U.S. hotels collect nearly $2 billion in fees and surcharges in 2012

Think hotels already nickel and dime guests with added fees? Those nickels and dimes really add up. And what do you think about nonrefundable reservation fees pegged to room rates? The lower the rate, the higher the reservation fee. A new hotel reservations model could grow the $2 billion from hotel fees in 2012 to an astronomical revenue stream for hotels.

Two hotel industry articles caught my attention today. Hotel News Now has an article Hotel fees, surcharges ‘uniquely profitable’ stating U.S. hotels are on pace to earn $1.95 billion in add-on fees and surcharges.  These are items on your hotel checkout bill like resort fees, parking fees, energy fees, internet fees, fitness center and pool fees, room service fees, mini-bar restocking fee, reservation cancellation fees and more fees.

I recall my mother ranting to me a few years ago after she was charged an in-room safe fee for a hotel room where she never touched the safe.

2012 will be a record year for hotel add-on fees with the collection of $100 million more in fees estimated for 2012 hotel stays in the U.S. compared to 2011. Hotel fees are a growing revenue stream.

In 2003 fees collected were around $1 billion, so $1.95 billion is nearly a doubling of hotel fees paid in the past decade.

Personally the parking fees are the biggest hit in my travel, followed by resort fees and internet fees (usually included in resort fee at resorts).

In California where many hotels have parking fees in the $50 range, I find myself sometimes choosing a different hotel to save the parking expense.

I have had good luck finding free street parking in many cities like Los Angeles in April where Jen Miner of The Vacation Gals seemed shocked I parked my car ‘on the street’ across from the LA Convention Center.

San Francisco is a place where I have saved thousands of dollars in hotel parking fees by parking my car on the street, but it also cost me $300 in 2010 when my side mirror was broken off after leaving the car one weekend near Fisherman’s Wharf and $63 when I learned that San Francisco Parking Division does not count Labor Day Monday as a holiday for free parking. There is no fine print on the signs “Parking Free Sundays & Holidays” in San Francisco.

Are nonrefundable reservation fees the future for hotels?

$1.95 billion in hotel fees is a revealing number, but one I don’t find surprising. The eye opener for me was reading the recent Cornell Center for Hospitality Research article on ‘Optimizing Hotel Pricing’ by Peng Liu, Ph.D.

Let me be clear that this is my interpretation of the Cornell research article and I have no background in hotel revenue management. These are just my thoughts from the aspect of a hotel traveler-consumer.

The Cornell CHR article indicates a way for hotel fees to skyrocket in the near future if the hotel industry adopts the ‘Optimizing Hotel Pricing’ model.

The paper discusses how before personal computers hotel reservations were handled by phone and mail. Hotel room rates were relatively fixed at a property with little week-to-week fluctuation. The room rate often did not change from the time a guest booked a hotel room to the date of the hotel stay. The guest had a high probability of staying at the hotel once the room was booked by mail or phone.

Computer booking systems over the past two decades changed the nature of the reservations process to dynamic pricing with frequent room rate changes in an effort to maximize room revenue and room rate competition between the hotel itself and online travel agencies.

A guest can easily book a room online with a room rate that offers no cancellation penalty.  The guest can continue to look for a better priced room for the hotel stay knowing that a room is reserved, even though there might be a high probability of cancelling the reservation.

This is my standard strategy. I often book the best no cancellation penalty room I can find and continue to look for better hotel rates. I might go through five or more reservations before I actually check in to one of the hotels.

Since hotel bookings can be cancelled without penalty by the guest, revenue management is more difficult for the hotel that has no way of knowing among 100 guests with flexible reservations what any specific guest’s probability is for cancelling the room reservation before the hotel stay. The hotel looks at past trends to predict the percentage of guests who will cancel their room reservation before the hotel stay.

The optimizing hotel price argument is the current no penalty cancellation booking favors the consumer with all the upside while the hotel does not really have an assurance the guest will actually occupy the room. The guest can cancel, perhaps even on the day of the stay without any penalty, yet the hotel loses potential revenue, assuming the room goes unoccupied.

The basis of the research paper shows a model combining a nonrefundable reservation fee to the room reservation. 

In 2012 most U.S. hotel reservations offer a cancellation period with no penalty ranging from  6pm day of arrival to 7 days of arrival at some resorts. Fully prepaid and nonrefundable hotel room rates are typically 10 to 30% lower than the Best Available Rate with no penalty cancellation.

Peng Liu, Ph.D. suggests hotels tie a nonrefundable reservation booking fee to the room rate. The same room type will have different rates that correlate to the probability the guest will actually occupy the room. The higher the reservation fee, the lower the room rate.

Currently hotels tend to either have no cancellation fee on most bookings or discounted room rates with 100% cancellation fee on prepaid advance purchase rates.

Nonrefundable reservation fees example 

Assume the standard room at an upper upscale hotel is currently priced at $200 for a flexible room rate with no penalty cancellation up to day before arrival. The same standard room is available for $100 (50% discount) on a prepaid, nonrefundable room reservation.

The guest booking a hotel room pays a nonrefundable reservation fee that increases as the room rate decreases.

• $200 room rate = No reservation fee. $200 due at hotel.             [This is currently the norm for flexible cancellation rates.]
• $191 room rate = $1.00 reservation fee and $190 due at hotel.
• $164 room rate = $4.00 reservation fee and $160 due at hotel.
• $149 room rate = $9.00 reservation fee and $140 due at hotel.
• $136 room rate = $16.00 reservation fee and $120 due at hotel.
• $125 room rate = $25 reservation fee and $100 due at hotel.
• $116 room rate = $36 reservation fee and $80 due at hotel.
• $109 room rate = $49 reservation fee and $60 due at hotel.
• $104 room rate = $64 reservation fee and $40 due at hotel.
• $101 room rate = $81 reservation fee and $20 due at hotel.
• $100 room rate = $100 reservation fee                                      [This is currently the norm for many advance purchase rates.]

The theory is hotel guests will self-select their probability of actually staying at the hotel by their risk tolerance for losing the nonrefundable reservation fee.

You can book a $200 room rate for a room you can cancel without penalty or you can pay $136 for the same room and lose $16 in the nonrefundable reservation fee if the reservation is cancelled. That is hotel revenue on far more cancelled reservations than hotels currently receive in the booking processes. You can bring the rate way down to $109 by paying a $49 nonrefundable fee. Basically the room rate offers many more rate options depending on the nonrefundable reservation fee you are willing to risk.

In the future you may be provided with a series of room rates accompanied with a nonrefundable reservation fee. If the hotel chains adopt this model, the OTAs will follow suit.

This optimizing hotel pricing model indicates a way hotels may be collecting far more than $2 billion in added guest fees a decade from now.

Loyalty Traveler post link: http://loyaltytraveler.boardingarea.com/2012/08/23/u-s-hotels-collect-nearly-2-billion-in-fees-and-surcharges-in-2012/

Ric Garrido, writer and content owner of Loyalty Traveler, shares news and views on hotels, hotel loyalty programs and vacation destinations for frequent guests. You can follow Loyalty Traveler on Twitter and Facebook and RSS feed.