One of the most prominent hotel investment companies in America wants the hotel industry transform into Spirit Airlines and unbundle.
Hotels will soon have more a la carte pricing
Tyler Morse (CEO of MCR Hotels) made some interesting comments this week at Skift Global Forum about the future prospects for the hotel industry. MCR Hotels has 125 hotels across 34 states and more than 20,000 guest rooms. It is America's fourth-largest hotel owner.
Although you might not be familiar with MCR, you may have stayed in some properties managed by Hilton or Marriott. Other properties, such as the TWA Hotel JFK, are owned and managed by independent companies.
MCR Hotels owns the TWA Hotel JFK
Morse hopes that the hotel industry will take inspiration from the ultra-low cost airline industry and offer a more flexible pricing structure. Many of these ideas have been tested at the TWA Hotel JFK. They include charging for the use of the pool and late check-out as well as premium Wi-Fi.
Use of the pool is charged by the TWA Hotel
This is how he describes it:
I'm always trying to push the boundaries and say that a hospitality company should stop giving away free things. It is not enough to be friendly and give people something for free. The pool is not used by business travelers so they don't have to pay an indirect cost. This allows us to charge less to everyone, so people can spend more. Everyone gets a lower rate.
Morse admits that guests might struggle to adjust to the new pricing model. However, if it is adopted widely, guests will not have any choice. Morse also believes that the potential revenue potential is huge. This is because at certain ultra-low cost carriers, ancillary revenues are higher than ticket revenue. It is a win-win situation for everyone involved.
The customer will get what they want if the hotel business is moving in this direction. Everyone gets a lower price, which makes the industry more profitable.
Morse believes leaders of major hotel chains are largely opposed to changes like these, as they don't have the same incentives.
All the major hotel CEOs give lip service to this but keep in mind that they are in business of giving away things for free. This adds brand value. Owners are not in business to give things away for free. It is our bottom line. It's not a bad thing for Tony [Marriott CEO] Capuano or Chris [Hilton CEO] Nassetta to give away things for free. It's bad for our P&L.
The major hotel chains (Hilton, Hyatt and Marriott) generally get a percentage of revenue as part of their management fees. They get a percentage revenue in management fees rather than a percentage profit. They are not as invested in hotel margins as individual property owners.
Chief executives of major hotel groups aren't completely on board with a la carte pricing
Unbundling hotel rooms is a problem
Morses' perspective is far from my understanding. The most basic level of the matter:
Hotels don't give anything away free of charge, rather they include it in the price of a hotel room. It is like saying that first-class airlines give away caviar for free.
Although it is claimed that rates will be reduced so guests only pay for what they use we know this is not the case. Hotels won't lower their rates significantly, but will try to increase their margins by charging extra fees
Is the TWA Hotel charging more for pool access or has it lowered its rates? How can hotel margins improve if guests only pay for what they use and rates are lower?
It is unlikely that unbundling will result in significantly lower room rates
The comparison to airlines is also not something I believe in.
The hospitality industry includes hotels, and airlines is in the transportation sector. People book airline tickets to get there and then book hotels for a pleasant experience. However, they also have options (Airbnbs and staying with friends and family).
It is unlikely that the entire hotel industry would adopt these changes. The hotel industry includes everything from Motel 6 and Four Seasons. There aren't many options when it comes to airline travel (flying Delta economy will usually cost you 10x more than flying Spirit Airlines economy).
Let's not forget about the question of what hotels should charge. You are reducing the value proposition of choosing a hotel. Some people don't use the hotel gym. Not all people park in the free parking. Not everyone enjoys the free breakfast.
Perhaps some people don't eat breakfast.
Is there any merit in a hotel's a la carte pricing?
This is a balanced question. Is there a better way to monetize services? I have always believed that hotel check in and check out times were poorly managed.
Hotels generally allow you to check in early if you have a room available.
It is usually on a first-come, first-served basis. This doesn't seem fair nor ideal. For example, if two rooms are available prior to the official check in time, should they go to those who arrive at 8AM? Or to those who arrive at 12PM, but are willing to pay a premium to stay a few more hours?
Late check-out is something I believe hotels can better market. If you have an 11PM flight, and there are empty rooms at the hotel, would it not make more sense to charge for late check out?
Some hotels are good at this but it is not the norm. There are ways hotels can be more efficient and generate ancillary revenues, but it shouldn't go so far as Spirit Airlines.
Perhaps Spirit Airlines should consider opening some hotels.
Concerning the direction of the hotel and airline industries, it is interesting that airlines are becoming more welcoming while hotels are becoming less friendly. The pandemic saw airlines eliminate change fees and some airlines even eliminated standby fees. The airline industry is less punitive. It seems like it has been a negative change after a negative change in hotels.
Bottom line
One of the nation's largest hotel investment companies wants hotels to give away items for free and offer unbundled pricing. I find the logic deeply flawed, particularly when it comes down to drawing inspiration from ultra-low cost airlines.
The hotel industry is quite different from the airline industry. I don't think that this would be a popular choice. Unbundling would not result in rates being significantly lower, and owners would be able to make more profit.
Some CEOs of hotel investment firms are making controversial statements lately. Recently, another CEO stated that he would prefer guests to tip more than increasing their wages.
How do you feel about hotel stays that are unbundled?
