For the past two years Starwood has ‘suspended’ peak season surcharges, where they charge extra points for up to 16 weeks a year for category 5, 6, and 7 hotels.
They’ve cited the overall economy and room rates as the reason for the decision, and it was a real boon to members.
Each hotel in the upper 3 redemption categories gets to declare what dates are their peak season and members are charged:
- 16,000 points per night instead of 12,000 for category 5 (33% upcharge)
- 25,000 points per night instead of 20,000 for category 6 (25% upcharge)
- 35,000 points per night instead of 30,000 for category 7 (17% upcharge)
But in 2009 and 2010 the practice was suspended. However, it’s back and Starwood has announced peak season dates that hotels have submitted for 2011 and 2012.
Now, peak season doesn’t get re-implemented until January 10, 2011. That means if you want to redeem points for any published season peak season dates in 2011 (and 2012 where rate plans are loaded to do so) that you can do so by January 9 and avoid paying the peak season rates. Through January 9 you’ll pay the regular redemption rates even for peak season dates. After that you’ll pay the higher peak season rates for declared peak season dates.
Now, the game theory on the part of individual hotels is interesting. Presumably they attract higher reimbursement rates from Starwood Preferred Guest during declared peak season, and Starwood Preferred Guest charges more points as a result. On the one hand, each redemption generates more revenue. On the other hand, higher rates discourage redemption. So far, so good, that’s just like higher room rates and during high season room rates naturally rise so you’d expect points costs to rise as wel.
Except that Starwood Preferred Guest reimburses a hotel at a much higher rate — at their average daily room rate — for nights when the hotel hits 90% occupancy. Presumably that doesn’t rise during peak season, though I don’t know that to be the case.
A hotel could logically conclude, “During high season my hotel will be full. I’d rather get my average daily room rate than the high season upcharge. I want to encourage redemptions and more revenue from Starwood Preferred Guest. I’ll maximize revenue by not declaring a peak season.”
On the other hand they could believe that since their average daily room rate is still below peak season rates, and they won’t just hit 90% occupancy but significantly exceed it, that they’re better off hedging with the peak season surcharge, they’ll get the average daily room rate, and they’d rather discourage redemptions because each paid room will generate even more revenue.
A hotel might even decide that since they can only declare 16 weeks of the year to be peak season, and that during ‘true’ peak season they’ll likely get their average daily rate from Starwood anyway, that they might declare dates which aren’t their highest occupancy periods to be peak dates in order to get more revenue per redemption, though whether or not this is a revenue-maximizing strategy depends on the elasticity of demand amongst Starwood members who will be redeeming their points — does increasing the points requirement reduce redemptions, and if so at what margin?
Now, some hotels don’t declare a peak season at all, and it’s clear they’re happy with the revenue they’re getting from Starwood Preferred Guest for award nights. Perhaps they’re overindexed to begin with, Starwood has a hotel in category 6 when the property doesn’t believe their revenue actually justifies that. They’re happy with the higher reimbursement rates and wouldn’t want to scare off award customers. A good example of this, I think, would be the W Koh Samui in Thailand. There’s no way that rates there justify category 6 and double points even at category 6 because ‘all of their rooms are suites. So naturally the property is thrilled with the income off of award nights from anyone silly enough to spend double points there, 40,000 points per night instead of spending perhaps $450 a night (and often less on average with various 3rd or 4th night free promotions).
This underscores the absurdity of Starwood’s requirement that all-suite hotel properties require double points for redemption, that penalizes the member twice. A hotel achieves its high revenue precisely because of the nature of its rooms, and thus gets categorized as a category 6 or 7 property. But hten because of the nature of the rooms, independent of room rate, Starwood says the property require double pooints.
That’s why Starwood, which has some of the nicest high-end aspirational properties, also places those properties well beyond reach of most members and beyond what the underlying room rates at the properties would suggest.
Take Bora Bora Nui, which had been charging something like 60,000 Starwood points per night prior to leaving for Hilton. Now it takes fewer Hilton points to redeem at the property than it did Starwood points, even though Hilton points are generally inflated (at the lower tiers, a Starwood point is usually worth 3-4 times as much as a Hilton point, but not at the upper tier properties).
Ultimately, the return of high season is a pain at high season properties. But it’s not unexpected, Starwood simply suspended the high season practice they didn’t abolish it. And with business travel recovering from the depths of the recession, it’s not at all unexpected so I’m not particularly excised by it.
The real telling event is yet to come — as usual in February we should learn what Starwood does in terms of annual category shifts.
A common misconception is that Starwood’s redemption categories bear some relationship to the quality of the property when instead they tier to a property’s projected average daily rates for the coming year. Last year, though I much expected redemption levels to fall based on historic drops in room rates, Starwood simply froze the redmeption chart for the most part.
With rates still below the median for the entire 2000 to 2007 period and with occupancy and rates still below 2008 levels, we certainly shouldn’t see hotel redemption categories shift to make rooms more expensive than they were in 2008. But since Starwood assigns categories off of forward-looking projections, we certainly might. We’ll see in about two months!