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Luxury for less: There’s lots of room at the inn

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.
Image: Plaza Hotel's Palm Court
In December, New York's Plaza Hotel temporarily closed its underperforming Palm Court restaurant. In this recession, some luxury hotels are slashing room rates and reducing services in ways that could ultimately affect the quality of your "luxury stay." Jim Cooper / AP file
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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 Web site 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 Jan. 24, Smith said occupancy at luxury hotels fell 19.8 percent and revpar tumbled 22 percent.

Amazing deals — but no travelers
"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.

"Nobody 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."

The luxury downturn will impact airlines and hotels in sharply different ways.

Airlines, for example, have a limited number of tools at their disposal. They can discount premium-class fares and will undoubtedly trim up-front costs, eliminating some meal and wine choices and cheapening the niceties in the amenity kits. If the slump continues indefinitely, they will also embark on the costly task of reconfiguring aircraft with fewer premium-class seats and more coach chairs.

But since airlines are overwhelmingly dependent on premium-priced fliers — after all, one business-class traveler paying $5,000 roundtrip generates as much revenue as 10 coach passengers paying $500 each — a long-term shortfall of luxury customers means some flights simply won't be worth flying.

Airlines offering fewer flights
That's already happening. Until the end of winter, Singapore Airlines' all-business-class flights to Singapore from New York and Los Angeles will operate just five times a week instead of daily. United Airlines has cut the frequency on its flights between Washington and Beijing. US Airways and Delta Air Lines have eliminated some off-peak flights on its East Coast Corridor runs that connect Boston, Washington and New York.

"You look for days with low [passenger] loads where you can eliminate flights," explains Jack Foley, executive vice president of Aer Lingus, the Irish carrier that recently suspended its Los Angeles-Dublin nonstops. "But if you cut too many frequencies, you inconvenience your business-class fliers. They book away from you, you lose even more revenue, and you end up dropping the route anyway."

Luxury hotels, which won't generate any revenue if they simply close their gilded doors, deal with the crisis by spreading the pain to both stakeholders and guests. Lenders and bondholders suffer as the hotel's underlying real-estate value plummets and the property goes into workout, but travelers do get what looks like a deal. Nightly room rates plummet — but managers make service reductions, some obvious and some subtle, that ultimately affect the quality of your "luxury stay."

It's already become a cliché that Ritz-Carlton hotels are substituting potted plants for the fresh flower arrangements in its public areas. And the recently renovated Plaza Hotel on New York's Central Park was forced to close its once-iconic Palm Court restaurant.

"Hotels are reducing housekeeping staff, which means you'll wait longer to get your room serviced," explains Michael Matthews, a consultant to luxury-property owners and managers. "There'll be less extensive and elaborate room-service menus because room service doesn't make money in the best times. One luxury hotel recently switched to a cheaper brand of bathroom amenities. And naturally they'll do unwise things like lay off switchboard operators. They'll route calls to the front desk, which means you'll spend more time checking in because the front-desk people are overworked."

And one desperate luxury hotel group recently made what Matthews called a "ridiculous and dangerous" decision: It dismissed its security staff, eliminating the dark-suited types who patrol the lobbies and scare off potential miscreants.

"I can't imagine what guests will think if they find out there's no security," Matthews said. "And wait until the hotel's liability carrier finds out."