On Tuesday I wrote that Starwood is suing the Parker Meridien and Perker Palm Springs hotels, accusing them of fraud and seeking to abrogate their contracts.
Starwood is trying to cancel its agreements with the Parker Meridien hotels in New York and Palm Springs after the properties allegedly faked accounting records and guests in order to claim over $1 million in payments from SPG.
It reveals the details of the fraud. Starwood Preferred Guest was the first program to offer ‘no capacity controls’ on award nights. If a standard room is available at a hotel, a member can use points for the room. The way that they do that is offering deeply discounted payments to hotels for their rooms most of the time (since those rooms would otherwise go empty), but when a hotel is full they pay that hotel its average daily room rate (so that giving a member an award doesn’t trade off with revenue they could have received for the room).
What the two properties allegedly did was fake their occupancy rates in order to claim they were full, so that Starwood would have to reimburse them at their full rate instead of at discount rates.
I had understood that Starwood Preferred Guest reimbrused its hotels for average daily room rate when occupancy exceeds 90% on a given night. So I’m glad to have read the suit, since I learned that the actual occupancy rate for that level of reimbursement is 95%. Perhaps that’s pretty inside baseball, but it’s important learning for me since I occasionally repeat the detail as part of my understanding of the economics of the program.
Supposedly the scheme to inflate occupancy began at the New York hotel shortly after beginning to participate in SPG in 2008.
They created fake reservations and checked in those reservations to inflate occupancy rates. Most of the reservations were ostensibly complimentary bookings for travel agents, something hotels try to avoid offering when they’re otherwise going to be fully booked. They also checked in ‘no show’ reservations in order to look more full. And they checked hotel employees into free rooms.
Somewhat surprisingly, the hotel ownership claims that Starwood isn’t entitled to end the relationship. The amount of money at issue is in the hundreds of thousands of dollars at each of the two properties, so one imagines that the ‘errors’ could be defended as inadvertent or the result of misunderstandings, and that repayment would be sufficient to cure the breach. Clearly Starwood wants no part of that.
There’s no question that there’s a real incentive for hotels to show occupancy at 95% or above (without showing additional revenue that Starwood would earn off of), in order to boost their payments from Starwood Preferred Guest.
If this scheem was going on at the Parker Meridien properties, one wonders if it’s going on elsewhere. And not just with Starwood, as some other chains operate under a similar structure for their own reward nights.
While reports have to be filed by the hotel, reports can be fabricated, and Starwood’s internal audit procedures didn’t detect the fraud (such as unusually high numbers of free room nights correlating with nights where the hotel was booked full), relying instead of a whistleblower. So both Starwood Preferred Guest and other hotel loyalty programs probably need to take note and evaluate their own internal audit procedures.
It’s the high occupancy rate payments that have historically driven SPG costs — and are one reason that the chain has looked at ways of offsetting those costs, such as through the introduction of higher redemption tiers. The Parker Meridien case is clearly not what gave us ‘category 7′ in SPG (based on timing), but the issues in the Parker Meridien case are the same as those which drove the introduction of the category.
So a program’s failure to crack down on fraud by its hotels is a straight line to program devaluation as a means of controlling costs. And as a result, this is more than of prurient interest, but of real concern to members.