Shock Absorbed by Revenue
|by Robert Mandelbaum, March 2006
Throughout 2005 we all heard the news of oil prices lingering above $50 a barrel and gasoline exceeding $3.00 a gallon. For long-term lodging industry participants, vivid memories of the gas lines and high inflation of the 1970s resurfaced. Understandingly, hotel owners and operators feared that a fall off in travel would cause occupancy to decline, and rising utility costs would kill profits.
Looking back at 2005, it appears that the U.S. lodging industry was able to withstand the spike in energy costs. By year-end 2005, PKF Hospitality Research (PKF-HR) estimates that U.S. hotels enjoyed significant increases in demand that lead to increasing occupancy and record growth in profits.
Based on input from several hotel companies, PKF-HR estimates that the
typical hotel in the U.S. spent 12.0 percent more on utility costs in 2005
versus 2004. This is the largest single year increase in utility
costs since 1981 when energy expenses rose 17.1 percent. During the
year, full-service hotels endured a slightly greater increase (13.0 percent)
compared to limited-service properties (11.0 percent).
By Property Type
Source: PKF Hospitality Research
Fortunately for U.S. hotels, tremendous gains in revenue helped to absorb the rise in utility costs. During 2005, U.S. hotels were able to raise their total revenues by an estimated 10.5 percent. Like the growth in energy costs, the 10.5 percent gain in total revenues is the greatest seen in over 20 years.
For reference purposes, hotel utility costs increased an average of 14.2 percent per year during the energy crisis of the late 1970s. Luckily, total hotel revenues averaged a healthy annual increase of 11.4 percent during that same period, thus limiting the impact on profitability to some degree.
The ability of hotels to tolerate rising energy costs becomes evident
when analyzing utility expenses as a percent of total revenues. From
1970 through 2005, hotel utility expenses have averaged 4.2 percent of
total revenue. During this same period, this ratio has rarely deviated
more than one percentage point from the long-term average.
Percent of Total Revenue
1970 to 2005 Est
Of course, you canít take percentages to the bank. The real impact should be measured based on the potential profit dollars lost. In 2005, a one percentage point change in growth of utility costs would have translated into a savings (or loss) of approximately $17.00 per available room in profits. For a 500-room hotel, the six percentage point increase in the growth rate for utility costs from 2004 to 2005 translates into an estimated $51,000 cut on the bottom-line.
When analyzing the effect of rising energy prices on the hotel industry, PKF-HR breaks it down into direct impacts and indirect impacts. The direct impact on hotels is the rising utility bills previously discussed. The indirect impacts surface with the potential that rising gas prices may have a negative affect consumer travel patterns, as well as the cost of goods purchased by hotels.
On a good note, data from the Travel Industry Association indicates
that gas prices did not cause a decline in the number of trips taken by
Americans in 2005. For the year, domestic leisure travel increased
by four percent, while business travel grew one percent. For hotels
in the nationís major markets, this translated into a 4.7 percent rise
in lodging demand, or a 3.4 percent increase in occupancy.
By Property Type
Source: PKF Hospitality Research
U.S. HOTEL UTILITY COSTS2004
An increase in operating expenses is where we did observe a negative impact on hotels. Total hotel operating expenses, excluding labor and utility costs, increased an estimated 6.8 percent in 2005. This is more than twice the pace of inflation. We have heard from several hotel operators that vendors added fuel surcharges to their invoices in 2005, thus exacerbating increases in the cost of goods, supplies, and services purchased by hotels.
Less Cost Cover In 2006
The Winter 2006 Hotel Outlook report prepared by PKF-HR and Torto Wheaton Research projects a slowdown in the pace of revenue growth for U.S. hotels in the nationís largest cities. The 4.0 percent forecast of RevPAR growth for 2006 percent is more than half the 11.2 percent increase in RevPAR enjoyed during 2005. With rooms revenue comprising approximately 65 percent of the total revenue for the typical U.S. hotel, it can be assumed that total hotel revenue growth will also slow down dramatically in 2006.
Unfortunately for hotel owners and operators, it does not appear that
the energy costs will decelerate to the same degree as hotel revenues in
2006. Forecasts prepared by the Energy Information System show increases
in heating oil and natural gas of approximately 12.5 percent for the year.
The good news is that this is roughly half the pace of 25.3 percent growth
exhibited by these energy sources in 2005. From this data, we can
deduce that the pace of growth for hotel utility costs will also decline
in 2006. However, the growth in hotel utility costs will most likely
continue to be greater than the growth in hotel revenues.
Annual Change -1970 to 2005 Est
Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research. He is located in the firmís Atlanta office.
|Also See:||Double-Digit Profit Growth for U.S. Hotels in 2004 and 2005; Strong Revenue Growth Overcomes Some Expense Concerns / PKF / February 2005|
|Hotel Utility Costs; Surge Protection Is Needed / PKF Consulting / March 2004|