“The 10.1 percent growth in profits achieved in 2000 is the strongest we’ve seen since 1997.  It was a result of moderate increases in both occupancy and average daily room rates,” says R. Mark Woodworth, Executive Managing Director of Atlanta-based HRG.  “In 2001, however, we are in an environment of declining occupancies and minimal rate growth.  Under these conditions, it will be extremely challenging for hotel management to maintain their bottom line.”

Based on an estimated 1.2 percent decline in occupancy, together with a 2.4 percent increase in average daily rates (ADR) in 2001, HRG is projecting that the average U.S. hotel will suffer a 5.6 percent decline in operating profits for the year.  Operating profits are defined as income after management fees, property taxes, and insurance, but before capital reserves, rent, interest, income taxes, depreciation, and amortization.

“The ability of hotels to grow their ADR in excess of inflation was the real driver of the record growth in profits during the 1990s,” says Woodworth.  “We’ve had years of declines in occupancy, yet growth in profits was sustained because hotels were able to raise their prices two to three times the pace of inflation.  This year, the decline in occupancy is not being offset by strong ADR growth, and the cost of operating a hotel continues to rise above the pace of inflation.”

Surcharges And Energy Costs

Contributing to the decline in unit-level profitability projected for 2001 is a decline in “other” revenue sources for hotels.  HRG is projecting that the revenues hotels receive from sources such as food, beverage, telephones, and newly instituted surcharges should decline in 2001 by an average of 4.9 percent.

“With fewer guests staying at their properties, hotel owners and operators will also see a decline in the dollars these guests would have spent in the restaurant, lounge, or using the telephone,” explains Robert Mandelbaum, Director of Research Information Services for HRG.  “In addition, those guests who are traveling have much tighter budgets and are looking to economize their other expenditures.”

On the expense side, the well-documented increase in energy costs will also bite into the average hotel’s profitability in 2001.  Based on a separate analysis conducted by HRG, a five percent increase in energy costs would have a negative 0.5 percent impact on the typical hotel’s bottom line.  “With projections of increased utility expenses ranging anywhere from 10 to 20 percent, the additional energy costs could cost the average hotel up to 2.1 percent in lost profits,” says Mandelbaum.

Reversal of Fortune

“So far in 2001, we are seeing an upheaval in the performance of the industry,” notes Mandelbaum.  “Those hotels and markets that performed the best in the 2000 are struggling the most in 2001.  On the other hand, the segments of the industry that were hurting in 2000 are seeing some stability in 2001.”

According to the Trends in the Hotel Industry report, resort hotels enjoyed the greatest increase in profits during 2000 (13.0 percent), followed by convention hotels (12.6 percent) and full-service properties (10.4 percent).  At the other end of the spectrum, all-suite hotels were only able to grow their profits by 5.2 percent, while limited-service hotels actually earned 1.4 percent fewer profits in 2000 compared to 1999.

“During the first half of 2001, the situation has turned completely around,” says Mandelbaum.  “The larger, upper-end, full-service and resort hotels are showing the significant declines in top-line performance.  These declines will most likely lead to a smaller bottom line for the year.  Conversely, the mid-market and limited-service properties, for the most part, are holding their own in the marketplace and should be in a better position to at least maintain their profit levels in 2001.”

Long-Term Perspective

While news of declining profitability is certainly distressing, it should be noted that the U.S. lodging industry is still performing at high levels of profitability compared to long-term averages.  The 30.8 percent operating profit margin estimated by HRG for 2001 is still 6.6 percentage points above the industry average for the past 30 years.  In addition, for the period 1991 through 2000, the typical hotel in the U.S. improved its profitability an average of 11.4 percent annually, or 4.5 times the pace of inflation.

“Despite our gloomy forecast of unit-level profits, it should be noted that most hotels are financially better prepared to face this slump than they have been prior to previous recessions,” says Woodworth.  “Most hotel owners have built up a bit of a cushion after 10 years of strong growth in profits.  In addition, most hotels today stand on a fiscal foundation that is much less leveraged.  We will not see the wholesale bankruptcies that plagued the industry in the late 1980s and early 1990s.”    

The Importance of Benchmarking

“Given the projected declines in revenue, we see the ability to control costs as the primary route to maintain profitability in 2001,” says Jack Corgel Ph.D., Managing Director of Applied Research for HRG.  “For the past 10 years, industry management has focused largely on benchmarking their top-line performance compared to the competition.  Market penetration and RevPAR were the measurements of greatest concern.  Now, the focus has changed.  Our clients have become much more refined in their analysis of operating expenses.  They are demanding from us detailed information regarding industry expense ratios and productivity.  They want to know what the competition is doing to improve their bottom line.”

In response to this increased demand for expense data, HRG introduced its Benchmarker product in 2000.  Benchmarker is a service that allows hotel owners and operators to compare the financial performance of their properties against a select group of comparable properties.  Hotel owners and operators interested in HRG’s Benchmarking products can contact them at (404) 842-1150, ext 237.

The 2001 edition of Trends in the Hotel Industry will be available for purchase later in the summer of 2001.

The Hospitality Research Group (HRG), headquartered in Atlanta, is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry.  HRG, along with PKF Consulting and hotel brokerage affiliate Hospitality Asset Advisors Incorporated, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore.