Profit and ProfPAR Defined
|by Kristin Rohlfs,
Hospitality Research Group of PKF Consulting
April 2003 - An issue developing within the lodging industry is whether or not Profit Per Available Room (ProfPAR) is a better way to measure hotel performance than the well-known Revenue Per Available Room (RevPAR) statistic. Specifically, the main question is – Does RevPAR miss some important economic phenomena that ProfPAR reveals? Arguably, the first steps in gaining insight about the ProfPAR vs. RevPAR debate are to clarify the definition and measurement of profit and to obtain a better understanding of how historical revenue and profit movements differ.
Profit and ProfPAR Defined
Profit may be defined in many ways to address particular business topics. Operating profit from hotels represents the operating decisions made by an owner, or in many cases the management team employed by the owner. As a result, operating profits show how successful managers have been in generating income from property operations. RevPAR however, only reflects rooms revenue, which is heavily influenced by factors managers cannot control, such as business travel and the general economy.
The following definitions of profit measures are
To provide historical perspective on operating profit, we use three samples from our Trends in the Hotel Industry survey, which has been conducted annually for close to 70 years. We examined total revenues, total operating expenses, operating profit, and the operating profit margin for an all-hotel sample, full-service hotels, and limited-service properties. The data in the three samples reflect the average unit-level, dollars per-available room of hotels for which we have 20 years of comprehensive information. 2002 figures have been estimated.
When examining the all-hotels sample, revenues increased over time, with operating expenses logically following due to the variable nature of expenses in the hotel business. However, the gap between revenue and operating expenses is the not constant beginning in the early 1990s. This gap represents operating profit, and the larger and more sustained the gap, the more unit-level managers have controlled operating expenses regardless of total revenue (and RevPAR!). The profit margin line simply translates the operating profit dollars per available room to the percentage of total revenues that falls to operating profit.
The operating profit margin for all-hotels has trended upward since 1991, and peaked at 32.9% in 2000, meaning that almost 33% of the total revenue of a property went straight to the bottom-line. The 2002 operating profit margin is estimated to be 28.1%, which is higher than the operating profit margin generated in 14 of the 20 years studied. This indicates that while we know RevPAR has been declining at rates not seen over the past 15 years, managers have effectively handled operational expenses.
The sample of full-service hotels shows a similar pattern to that of the all-hotels sample. Revenue increases are followed closely by operating expense increases until the early 1990s, when the gap widens and operating profit increases. The operating profit margin for full-service hotels peaked in 2000 at 30.6% and registered an estimated 25.7% in 2002, one of the more operationally challenging years in the past two decades.
Limited-service hotels also show an increasing operating profit over time as the gap between total revenue and total operating expenses has widened. The operating profit margin for limited-service properties peaked in 1997 at 42.6% and registered an estimated 35.6% in 2002.
Operating Profit Insights
High operating profits and profit margins can mean two things: sales are increasing faster than expenses or operating costs are controlled effectively. Based on the data examined by HRG, it appears that both of these explanations apply to the average hotel in each sample. Revenue began to increase in the 1990s and expenses followed at a lower growth rate. However, this discrepancy in revenue and expense growth rates was sustained over a decade, indicating that managers have been effectively controlling costs since the early to mid-1990s.
While we have not delved too deeply into the RevPAR vs. ProfPAR issue, the data suggest that ProfPAR will uncover economic phenomena that RevPAR will not. ProfPAR is based on operating profit, which accounts for movements in both revenues and expenses. Examining a 20-year trend of profit margin illustrates that profit and revenue do not always follow the same trend. As a result, examining unit-level profits is a logical next step in establishing ProfPAR as the industry standard for measuring hotel performance.
Kristin Rohlfs is a Senior Research Associate in the Atlanta office of The Hospitality Research Group of PKF Consulting (HRG).
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|Also See:||Operating Profits for the Average U.S. Hotel Dropped 9.6% in 2002, This After a 19.4% Decline In 2001 / PKF Consulting - HRG Annual Hotel Trends Report / April 2003|
|Hotel Real Estate Transactions During the First Eight Months of 2002 - Way Down, But Not 'Way Different' / PKFConsulting / March 2003|
|RevPAR Decline Only Tells Part Of The Story; Drop In Hotel Profits Is the Real Concern / PKF Consulting / Jan 2003|