Surge Protection Is Needed
|by Robert Mandelbaum
March 2004 - Everyone in the hotel industry understands how cyclical their business is. Every ten years or so, the industry falls into a recession, followed by years of recovery, then periods of prosperity. Therefore, hotel managers tend to be very adept at adjusting to external factors beyond their immediate control.
One such external factor over which hotel managers appear to have minimal control is the cost of utilities. While hotels have incorporated energy conservation practices into their operating policies, they still have little influence on the pricing of utilities charged by their local municipality. When faced with increases in utility costs, hotels have to bear the brunt of these increases.
To analyze movements in hotel utility costs and how they have affected
U.S. hotels, we analyzed data from our Trends in the Hotel Industry database
for the period 1990 through our estimates for 2003. What we found
was an expense item that has increased and decreased on a tight cyclical
basis. Almost every three years, it appears that hotel utility costs
show relatively dramatic increases, remain flat, or post declines.
Fixed Or Variable
For most industry participants, utility costs are perceived to be largely fixed and immune to movements in business volume. The local municipality controls the pricing, and hotels are faced with a set of minimum energy requirements for keeping unused guest rooms and publics areas air conditioned and heated.
Despite the appearance of being heavily fixed, hotel utility costs have moved almost in sync with hotel revenues. Our analysis shows that utility expenses have risen at a compound annual rate of 2.5 percent from 1990 through the end of 2003, compared to 2.7 percent for total revenue during the same period. Given such similar growth rates, hotel utility costs have consistently ranged from 3.5 to 4.5 percent of total revenue. What this implies is that hotel managers can, and have, adjusted their energy costs in proportion to increases and decreases in revenue.
Timing Is Everything
For U.S. hotels, utility costs spiked in 1993, 1996, and 2000. Fortunately, these “spikes” occurred during periods generally considered to be recovery (1993) or peak performance (1996 and 2000) years. Therefore, improved revenues have historically helped to mitigate the negative effects of dramatic increases in utility costs.
On the other hand, the increases in utility costs that have occurred in 2001 and 2003 could not have happened at a worse time. The 7.0 percent and 7.6 percent annual increases in utility costs for 2001 and 2003, respectively, were among the greatest increases in the past 13 years.
Not only have utility costs been one of the few expenses to increase in the past two years (the other being insurance), these increases have occurred coincident with 9.9 and 0.2 percent declines in hotel revenue. Benefiting hotels was an “un-cyclical” decline in energy costs that occurred in 2002. During that year, utility costs fell 5.5 percent, therefore softening the effects of a 4.0 percent decline in revenue.
Costs Vary By Property Type
As expected, those property types with the most extensive facilities incur the greatest utility costs when measured on a dollar-per-available-room basis. In 2003, resort hotels averaged an estimated utility cost of $2,497 per available room, followed by convention hotels ($2,113) and conference centers ($2,013). Fortunately, these same property types realized the highest revenues; therefore, utility costs represent a relatively low percentage of total revenue.
At the other end of the spectrum, limited-service ($751) and extended-stay ($766) hotels averaged the lowest utility costs measured on a dollar-per-available-room basis. However, given their lower revenues, utility costs represent a rather stout 4.8 percent of revenues for both of these property types.
Of interest is the fact that the average utility costs for extended-stay hotels are only 2.0 percent more than limited-service hotels. Both property types have relatively limited public space, yet extended-stay rooms have either full kitchens or kitchenettes in their guest rooms. Apparently, guest use of the kitchen equipment is minimal, or the equipment is energy efficient.
For all property types, electricity dominates the utility bills that hotels pay. On average, electricity costs represent 58.4 percent of the total utility charges for U.S. hotels. Resort hotels pay the highest percent of utility costs for electricity, while convention hotels pay the least.
Thankfully, electricity costs have risen at a pace less than other utility costs in the past two years. On the other hand, the increases for gas/fuel charges (the second largest component of utility costs, at 21.1 percent) in 2001 and 2003 have been greater than 23.0 percent each year.
Managers Do React
Given its perception as a “fixed cost”, as well as its relatively low cost as a percent of total revenue, utility expenses usually do not receive significant attention from management. However, when energy cost increases make the news, as they did in the 1970s and again in 2000, or when hotel revenues fall, managers do taken notice and react as best they can to minimize the negative impacts.
Director of Research Information Services
The Hospitality Research Group of PKF Consulting
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
Phone: (404) 842-1150, ext 223
|Also See:||Managing Hotel Labor Costs / PKF Consulting / February 2004|
|The Evolving Relationship Between Hotel Sales Managers and Meeting Planners / What's in the Minds of Meeting Planners Today? / Robert Mandelbaum / January 2004|
|Bed-and-Breakfast and Country Inns Suffer Less than Hotels / Robert Mandelbaum / December 2003|
|PKF Consulting Forecasts 2003 Holiday Season for Hotels; 2003 Performance Will Exceed Levels Achieved in the Year 2000 / PKF / November 2003|
|2003 First Half Hotel Profits Plunge; Average U.S. Hotel Suffered 11.9% Decline in IBFC During the First Six months of 2003 / PKF / October 2003|
|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 Benchmarking Revisited; Bottom-Line Comparisons Among Similar Properties Are the 'Bottom Line' / May 2003|