Luxury Business Travel Take Hit

Luxury hotels, which won't generate any revenue if they simply close their gilded doors, have more flexibility than airlines in filling empty rooms.

Image: Punchstock

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Dublin's Merrion Hotel is the very model of a modern luxury lodging: five-star rating; four landmark Georgian townhouses; two gardens; Michelin two-star dining room; prestigious art collection; 142 gracious guest rooms and suites; spa and indoor pool; statue of James Joyce; and a stratospheric rate structure that starts at 455 euros (about $590) a night.

But surf to the Merrion website these days and you'll find all of that luxury on sale for as little as 199 euros a night. And the Merrion's self-described "giveaway" package, priced at just 21 euros more, includes a full Irish breakfast for two and parking, extras that cost about 80 euros a night in palmier days.

The Merrion is not suffering through these down economic times alone. Luxury hotels from Dallas to Dubai are slashing rates and concocting value-added packages in a desperate attempt to attract business travelers and upmarket vacationers. Airlines are hacking away at once-sacrosanct business- and first-class fares to seduce travelers back to the front cabins.

Travel is down all over and in prices categories, of course. But luxury travel has tumbled off the proverbial cliff, and that means airlines and hotels will make fundamental changes in how they price and how they operate.

According to IATA, the airline trade group, year-over-year premium-class traffic fell a modest 1.5 percent in August, then began to plummet: down 8 percent in September, 6.9 percent in October, and 11.5 percent in November. "The low point…has not been reached," IATA economists warned.

Deluxe hoteliers are faring even more poorly. In November, Smith Travel Research said occupancy rates at the luxury end of the lodging universe tumbled 15 percent and revenue per available room (revpar) fell almost 21 percent. In December, the declines were 11.5 percent and 17.9 percent. For the week ended January 24, Smith said occupancy at luxury hotels fell 19.8 percent and revpar tumbled 22 percent.

"The panic is in," says Al Thomas of EtravelBid one of a handful of respected "airline consolidators" who help carriers sell distressed seat inventory. "I'm getting amazing deals on [premium-class] tickets, but the problem is that the travelers aren't there."

The travel industry went conspicuously public with its woes last week. Continental Airlines, a pioneer of tactical fare sales on business-class seats to Europe, not only unleashed its traditional summer sale two months earlier than last year, it also slashed prices on winter and early spring flights. Swiss International added a business-class sale on winter flights to Tel Aviv and Johannesburg, two destinations that rarely see price reductions. United Airlines launched a sale on business-class seats to Australia. And luxury hoteliers like Four Seasons and Fairmont began worldwide promotions offering everything from 20 percent off the lowest previous rate to free room nights.

Why is luxury travel suffering most? For one thing, business travel has tumbled as business has slowed—and business travelers represent a disproportionately large percentage of the people who fill upscale hotel rooms and the front cabins of aircraft. As we discussed shortly after Lehman Brothers collapsed, bankers and brokers represent a disproportionately profitable segment of business travel, and they have stopped traveling faster than the rest of us.

There is also what the travel industry now calls "the AIG Effect." Once AIG was publicly castigated for planning costly retreats at St. Regis and Ritz-Carlton resorts after its government bailout, companies began to shift its travel downmarket—if only to keep fancy hotel names and first-class plane tickets off expense accounts.

"Noboby wants to be the John Thain of travel," says a travel agent who specializes in luxury travel for C-suite types. "They don't want a $30,000 first-class ticket to Hong Kong on their record. And the CEOs are telling their VPs to book Hiltons and Hyatts instead of Mandarin Orientals or Four Seasons."

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