By: Robert Mandelbaum, May, 1997

Despite stagnant occupancy and rising payrolls, hotel managers are able to boost profits through rate increases and enhanced productivity.

Now into its second year of the mature stage of the current business cycle, the U.S. lodging industry continues along a path of stagnation in occupancy, strong growth in average room rates, and tremendous improvements in profitability. The occupancy level for major U.S. cities rose a mere 0.4 percent during the first quarter of 1997, while the average price paid by guests grew 7.8 percent, more than two-and-a-half times the rate inflation during the same period.

Competition Spreads

The pattern of declining occupancies created by increases in the room supply began in 1995 in the South Central region and then spread to the Southeast. Improving economies, affordable and available land, and several years of no new supply editions made these regions fertile for the ensuing explosion of limited-service properties. Looking at the results for the first quarter of 1997, it appears that other cities all across the nation are beginning to show signs of flat or declining occupancy. Although cities like Boston, St. Louis, and Portland don’t exhibit the same development-prone characteristics that drove hotel construction in the southern regions, they are now seeing declines in occupancy caused by increased competition, local economic conditions, or both. As we enter the “in-season” months of 1997 and reach capacity situations in most markets, the number of cities showing flat or declining occupancy from their 1996 performance levels should increase.

Few Bargains To Be Found

Once again, in spite of increased competition, the U.S. lodging industry has taken an aggressive posture in pricing its product and services. While twenty-two of the forty-two markets surveyed by PKF Consulting are showing a decline in occupancy from the first quarter of 1996 to the first quarter of 1997, all but six markets have raised their average room rates above the 2.8 percent inflation mark for the same period. In fact, only one market in the entire survey (San Antonio) showed a decline in the average room rate. Overall, the average room rate for hotels in the major U.S. cities rose 7.8 percent in the first quarter, slightly ahead of the 7.7 percent pace achieved by hotels throughout 1996. Part of this aggressive pricing structure can be attributed to the adoption of more sophisticated marketing plans implemented through automated revenue management systems.

Hoteliers Differ In Profit Growth

Like the rest of the nation’s economy, U.S. hotels are enjoying all-time record growth in profitability. However, the approach and methods used by hoteliers to achieve their improvements in the bottom line differs from other industries.

Overall, the U.S. economy is enjoying a rare mix of low unemployment, low inflation, and improved profits. What makes this combination rare, is that low unemployment typically puts pressure on wages, which in turn forces businesses to raise prices in order to cover the increased cost of production. Fortunately for U.S. business, low unemployment has yet to result in significant increases in wages. With wages remaining steady, and productivity significantly improved, companies are able to improve their bottom lines without significant increases in their prices.

Preliminary results from PKF Consulting’s 1997 edition of Trends In The Hotel Industry show a slightly different route to improved profitability in the hotel industry. Following a more traditional economic model, U.S. hotel managers, faced with wage increases twice the pace of inflation, combined price increases and improved productivity to achieve their improved profitability.

On a per available room basis, the total salaries and wages paid by U.S. hotels rose 6.0 percent from 1995 to 1996. This compares to a national average increase in wages of 3.6 percent for all industries during the same period. However, when measured on a per occupied basis, the total payroll and related costs for hotels actually declined 0.8 percent. In other words, U.S. hotels are paying their workforce more, but achieving more productivity from each employee.

This improvement in productivity allowed for the 7.9 percent increase in hotel revenues to turn into a 17.9 percent increase in hotel operating profits (before capital reserves, rent, debt service, depreciation, and amortization). Preliminary results show that the average operating profit margin grew from 25.0 percent in 1995 to 27.3 percent in 1996. Unlike the early stages of the recovery, when hotel management improved profitability by cutting expenses, today’s managers are maximizing their revenue opportunities and investing in resources that improve revenue and/or productivity.

For additional information contact Robert Mandelbaum at the firm:

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