Starwood assigns hotels to award categories (which determines the number of points it takes to redeem a room night) based on each hotel’s projected average daily room rate for the year.

Back in February, Starwood announced that they wouldn’t be changing hotels’ award category assignments (for the most part) for 2010.

They spun this as doing a favor for their members — we aren’t raising point requirements! — but my view was that given the way they structure and describe the program, they should have been lowering points costs.

Each year when they moved more hotels up in categories than down, it was justified based on the room rates those hotels were drawing. Starwood has even added increasingly higher category levels to the program in order to charge more points for the highest priced properties.

But then 2009 was the worst hotel occupancy and revenue environment since the Great Depression.

So it seemed to me that on the whole hotels should have been going down in category, not staying the same — that was just locking in award chart inflation in a falling price environemnt.

In fairness to Starwood, they did get into the nitty gritty with me and explain that award categories are based on their revenue projections for the year going forward, and that they expected 2010 to be better than 2009 and thus on the whole many properties should have been going up in price — but they weren’t passing along those increases.

Ok, they base these things on forecasts so they get to ignore the abysmal 2009 actual numbers (as one Flyertalk member observed early in the year, “They look into their crystal ball, and based upon what they see the ADRs are likely to be in the coming year, they adjust the categories. GAAP needs a provision for this approach to accounting”). How they expected 2010 to be even as good or better than 2007 or 2008 it’s hard to imagine.

Fairness to Starwood, in 2009 they suspended high season surcharges for top category properties, and certainly it’s true that some hotels would have gone up in price.

But after an award category decision at the beginning of 2010 that struck me as sleight of hand, but which Starwood assures was not, it will be especially crucial to watch their decision-making for 2011. It’s a key time for the program, where members will really discover whether or not they can trust the program (with their point balances and their loyalty).

As we enter the fourth quarter of the year, industry-wide hotel occupancy is 5.7% below the median for the entire 2000 through 2007 period. Occupancy is below 2008 levels. And more importantly, average daily rates (which Starwood bases its categories on) are off more than 10% from 2008 levels. So if current trends hold, and fuzzy math about projections aside, we should see an on-net reduction in hotel categories for Starwood at the beginning of the year.

My bet is that we won’t, but I’d love to be proven wrong!