Description
The aim of the paper is to help graduate students in the area of hospitality management to
understand and deal with non-performance charges and attrition issues.
International Journal of Culture, Tourism and Hospitality Research
Executive training exercises in non-performance and attrition charges in the hospitality
industry
Rex S. Toh Barbara M. Yates Frederick DeKay
Article information:
To cite this document:
Rex S. Toh Barbara M. Yates Frederick DeKay, (2007),"Executive training exercises in non-performance
and attrition charges in the hospitality industry", International J ournal of Culture, Tourism and Hospitality
Research, Vol. 1 Iss 4 pp. 281 - 288
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Executive training exercises
in non-performance and attrition
charges in the hospitality industry
Rex S. Toh, Barbara M. Yates and Frederick DeKay
Department of Marketing, Albers School of Business and Economics,
Seattle University, Seattle, Washington, USA
Abstract
Purpose – The aim of the paper is to help graduate students in the area of hospitality management to
understand and deal with non-performance charges and attrition issues.
Design/methodology/approach – The paper uses case studies to illustrate the issues that must be
resolved.
Findings – There are many ways to look at issues – from the hotel’s perspective, from the customer’s
viewpoint, and from an independent observer’s position.
Originality/value – This training exercise highlights the complicated issues surrounding
non-performance charges and attrition issues, and suggests ways in which they can be fairly
resolved to the mutual satisfaction of all parties to preserve goodwill all around.
Keywords Hospitality management, Graduates, Training
Paper type Case study
Introduction
The most distinguishing aspect of the hospitality industry is that room inventory is
perishable, together with conference halls, banquet facilities, parking, and other support
services. Room inventory’s perishable nature permeates the mindset of hotel managers,
who struggle with late cancellations, no-shows, early departures, and the possibility of
groups not picking up their room blocks. To hedge against these uncertainties, room
managers overbook hotels, which leads to oversales and walks (sending displaced
guests to other hotels), especially if some stay-overs do not leave on the expected
departure date.
Room bookings usually require credit card guarantees. If the reservations are not
cancelled with at least 24 hours of notice, customers are charged for the ?rst night’s
room rate, plus taxes if applicable. Also, some hotels impose early departure charges of
about $75 if guests leave before their expected departure date. Groups of ten or more
managed by corporate meeting planners, association meeting planners, or independents
typically sign group sales agreements with attrition clauses, essentially committing the
groups to picking up their room blocks. As a result, these agents have legal obligations
to pay the hotels or cruise lines liquidated damages for a revenue shortfall.
Previous studies discuss these complex issues in detail (DeKay et al., 2004; Toh and
DeKay, 2002; Toh et al., 2005a, b, c; Toh et al., 2006; Toh et al., 2007). One area issue that
requires additional clari?cation is non-performance charges. The purpose of this paper
is to provide further insights on issues related to non-performance charges on individual
and attrition charges directed at groups, as assessed by hotels and cruise lines.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1750-6182.htm
Executive
training
exercises
281
Received March 2007
Revised April 2007
Accepted June 2007
International Journal of Culture,
Tourism and Hospitality Research
Vol. 1 No. 4, 2007
pp. 281-288
qEmerald Group Publishing Limited
1750-6182
DOI 10.1108/17506180710824163
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Part 1 deals with non-performance charges on individuals and Part 2 deals with attrition
charges directed at groups. Evidence presented shows how these charges can
be calculated from different viewpoints (the hotels and the guests). Using different
computation methods, complex issues are discussed, as well as howthey can be resolved
fairly and productively to preserve goodwill all around.
Part 1
Both Minnie DeCosta, Corporate Meeting Planner for New Horizon Corporation, and
Max Filmore, Room Manager for Norwest Hotel, sat in their respective of?ces
reviewing data on the recently concluded meeting the company held at the hotel. The
records show evidence of some no-shows and early departures. Also, some attendees
were walked on the ?rst night of the meeting. Both managers pondered how to
compute the related non-performance charges that might be levied, and what the total
bill ought to be. Max wanted to maximize room revenue for the hotel while Minnie
wanted to minimize the cost to the company. As an independent observer, what do you
think is the fairest amount to maintain goodwill between both parties?
Minnie booked 560, 590, 585, and 550 rooms on each of four nights at a discounted
room rate of $120 per night at the 1,000-room Norwest Hotel in Chicago for a strategic
planning meeting of key employees of New Horizon, a large media company. A group
sales agreement with attrition clauses was not signed, so no room block existed. Owing
to travel dif?culties or sudden changes in plans for some attendees, 25 late
cancellations and no-shows occurred on the ?rst night and ?ve on the second night of
the meeting. In addition, there were ?ve early departures on the third night and an
additional ten on the fourth night. Three of the early departure cases were due to
family emergencies.
The Norwest Hotel has a well publicized policy of requiring payment of the ?rst
night’s roomrate (including taxes) for any reservation not cancelled by at least 24 hours
before 6.00 p.m. of the day of arrival. Norwest also informed guests at check-in that it
would assess a charge of $75 for early departures before the expected departure date.
Since, the hotel normally expects a no-show rate of 5 percent or more, Norwest accepts
more reservations than the hotel has rooms. In this case, Norwest overbooked by
40 rooms for each of the four nights during New Horizon’s meeting. Since, there were
only 25 no-shows on the ?rst night of the meeting, 15 guests with reservations
were walked (denied accommodation and sent to other hotels), including ten attendees
of the New Horizon meeting. All of the walked guests received free rooms at nearby
hotels with free-cab rides and breakfasts included. New Horizon’s ten walked guests all
returned to the Norwest Hotel on the second night, and were given courtesy room
upgrades. On the second, third, and fourth nights, the hotel ?lled 990, 990, and
995 rooms, respectively.
Issues
(1) Assuming the role of Max Filmore, how would you maximize the
non-performance charges and accommodation costs to be paid by New
Horizon to Norwest Hotel, and how would you justify your case?
(2) Assuming the role of Minnie DeCosta, how would you minimize the
non-performance charges and overall accommodation costs to be paid by
New Horizon to Norwest Hotel, and how would you justify your case?
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(3) As an impartial observer, what solution would you recommend as the fairest to
both the company and the hotel to maintain goodwill all around?
Question 1: speaking as Max Filmore, Room Manager for Norwest Hotel
From the perspective of the hotel, the total room bill including non-performance
charges for New Horizon Corporation for all four nights should be $261,525, plus taxes.
Table I illustrates the calculations. The total bill for all four nights including
non-performance penalties is calculated at $261,525, plus taxes.
The 25 no-shows on the ?rst night are charged the ?rst night’s room rate plus taxes,
in spite of the ten walks, because walks are not charged. The policy of charging for late
cancellations and no-shows is well publicized and is customary in the hospitality
industry, thus charging for the ?rst night is reasonable and expected. Note that losses
are not easy to make up for subsequent nights as well. Often, last-minute available
rooms must be sold at a discount. The 25 no-shows from the ?rst night are not charged
on the second and subsequent nights. Also, early departures often cost the hotel money
because they must be offset by last-minute walk-ins, which may not always
materialize. This problem is common for business hotels (as contrasting with drive-by
motels which receive a lot of walk-ins), thus resulting in empty rooms on the third and
fourth nights. A ?nal point is that the policy on early departures was made known to
all hotel guests upon check in.
Question 2: speaking as Minnie DeCosta, Corporate Meeting Planner for the New
Horizon Corporation
While late cancellation and no-show policies are customary and well known, policies on
early departure are not universal. Perhaps, the hotel might be more accommodating
under the circumstances. On the ?rst night, there were 25 no-shows. The hotel was full
because of overbooking and last-minute walk-ins. Thus, the hotel did not lose room,
food, or beverage revenues either. In fact, charging the company for 25 no-shows on the
?rst night and then collecting from room occupants is double dipping by the hotel.
Night 1 Night 2 Night 3 Night 4 Total bill
Norwest hotel
Available rooms 1,000 1,000 1,000 1,000
Rooms occupied 1,000 990 990 995
New horizon Corp.
Reservations 560 590 585 550
No-shows 25 5 0 0
Early departures 0 0 5 10
Walks 10 0 0 0
Rooms occupied
a
525 560 550 505
Bill
b
$66,000 $67,800 $66,375 $61,350 $261,525
Notes:
a
Reservations – cumulative no-shows – cumulative early departures – walks;
b
(rooms
occupied þ no-shows on night) £ $120 þ (early departures on day) £ $75. On Night 1, the bill should
be (525 þ 25) £ $120 ¼ $66,000; on Night 2, the bill should be (560 þ 5) £ $120 ¼ $67,800; on Night 3,
the bill should be (550) £ $120 £ 5 £ $75 ¼ $66,375; on Night 4, the bill should be (505) £ $120 þ
10 £ $75 ¼ $61,350
Table I.
New horizon room bill
calculations
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Also, note that state laws do not allow for the collection of taxes on services not
rendered.
On the ?rst night, ten meeting attendees were walked in spite of their long-standing
reservations. While they were treated well, staying away from the meeting place was
an inconvenience for them as well as for the New Horizon Company (thanks by the way
for re-directing corporate messages meant for the ten displaced guests who were
walked to other hotels).
Regarding the early departures, three were in response to family emergencies.
Hotels commonly drop the early departure charges in such cases. Also, since the hotel
ended up with only ?ve empty rooms on the fourth night of our meeting, justifying the
early departure charges for all ten rooms is dif?cult.
Question 3: speaking as an impartial observer arbitrating a fair solution
Given the perishable nature of hotel capacity, rooms not occupied due to late
cancellations, no-shows, or early departures usually cause a loss in revenue that cannot
be recovered later. Thus, imposing charges to cover potential losses is reasonable.
Nevertheless, the hotel should encourage repeat business from clients, especially
customers like New Horizon that hold frequent meetings throughout the year.
From the long-term perspective, Norwest Hotel should avoid any appearance of
double dipping, particularly when the meeting attendees were walked on the ?rst
night. On the other hand, the no double dipping rule applies only when a group sales
agreement with attrition clauses exists. One compromise is to split the no-show
charges. Since, some New Horizon employees were walked on the ?rst night, this
charge could be applied fully only on the second night when none were walked. Also,
taxes should not be assessed on no-shows as per state law. Another suggestion is to
forgive early departure charges for the three family emergencies, as is the custom.
Both, the hotel and the company should recognize the value of being reasonable and
maintaining good relations for the sake of future bookings.
Additional training note
One possible pedagogical technique is to allow individuals or groups to play the roles
of Minnie DeCosta and Max Filmore. The rest of the class can then help to determine
the ultimate fair solution.
Part 2
Justin Solomon, Group Sales Manager for the 800-room Plaza Continental Hotel, is
scowling at the numbers on his screen. The Binary Computing Corporation (BCC)
meeting of top of?cers was scheduled for two nights. About 30 days out, the attrition
clause in the group sales agreement called for a ?nal room block of 100 rooms for each
night, resulting in a total guaranteed block of 200 room nights. The company’s
100 of?cers arrived as scheduled, but 20 attendees left one day early when news broke
that the top of?cers were under investigation for back-dating stock options. The result
was an attrition of 20 room nights on the second day.
The American Marketing Association’s (AMA) regional conference was held on
the same two days. About 30 days out, the AMA was responsible for 300 rooms for
each of the two nights, resulting in a guaranteed room block of 600 room nights.
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Only 225 conference attendees showed up for the conference with no early departures,
so the total attrition was 75 £ 2 ¼ 150 room nights over the two days.
On the second night, the hotel was not booked fully. At checkout time, the hotel still
had 20 unreserved rooms for that night, plus the 95 un?lled rooms from the two
meetings. Fortunately, 30 days out, Justin realized, based on the AMA’s historical
pro?le of past conferences, the room pick up rate was behind schedule. Fearing
attrition, he started selling into the room block. On the conference’s second day, the
hotel experienced an unusually large number of evening walk-ins, so Justin ?lled 60 of
the 115 empty rooms. Justin had been savvy enough to include attrition clauses in his
contracts for both meetings. Surprisingly, neither meeting planner had insisted that her
organization get ?rst credit for resold rooms. Both contracts did specify that there
would be no double dipping, but the last sale rule applied. The conundrum for Justin is
how to justly apportion the attrition between the two groups on the second day when
attrition occurred for both groups (20 room nights for BCC and 75 room-nights for the
AMA). Alternatively, based on the last sale rule, of the 60 resold rooms, only 40 can be
credited toward the combined attrition of 95 rooms. Thus, 55 net attrited rooms have to
be apportioned between BCC and the AMA.
Dilemma
How should Justin apportion the attrition on the second night between BCC and the
AMA? Should Justin try to allocate the 40 resold rooms between the two groups, or
should he try to allocate the 55 net room nights that went into attrition between them?
If yes, what method of allocation should he use?
Solution
Developing a fair solution requires a number of steps. First, the criteria for a fair and
productive allocation must be outlined. Second, based on these criteria, a workable
approach should be selected – allocate the resold rooms or allocate the empty rooms.
Third, the various methods for allocation and how each alternative meets the stated
criteria should be discussed. Finally, a recommendation of the fairest and most
productive allocation method is made.
Criteria
The chosen allocation method should have several desirable results. First, the
allocation method should provide incentives for both groups to try to ?ll their room
blocks and to avoid attrition. Attrition is troublesome for the hotel to collect, as well as
expensive for the defaulting groups. Second, groups with more un?lled rooms should
pay a higher attrition fee. Third, the allocation method should not result in an
allocation of resold rooms greater than the actual amount of rooms attrited by the
group. Fourth, the allocation method should honor the no double dipping clause. All
resold rooms should be distributed, subject of course, to the last sale rule. Fifth, the
method should be easy to explain to the competing clients, and should be pleasing.
Preferred approach
An approach that allocates resold rooms rather than empty rooms is recommended.
This alternative allows managers to start from the full amount of the liquidated
damages arising from the empty rooms. This baseline should be mitigated by
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distributing the resold rooms in compliance with the no double dipping clause. Using
sensitivity analysis, allocating empty rooms may result in assigning more unsold
rooms to a group than the actual number of rooms that they did not ?ll, obviously
ludicrous.
Allocation methods
Here are six possible allocation methods for the resold rooms:
(1) distribute all resold rooms equally between the two groups;
(2) give all the resold rooms to the group with the better show up performance;
(3) distribute the resold rooms in proportion to the pick up percentage during the
day in question;
(4) credit each group in proportion to the number of room nights blocked
throughout the meeting;
(5) distribute the resold rooms according to the percentage blocked by each group
relative to the hotel capacity; and
(6) credit each group in proportion to the number of rooms occupied during the
entire meeting period.
Allocation by methods
Recall that the hotel has a capacity of 800 rooms. BCC booked 100 rooms on each night
for a total of 200 room nights over the two-day meeting period. The 20 un?lled rooms
on the second night represent an 80/100 ¼ 80 percent pick up rate. AMA booked
300 rooms on each night for a total of 600 room nights over the two-day meeting period.
The 75 un?lled rooms on the second night represent a 225/300 ¼ 75 percent pick up
rate. According to the last sale rule, the hotel resold 40 of the empty rooms. Which of
the six methods of allocating the 40 resold rooms between BCC and the AMA best
satis?es the ?ve decision criteria?
Method 1. Credit BCC and AMA equally, thus each group will get 20 resold rooms.
This method credits the resold rooms equally to each group. While this alternative is
easy to explain, Method 1 is not fair. Bigger groups should get more resold rooms
because they occupy more of the hotel. Besides, this method does not provide
incentives for the groups to ?ll up their blocks. Also, equal allocation may lead to the
ludicrous result of crediting more resold rooms to a small group than originally
attrited.
Method 2. Since, the second night’s pickup performance of BCC (80 percent) was
better than AMA’s (75 percent), BCC receives all 40 resold rooms. This method gives all
the resold rooms to the group with the better show up record. While this alternative
sounds fair, easy to explain, and provides incentives for groups to pick up their room
blocks, this action may credit more resold rooms to small groups than their number of
empty rooms due to attrition. In this case, crediting BCC with all 40 resold rooms more
than compensates for the organization’s 20 empty rooms.
Method 3. BCC had a pick up of 80 percent on the second night while AMA had
75 percent, so BCC should get (80/155) £ 40 ¼ 21 of the resold rooms. AMA receives
the other 19 rooms. This method proportionately distributes the resold rooms based on
pick up percentage. This alternative seems fair and provides an incentive for groups to
?ll up their blocks. Also, the group charged with more un?lled rooms pays a
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higher attrition fee. All resold rooms are distributed after the last sale rule applies.
Method 3 abides by the no double dipping clause; however, small groups may end up
with a disproportionate number of resold rooms. Also, resold room numbers allocated
to groups may exceed the number of empty rooms each one is responsible for. In this
case, BCC ends up with 21 of the unsold rooms, one more than the organization’s
original responsibility.
Method 4. BCC and the AMA blocked 200 and 600 room nights, respectively. Thus,
BCC should get (200/800) £ 40 ¼ 10 of the resold rooms and AMA should get the
other 30, according to their respective percentage of rooms booked. This method
distributes the resold rooms proportionately based on the hotel’s total capacity blocked
during the meeting. This alternative seems fair because the bigger group used more of
the hotel’s room capacity with guaranteed payment. Also, a small group should not get
more resold rooms than attrited. Unfortunately, this method does not directly reward
pick up performance.
Method 5. BCC had blocked 100/800 ¼ 12.5 percent of the hotel capacity on the
second night, so this organization is entitled to 0.125 £ 40 ¼ 5 of the resold rooms.
AMA blocked 300/800 ¼ 37.5 percent of the hotel capacity on the second night,
so this organization is entitled to 0.375 £ 40 ¼ 15 of the resold rooms.
Method 5 distributes the resold rooms according to the proportion of the total hotel
capacity booked. This alternative may not fully allocate the resold rooms and may lead
to violating the no double dipping clause, which is unacceptable.
Method 6. BCC picked up 180 rooms in total while AMA picked up 450. Thus, BCC
receives (180/630) £ 40 ¼ 11 of the resold rooms and AMA gets the other 29 based on
the proportionate number of rooms occupied throughout the meeting period. Resold
rooms are distributed according to the number of rooms picked up by each group during
the entire meeting period. This method rewards the groups according to performance
(minimizing attrition) as well as the volume of business generated. Groups with
more empty rooms are penalized. Furthermore, this alternative will not result in double
dipping, since all resold rooms are fully allocated. Although dif?cult to compute and
explain to the defaulting clients, Method 6 is the best alternative. Groups are
encouraged to ?ll up their roomblocks, and the hotel’s best customers are rewarded. For
the second night, BCC should pay liquidated damages associated with 20 2 11 ¼ 9
empty rooms, while AMA should be charged for 75-29 ¼ 46 empty rooms. This
method also ensures that all 55 net attrited rooms on the second night have been
allocated. However, one must be cautioned that reallocating resold rooms may lead to
giving more resold rooms to a group than its number of attrited rooms, especially when
the attrition rate is very low. Whenever this event occurs, one must observe the rule that
the number of resold rooms allocated to any group must not exceed the number of rooms
attrited. The excess rooms must then be credited to the other group.
Conclusions
The two exercises show the complexity of resolving charges related to late
cancellations, no-shows, early departures, un?lled room blocks, and overbooking and
walks. In the hospitality industry, there are no “right” answers to the inter-related
problems associated with non-performance. Both, good judgment and a willingness to
compromise with a fair and just solution are necessary to preserve goodwill and
maintain mutually pro?table relationships.
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References
DeKay, F., Yates, B.M. and Toh, R.S. (2004), “Non-performance penalties in the hotel industry”,
International Journal of Hospitality Management, Vol. 23, pp. 273-86.
Toh, R.S. and DeKay, F. (2002), “Hotel room inventory management: an overbooking model”,
Cornell Hotel & Restaurant Administration Quarterly, Vol. 43 No. 4, pp. 79-90.
Toh, R.S., DeKay, F. and Lasprogata, G. (2005a), “Attrition clauses: outstanding issues and
recommendations for meeting planners”, International Journal of Hospitality Management,
Vol. 24, pp. 107-19.
Toh, R.S., DeKay, F. and Yates, B.M. (2005b), “Independent meeting planners: roles,
compensation, and potential con?icts”, Cornell Hotel & Restaurant Administration
Quarterly, Vol. 46 No. 4, pp. 431-43.
Toh, R.S., Foster, T. and Peterson, D. (2006), “Reducing meeting costs: consolidation vs.
outsourcing”, Tourism Analysis, Vol. 11 No. 2, pp. 133-6.
Toh, R.S., Peterson, D. and Foster, T. (2007), “Contrasting approaches of corporate and
association meeting planners: how the hospitality industry should approach them
differently”, International Journal of Tourism Research, Vol. 9, pp. 43-50.
Toh, R.S., Rivers, M.J. and Ling, T. (2005c), “Room occupancies in the cruise industry: cruise lines
out-do the hotels”, International Journal of Hospitality Management, Vol. 24, pp. 121-35.
Corresponding author
Rex S. Toh can be contacted at: [email protected]
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doc_703666317.pdf
The aim of the paper is to help graduate students in the area of hospitality management to
understand and deal with non-performance charges and attrition issues.
International Journal of Culture, Tourism and Hospitality Research
Executive training exercises in non-performance and attrition charges in the hospitality
industry
Rex S. Toh Barbara M. Yates Frederick DeKay
Article information:
To cite this document:
Rex S. Toh Barbara M. Yates Frederick DeKay, (2007),"Executive training exercises in non-performance
and attrition charges in the hospitality industry", International J ournal of Culture, Tourism and Hospitality
Research, Vol. 1 Iss 4 pp. 281 - 288
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Executive training exercises
in non-performance and attrition
charges in the hospitality industry
Rex S. Toh, Barbara M. Yates and Frederick DeKay
Department of Marketing, Albers School of Business and Economics,
Seattle University, Seattle, Washington, USA
Abstract
Purpose – The aim of the paper is to help graduate students in the area of hospitality management to
understand and deal with non-performance charges and attrition issues.
Design/methodology/approach – The paper uses case studies to illustrate the issues that must be
resolved.
Findings – There are many ways to look at issues – from the hotel’s perspective, from the customer’s
viewpoint, and from an independent observer’s position.
Originality/value – This training exercise highlights the complicated issues surrounding
non-performance charges and attrition issues, and suggests ways in which they can be fairly
resolved to the mutual satisfaction of all parties to preserve goodwill all around.
Keywords Hospitality management, Graduates, Training
Paper type Case study
Introduction
The most distinguishing aspect of the hospitality industry is that room inventory is
perishable, together with conference halls, banquet facilities, parking, and other support
services. Room inventory’s perishable nature permeates the mindset of hotel managers,
who struggle with late cancellations, no-shows, early departures, and the possibility of
groups not picking up their room blocks. To hedge against these uncertainties, room
managers overbook hotels, which leads to oversales and walks (sending displaced
guests to other hotels), especially if some stay-overs do not leave on the expected
departure date.
Room bookings usually require credit card guarantees. If the reservations are not
cancelled with at least 24 hours of notice, customers are charged for the ?rst night’s
room rate, plus taxes if applicable. Also, some hotels impose early departure charges of
about $75 if guests leave before their expected departure date. Groups of ten or more
managed by corporate meeting planners, association meeting planners, or independents
typically sign group sales agreements with attrition clauses, essentially committing the
groups to picking up their room blocks. As a result, these agents have legal obligations
to pay the hotels or cruise lines liquidated damages for a revenue shortfall.
Previous studies discuss these complex issues in detail (DeKay et al., 2004; Toh and
DeKay, 2002; Toh et al., 2005a, b, c; Toh et al., 2006; Toh et al., 2007). One area issue that
requires additional clari?cation is non-performance charges. The purpose of this paper
is to provide further insights on issues related to non-performance charges on individual
and attrition charges directed at groups, as assessed by hotels and cruise lines.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1750-6182.htm
Executive
training
exercises
281
Received March 2007
Revised April 2007
Accepted June 2007
International Journal of Culture,
Tourism and Hospitality Research
Vol. 1 No. 4, 2007
pp. 281-288
qEmerald Group Publishing Limited
1750-6182
DOI 10.1108/17506180710824163
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Part 1 deals with non-performance charges on individuals and Part 2 deals with attrition
charges directed at groups. Evidence presented shows how these charges can
be calculated from different viewpoints (the hotels and the guests). Using different
computation methods, complex issues are discussed, as well as howthey can be resolved
fairly and productively to preserve goodwill all around.
Part 1
Both Minnie DeCosta, Corporate Meeting Planner for New Horizon Corporation, and
Max Filmore, Room Manager for Norwest Hotel, sat in their respective of?ces
reviewing data on the recently concluded meeting the company held at the hotel. The
records show evidence of some no-shows and early departures. Also, some attendees
were walked on the ?rst night of the meeting. Both managers pondered how to
compute the related non-performance charges that might be levied, and what the total
bill ought to be. Max wanted to maximize room revenue for the hotel while Minnie
wanted to minimize the cost to the company. As an independent observer, what do you
think is the fairest amount to maintain goodwill between both parties?
Minnie booked 560, 590, 585, and 550 rooms on each of four nights at a discounted
room rate of $120 per night at the 1,000-room Norwest Hotel in Chicago for a strategic
planning meeting of key employees of New Horizon, a large media company. A group
sales agreement with attrition clauses was not signed, so no room block existed. Owing
to travel dif?culties or sudden changes in plans for some attendees, 25 late
cancellations and no-shows occurred on the ?rst night and ?ve on the second night of
the meeting. In addition, there were ?ve early departures on the third night and an
additional ten on the fourth night. Three of the early departure cases were due to
family emergencies.
The Norwest Hotel has a well publicized policy of requiring payment of the ?rst
night’s roomrate (including taxes) for any reservation not cancelled by at least 24 hours
before 6.00 p.m. of the day of arrival. Norwest also informed guests at check-in that it
would assess a charge of $75 for early departures before the expected departure date.
Since, the hotel normally expects a no-show rate of 5 percent or more, Norwest accepts
more reservations than the hotel has rooms. In this case, Norwest overbooked by
40 rooms for each of the four nights during New Horizon’s meeting. Since, there were
only 25 no-shows on the ?rst night of the meeting, 15 guests with reservations
were walked (denied accommodation and sent to other hotels), including ten attendees
of the New Horizon meeting. All of the walked guests received free rooms at nearby
hotels with free-cab rides and breakfasts included. New Horizon’s ten walked guests all
returned to the Norwest Hotel on the second night, and were given courtesy room
upgrades. On the second, third, and fourth nights, the hotel ?lled 990, 990, and
995 rooms, respectively.
Issues
(1) Assuming the role of Max Filmore, how would you maximize the
non-performance charges and accommodation costs to be paid by New
Horizon to Norwest Hotel, and how would you justify your case?
(2) Assuming the role of Minnie DeCosta, how would you minimize the
non-performance charges and overall accommodation costs to be paid by
New Horizon to Norwest Hotel, and how would you justify your case?
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(3) As an impartial observer, what solution would you recommend as the fairest to
both the company and the hotel to maintain goodwill all around?
Question 1: speaking as Max Filmore, Room Manager for Norwest Hotel
From the perspective of the hotel, the total room bill including non-performance
charges for New Horizon Corporation for all four nights should be $261,525, plus taxes.
Table I illustrates the calculations. The total bill for all four nights including
non-performance penalties is calculated at $261,525, plus taxes.
The 25 no-shows on the ?rst night are charged the ?rst night’s room rate plus taxes,
in spite of the ten walks, because walks are not charged. The policy of charging for late
cancellations and no-shows is well publicized and is customary in the hospitality
industry, thus charging for the ?rst night is reasonable and expected. Note that losses
are not easy to make up for subsequent nights as well. Often, last-minute available
rooms must be sold at a discount. The 25 no-shows from the ?rst night are not charged
on the second and subsequent nights. Also, early departures often cost the hotel money
because they must be offset by last-minute walk-ins, which may not always
materialize. This problem is common for business hotels (as contrasting with drive-by
motels which receive a lot of walk-ins), thus resulting in empty rooms on the third and
fourth nights. A ?nal point is that the policy on early departures was made known to
all hotel guests upon check in.
Question 2: speaking as Minnie DeCosta, Corporate Meeting Planner for the New
Horizon Corporation
While late cancellation and no-show policies are customary and well known, policies on
early departure are not universal. Perhaps, the hotel might be more accommodating
under the circumstances. On the ?rst night, there were 25 no-shows. The hotel was full
because of overbooking and last-minute walk-ins. Thus, the hotel did not lose room,
food, or beverage revenues either. In fact, charging the company for 25 no-shows on the
?rst night and then collecting from room occupants is double dipping by the hotel.
Night 1 Night 2 Night 3 Night 4 Total bill
Norwest hotel
Available rooms 1,000 1,000 1,000 1,000
Rooms occupied 1,000 990 990 995
New horizon Corp.
Reservations 560 590 585 550
No-shows 25 5 0 0
Early departures 0 0 5 10
Walks 10 0 0 0
Rooms occupied
a
525 560 550 505
Bill
b
$66,000 $67,800 $66,375 $61,350 $261,525
Notes:
a
Reservations – cumulative no-shows – cumulative early departures – walks;
b
(rooms
occupied þ no-shows on night) £ $120 þ (early departures on day) £ $75. On Night 1, the bill should
be (525 þ 25) £ $120 ¼ $66,000; on Night 2, the bill should be (560 þ 5) £ $120 ¼ $67,800; on Night 3,
the bill should be (550) £ $120 £ 5 £ $75 ¼ $66,375; on Night 4, the bill should be (505) £ $120 þ
10 £ $75 ¼ $61,350
Table I.
New horizon room bill
calculations
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Also, note that state laws do not allow for the collection of taxes on services not
rendered.
On the ?rst night, ten meeting attendees were walked in spite of their long-standing
reservations. While they were treated well, staying away from the meeting place was
an inconvenience for them as well as for the New Horizon Company (thanks by the way
for re-directing corporate messages meant for the ten displaced guests who were
walked to other hotels).
Regarding the early departures, three were in response to family emergencies.
Hotels commonly drop the early departure charges in such cases. Also, since the hotel
ended up with only ?ve empty rooms on the fourth night of our meeting, justifying the
early departure charges for all ten rooms is dif?cult.
Question 3: speaking as an impartial observer arbitrating a fair solution
Given the perishable nature of hotel capacity, rooms not occupied due to late
cancellations, no-shows, or early departures usually cause a loss in revenue that cannot
be recovered later. Thus, imposing charges to cover potential losses is reasonable.
Nevertheless, the hotel should encourage repeat business from clients, especially
customers like New Horizon that hold frequent meetings throughout the year.
From the long-term perspective, Norwest Hotel should avoid any appearance of
double dipping, particularly when the meeting attendees were walked on the ?rst
night. On the other hand, the no double dipping rule applies only when a group sales
agreement with attrition clauses exists. One compromise is to split the no-show
charges. Since, some New Horizon employees were walked on the ?rst night, this
charge could be applied fully only on the second night when none were walked. Also,
taxes should not be assessed on no-shows as per state law. Another suggestion is to
forgive early departure charges for the three family emergencies, as is the custom.
Both, the hotel and the company should recognize the value of being reasonable and
maintaining good relations for the sake of future bookings.
Additional training note
One possible pedagogical technique is to allow individuals or groups to play the roles
of Minnie DeCosta and Max Filmore. The rest of the class can then help to determine
the ultimate fair solution.
Part 2
Justin Solomon, Group Sales Manager for the 800-room Plaza Continental Hotel, is
scowling at the numbers on his screen. The Binary Computing Corporation (BCC)
meeting of top of?cers was scheduled for two nights. About 30 days out, the attrition
clause in the group sales agreement called for a ?nal room block of 100 rooms for each
night, resulting in a total guaranteed block of 200 room nights. The company’s
100 of?cers arrived as scheduled, but 20 attendees left one day early when news broke
that the top of?cers were under investigation for back-dating stock options. The result
was an attrition of 20 room nights on the second day.
The American Marketing Association’s (AMA) regional conference was held on
the same two days. About 30 days out, the AMA was responsible for 300 rooms for
each of the two nights, resulting in a guaranteed room block of 600 room nights.
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Only 225 conference attendees showed up for the conference with no early departures,
so the total attrition was 75 £ 2 ¼ 150 room nights over the two days.
On the second night, the hotel was not booked fully. At checkout time, the hotel still
had 20 unreserved rooms for that night, plus the 95 un?lled rooms from the two
meetings. Fortunately, 30 days out, Justin realized, based on the AMA’s historical
pro?le of past conferences, the room pick up rate was behind schedule. Fearing
attrition, he started selling into the room block. On the conference’s second day, the
hotel experienced an unusually large number of evening walk-ins, so Justin ?lled 60 of
the 115 empty rooms. Justin had been savvy enough to include attrition clauses in his
contracts for both meetings. Surprisingly, neither meeting planner had insisted that her
organization get ?rst credit for resold rooms. Both contracts did specify that there
would be no double dipping, but the last sale rule applied. The conundrum for Justin is
how to justly apportion the attrition between the two groups on the second day when
attrition occurred for both groups (20 room nights for BCC and 75 room-nights for the
AMA). Alternatively, based on the last sale rule, of the 60 resold rooms, only 40 can be
credited toward the combined attrition of 95 rooms. Thus, 55 net attrited rooms have to
be apportioned between BCC and the AMA.
Dilemma
How should Justin apportion the attrition on the second night between BCC and the
AMA? Should Justin try to allocate the 40 resold rooms between the two groups, or
should he try to allocate the 55 net room nights that went into attrition between them?
If yes, what method of allocation should he use?
Solution
Developing a fair solution requires a number of steps. First, the criteria for a fair and
productive allocation must be outlined. Second, based on these criteria, a workable
approach should be selected – allocate the resold rooms or allocate the empty rooms.
Third, the various methods for allocation and how each alternative meets the stated
criteria should be discussed. Finally, a recommendation of the fairest and most
productive allocation method is made.
Criteria
The chosen allocation method should have several desirable results. First, the
allocation method should provide incentives for both groups to try to ?ll their room
blocks and to avoid attrition. Attrition is troublesome for the hotel to collect, as well as
expensive for the defaulting groups. Second, groups with more un?lled rooms should
pay a higher attrition fee. Third, the allocation method should not result in an
allocation of resold rooms greater than the actual amount of rooms attrited by the
group. Fourth, the allocation method should honor the no double dipping clause. All
resold rooms should be distributed, subject of course, to the last sale rule. Fifth, the
method should be easy to explain to the competing clients, and should be pleasing.
Preferred approach
An approach that allocates resold rooms rather than empty rooms is recommended.
This alternative allows managers to start from the full amount of the liquidated
damages arising from the empty rooms. This baseline should be mitigated by
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distributing the resold rooms in compliance with the no double dipping clause. Using
sensitivity analysis, allocating empty rooms may result in assigning more unsold
rooms to a group than the actual number of rooms that they did not ?ll, obviously
ludicrous.
Allocation methods
Here are six possible allocation methods for the resold rooms:
(1) distribute all resold rooms equally between the two groups;
(2) give all the resold rooms to the group with the better show up performance;
(3) distribute the resold rooms in proportion to the pick up percentage during the
day in question;
(4) credit each group in proportion to the number of room nights blocked
throughout the meeting;
(5) distribute the resold rooms according to the percentage blocked by each group
relative to the hotel capacity; and
(6) credit each group in proportion to the number of rooms occupied during the
entire meeting period.
Allocation by methods
Recall that the hotel has a capacity of 800 rooms. BCC booked 100 rooms on each night
for a total of 200 room nights over the two-day meeting period. The 20 un?lled rooms
on the second night represent an 80/100 ¼ 80 percent pick up rate. AMA booked
300 rooms on each night for a total of 600 room nights over the two-day meeting period.
The 75 un?lled rooms on the second night represent a 225/300 ¼ 75 percent pick up
rate. According to the last sale rule, the hotel resold 40 of the empty rooms. Which of
the six methods of allocating the 40 resold rooms between BCC and the AMA best
satis?es the ?ve decision criteria?
Method 1. Credit BCC and AMA equally, thus each group will get 20 resold rooms.
This method credits the resold rooms equally to each group. While this alternative is
easy to explain, Method 1 is not fair. Bigger groups should get more resold rooms
because they occupy more of the hotel. Besides, this method does not provide
incentives for the groups to ?ll up their blocks. Also, equal allocation may lead to the
ludicrous result of crediting more resold rooms to a small group than originally
attrited.
Method 2. Since, the second night’s pickup performance of BCC (80 percent) was
better than AMA’s (75 percent), BCC receives all 40 resold rooms. This method gives all
the resold rooms to the group with the better show up record. While this alternative
sounds fair, easy to explain, and provides incentives for groups to pick up their room
blocks, this action may credit more resold rooms to small groups than their number of
empty rooms due to attrition. In this case, crediting BCC with all 40 resold rooms more
than compensates for the organization’s 20 empty rooms.
Method 3. BCC had a pick up of 80 percent on the second night while AMA had
75 percent, so BCC should get (80/155) £ 40 ¼ 21 of the resold rooms. AMA receives
the other 19 rooms. This method proportionately distributes the resold rooms based on
pick up percentage. This alternative seems fair and provides an incentive for groups to
?ll up their blocks. Also, the group charged with more un?lled rooms pays a
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higher attrition fee. All resold rooms are distributed after the last sale rule applies.
Method 3 abides by the no double dipping clause; however, small groups may end up
with a disproportionate number of resold rooms. Also, resold room numbers allocated
to groups may exceed the number of empty rooms each one is responsible for. In this
case, BCC ends up with 21 of the unsold rooms, one more than the organization’s
original responsibility.
Method 4. BCC and the AMA blocked 200 and 600 room nights, respectively. Thus,
BCC should get (200/800) £ 40 ¼ 10 of the resold rooms and AMA should get the
other 30, according to their respective percentage of rooms booked. This method
distributes the resold rooms proportionately based on the hotel’s total capacity blocked
during the meeting. This alternative seems fair because the bigger group used more of
the hotel’s room capacity with guaranteed payment. Also, a small group should not get
more resold rooms than attrited. Unfortunately, this method does not directly reward
pick up performance.
Method 5. BCC had blocked 100/800 ¼ 12.5 percent of the hotel capacity on the
second night, so this organization is entitled to 0.125 £ 40 ¼ 5 of the resold rooms.
AMA blocked 300/800 ¼ 37.5 percent of the hotel capacity on the second night,
so this organization is entitled to 0.375 £ 40 ¼ 15 of the resold rooms.
Method 5 distributes the resold rooms according to the proportion of the total hotel
capacity booked. This alternative may not fully allocate the resold rooms and may lead
to violating the no double dipping clause, which is unacceptable.
Method 6. BCC picked up 180 rooms in total while AMA picked up 450. Thus, BCC
receives (180/630) £ 40 ¼ 11 of the resold rooms and AMA gets the other 29 based on
the proportionate number of rooms occupied throughout the meeting period. Resold
rooms are distributed according to the number of rooms picked up by each group during
the entire meeting period. This method rewards the groups according to performance
(minimizing attrition) as well as the volume of business generated. Groups with
more empty rooms are penalized. Furthermore, this alternative will not result in double
dipping, since all resold rooms are fully allocated. Although dif?cult to compute and
explain to the defaulting clients, Method 6 is the best alternative. Groups are
encouraged to ?ll up their roomblocks, and the hotel’s best customers are rewarded. For
the second night, BCC should pay liquidated damages associated with 20 2 11 ¼ 9
empty rooms, while AMA should be charged for 75-29 ¼ 46 empty rooms. This
method also ensures that all 55 net attrited rooms on the second night have been
allocated. However, one must be cautioned that reallocating resold rooms may lead to
giving more resold rooms to a group than its number of attrited rooms, especially when
the attrition rate is very low. Whenever this event occurs, one must observe the rule that
the number of resold rooms allocated to any group must not exceed the number of rooms
attrited. The excess rooms must then be credited to the other group.
Conclusions
The two exercises show the complexity of resolving charges related to late
cancellations, no-shows, early departures, un?lled room blocks, and overbooking and
walks. In the hospitality industry, there are no “right” answers to the inter-related
problems associated with non-performance. Both, good judgment and a willingness to
compromise with a fair and just solution are necessary to preserve goodwill and
maintain mutually pro?table relationships.
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References
DeKay, F., Yates, B.M. and Toh, R.S. (2004), “Non-performance penalties in the hotel industry”,
International Journal of Hospitality Management, Vol. 23, pp. 273-86.
Toh, R.S. and DeKay, F. (2002), “Hotel room inventory management: an overbooking model”,
Cornell Hotel & Restaurant Administration Quarterly, Vol. 43 No. 4, pp. 79-90.
Toh, R.S., DeKay, F. and Lasprogata, G. (2005a), “Attrition clauses: outstanding issues and
recommendations for meeting planners”, International Journal of Hospitality Management,
Vol. 24, pp. 107-19.
Toh, R.S., DeKay, F. and Yates, B.M. (2005b), “Independent meeting planners: roles,
compensation, and potential con?icts”, Cornell Hotel & Restaurant Administration
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Corresponding author
Rex S. Toh can be contacted at: [email protected]
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