“I will give you my decision in about a week,” said Georges Villedary, director-general of the Le Centre Sheraton, Montreal, as he put down the phone and looked pensively at the letter before him. The letter, dated March 15, 1994, was from Alitalia requesting a one-year contract for 40 rooms at $42 per night. In addition, the hotel would have to provide a crew allowance of $25,000 per day. Bills are to be paid within seven days of receipt of statement on a weekly basis. The problem facing Georges was a simple one: Does he take Alitalia and fill the 40 rooms for 365 days at $42 or does he refuse the business and hope that he can sell the rooms at the full rack rate of $105.00? Last year he had 115 nights sold out. 

General Background of the Hotel 

Le Centre Sheraton was located in the downtown area of Montreal. It was viewed as a corporate/convention hotel. In 1987 the hotel was named winner of the Canadian Automobile Association “Four Diamond Award” and the “Four Star Award” from the Mobil Travel Guide. The hotel had 824 rooms including the Sheraton Towers—a prestigious five-storey hotel within a hotel. The Towers had its own check-in facilities, lounge, and special amenities. It contained 131 rooms including 16 suites. The balance of the hotel offered a choice of king, queen, and double beds with an additional 24 suites and six rooms specially equipped for people with disabilities. All rooms were equipped with a pay-TV system. 

The hotel operated three restaurants. Le Point de Vue on the 37th floor offered gourmet French cuisine and an exceptional wine list. It had a seating capacity of 84. Le Boulevard on the third floor was open for breakfast, lunch, and dinner and had a seating capacity of 259. La Musette was a Europeanstyle “express” restaurant on the promenade level for people in a hurry. It had a seating capacity of 60. In addition to the restaurants, the hotel had five lounges and 14 function rooms, including a ballroom that would accommodate 1,100 people for banquets and 2,600 people for receptions. Other features of the hotel included a five-storey glassed-in atrium, a glassenclosed year-round pool, and a health club with gymnasium, sauna, whirlpool, and masseuse. There was indoor parking for 500 cars and boutiques and specialty shops on the promenade level. Other services included multilingual staff, and audio-visual services. All meeting rooms had cable-TV outlets, audio-visual facilities, and telephone jacks. 

Competition 

For airline crews, all hotels in the Montreal area were Sheraton’s competitors because airlines choose hotels based on price. Nevertheless, for Alitalia, the criteria for selecting a hotel were slightly different. They preferred four-star hotels located near shopping and entertainment facilities. Hence, the competition was limited to about 10 hotels located in the downtown area. Since all 10 hotels met the Alitalia criteria, the decision would be made on the basis of price and service. Georges was well aware that a number of his competitors had expressed interest in the Alitalia business. He was also aware that if he took the contract and satisfied the Alitalia crew, then he would have more negotiating power when the contract came up for renewal next year (i.e., the room rate could be increased). In the hotel business, it was always easier to renew existing room contracts than to solicit new ones. 

The Proposal 

Sheraton’s target market included all forms of corporate groups, professional associations, and conventions. The Alitalia proposal appeared to be a good opportunity for the Le Centre Sheraton because it guaranteed 40 rooms per night for the entire year plus potential clients from their flights. The contract, if accepted, would require the hotel to have clean rooms available immediately upon check-in; to have on hand $25,000 every day as an allowance for crews and to distribute the allowance as instructed; and to control the crews’ wake-up calls. These services were standard tasks for the Sheraton Centre; however, because of the late departure of aircraft to Europe, check-out time for Alitalia would be between 4:00 p.m. and 6:00 p.m., while the other crews would be arriving sometime between 9:00 p.m. and 10:00 p.m. the same night. This meant the hotel had to keep extra housekeeping staff on duty to have these rooms ready within two to four hours. In addition, when flight schedules were changed, there would be changes in wake-up calls and in the distribution of the allowances. This extra service to the crews would be at the expense of the other guests who were paying the full rack rate. 

Experience with other airlines had shown that airline crews spend less during their stay at a hotel than a regular guest. This was because their usual stay was only one night. If they were grounded for several days, they preferred to explore the city of Montreal, hence food and beverage purchases were often made outside the hotel. 

Sales and Cost Data 

Georges knew he would have to work fast on this proposal, so he called in his assistant Marie Alfieri and asked her to collect all the data required to estimate the additional revenue and costs that would be involved if the hotel decided to accept the Alitalia offer. She began with an analysis of room statistics for the previous year, which showed that if the proposal had been in place, then the number of regular guest rooms lost was equivalent to 115 sold-out nights. An analysis of food and beverage statistics for the previous year showed average food revenue (not including banquets) of $17 per occupied room and average beverage revenue (not including banquets) of $13 per occupied room. The hotel’s standard cost percentage was 36 percent for food and 32 percent for beverages. 

In analyzing the probable effect on operating costs, Marie found that during the period when the hotel was not full they would require the equivalent of one additional front-desk clerk to handle the Alitalia crew. The average hourly wage for this job was $9.20 per hour. Employee benefits were calculated at 35 percent of wage cost. In addition to this cost, Marie estimated the following variable costs per occupied room: 

1. Housekeeping—one half-hour per room. Housekeepers were paid $8.60 per hour. 

2. Laundry and linen—$0.75 per occupied room 

3. Utilities—$1.00 per occupied room 

4. Amenities—$2.25 per occupied room 

With this information in hand, she turned it over to Georges for final analysis and a decision. As Georges sat in his office with the new information supplied by Marie, he remembered a discussion at the recent meeting of general managers of all Sheraton hotels where they were told that one of the company’s objectives for the coming fiscal year was a 12 percent return on investment. He was also very aware of the serious cash-flow problem facing the hotel at that time. Cash flow for the last fiscal year was negative by over $2 million, and with a $50 million long-term mortgage at a floating interest rate and $4.2 million in annual municipal taxes to pay, the Alitalia business promised a steady and certain cash flow every week. 

Required 

As Georges Villedary, what is your decision? Why?