the rate level in the market.

"Its ARR is only RM9 higher than 1999's. Such a small increase does not really lift the rate game. If anything, Mandarin Oriental's conservative approach limits the rates other five-star hotels want to charge. It can actually command higher rates as it is within walking distance of some of the prime office space in the city."

Ritz-Carlton feels that while Mandarin Oriental's entry did not lift the rate game, it "gave a bit of buoyancy" to the situation. "Hotels should have taken the opportunity to raise rates but did not due to the difficult situation then," said general manager Jonathan Campbell. At that time, raising rates was the last thing on hoteliers' minds with occupancies barely touching 50 percent.

Mandarin Oriental says its promotional package was a response to the market. "We had to introduce the special package because of the recession and the oversupplied market in Kuala Lumpur. After six months we reverted to the promotional corporate rate," says general manager Christian Hassing.

The hotel continued to grow its rate by RM10 in the following year while its competitors continued to drop rates by about RM45. At the same time, the city occupancy went down to between 40 and high 50s, a slide of five to eight percent.

"If you compare the rates, our premium is high, about RM50. This is hardly a conservative increase. Hotels dropped their rates not in response to our entry. They lost market share and hoped to regain it through lower rates," says Hassing.

One thing hoteliers will agree on - the days of dropping rates are over. There is now only one direction for room rates in the country, Kuala Lumpur included, and that is up.

Hoteliers in Malaysia feel their products are undervalued. The destination is also undersold in comparison to Singapore, Bangkok and Jakarta, they say. Hotels that entered the market 15 years ago are actually doing lower rates than then. Of course, hoteliers would love to achieve rates of around US$200-US$220, a level they say reflects their true worth, but they have to be contented with a modest 10 to 20 percent increase. Even then some view 20 percent as quite unattainable.

"A 10 percent increase is possible but a 20 percent is difficult. We are not yet at the comfort level in occupancy which is an average occupancy of 65 to 70 percent year round. This is when hotels will see returns for their investments and make money for owners," says Ritz-Carlton's Campbell. Regent's Weber notes that with the downturn of the country's economy in late 1997, average rates and occupancy of all hotels, including the Regent's, are nowhere near rates pre-crisis.

"However room rates and occupancy are improving and we expect this to continue for the foreseeable future. The pegging of the ringgit at RM3.80 against the US dollar has made Malaysia one of the best value destinations in the region to visit for business or leisure. This is something that they will not find anywhere else in the world and that is staying in a five-star hotel for less than US$100 per night," he says.

Mandarin Oriental's Hassing is confident that the market can take a 15 percent increase in rate. "Compare the facilities and quality of service of hotels in Malaysia with hotels of similar standards elsewhere - they command rates of US$180 to US$200."

Hassing is confident days of drastic undercutting are over despite the fact that competition is still pretty intense. "From now on there will be a steady increase in rates even when more rooms come online. There is a simple reason for this. During the recession owners wanted their hotel general managers to slash rates to generate income and cash flow. They realised they ended up the losers with such short-term measures. Many have learned from this unhealthy practice."

For the moment, there is no major room onslaught coming into the market. No new hotel openings are planned for at least the next two years. Westin may open by end 2001 and the Duta Grand Hyatt by 2003 or 2004. They will inject an additional 700 rooms to the market. Coupled with the economic recovery, hoteliers look set to keep smiling.

For 2001, Hassing forecasts a 22 percent increase in business volume, a 10 percent increase in occupancy and a 10-15 percent growth in average room rate.

Crowe sees steady growth in rate and occupancy until 2003. "By then there will be added inventory. We are hopeful by then the demand will balance out the increased room inventory."

Next article: Sustaning the recovery

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