Why hotel owners wouldn't mind looking more like the airlines

ATLANTA—The airline industry has never had a reputation for exceptional hospitality and customer service. But some hotel owners still wouldn't mind looking more like it. 

A hotel stay shouldn't be as bumpy as a flight, but should be as lucrative, according to Mehul Patel, CEO of NewcrestImage, speaking on the "Main Street Talks" panel at the Hunter Hotel Investment Conference.

Patel was referring to the now customary ad hoc services that airlines charge customers beyond the original fare, including baggage and seat assignment fees.

According to NerdWallet, airlines such as American, Alaska, Delta and Hawaiian charge $30 for a checked bag, while JetBlue and United charge $35 for the same service. Meanwhile, low-cost carriers Spirit and Frontier charge customers for all overhead carry-on items. Most airlines also charge extra to sit in a specific seat, even in the main cabin.

The implication is nickel-and-diming, something Patel is not at issue with. "We should charge for housekeeping like airlines charge for baggage," he said, also citing Uber fees, which can include tolls, origination fees and, as of March 12, a fuel surcharge to offset higher gas prices.

"We can charge for surface parking," Patel continued. "We should do prepay," a reference to collecting payment in full at the time of booking, similar to the airlines. "We are the only ones not doing nickel-and-diming."

His fellow panelists were not in disagreement. Mitch Patel, president and CEO of Vision Hospitality Group, cited a time when the change fees he needed to pay for a flight amounted to more than the original ticket. "Taking payment upon booking is something the customer is ready for," he said. "I can book six different rooms for the same day and within 24 hours cancel them. We are the only industry that can tie up inventory without recourse."

Costing more

Transferring more costs to customers is something hoteliers have considered before, more so now as their own costs balloon—both operationally and developmentally.  

"We have a handle on replacement costs so know when to buy," said Al Patel, president of Baywood Hotels, but adding that it can now cost as much as 22 percent more to build a new hotel. As Mitch Patel pointed out, the rise in expense has much to do with the current supply chain crunch. "There are certain materials you just can’t get," he said. "There are 100 moving parts that have to move seamlessly and those have been disrupted. We are now trying to ignite it back, but it takes time."

He added that this was first time he could remember not having any hotel under construction, citing construction costs that are up some 230 percent since 2012. 

Moreover, materials, like steel, need to be purchased sometimes six months in advance. "You now need to order things even before getting the loan," Al Patel said. 

Hot market

Despite the rise in costs, the hotel industry continues to attract capital and the focus is slanted more toward acquisition than ground-up development. "The construction industry is a dying industry," said Greg Friedman, CEO of Peachtree Hotel Group, an allusion to the current length and steep price to build. "It can take 18-24 months to get a property open; stabilized two to three years later."

It's made deal-making tougher, as cap rates compress and there are myriad bids for one property. "It's been a difficult process," said Al Patel. "We are getting outbid." 

Many hotel owner/operators are also getting out of the management game. It's been an ongoing trend in the hotel industry, one coupled with consolidation within the broader third-party management sector. In January, NewcrestImage sold 27 management agreements to Aimbridge Hospitality, something Mitch Patel said there would be more of, acknowledging the challenge of managing hotels, something often better left to companies that specialize in it. "You are either all in or out in operations," he said.

Added Mehul Patel about his company's deal with Aimbridge: "Let them worry about occupancy."

Smaller third-party management companies are also stepping away from the table and joining up with larger operators. Consider Atlanta-based Hotel Equities, which has scaled up greatly in just a little more than a year, forming strategic alliances with four separate management companies.  

"If you have less than 20 hotels does it make sense to operate?" asked Friedman. "It’s super expensive and about controlling product, but doesn’t make economic sense."