Earlier this year, the media were flooded with stories of rising gas prices.  This sent a scare through the travel industry at large, and the hotel industry in particular.  Certainly, $2.75 per gallon gasoline and winter fuel shortages would not only cut back the demand for hotel rooms, but would also have a negative impact on operating costs.  Would 2000 – 2001 take hotels back to the energy crises of the 1970s?

Fortunately, it appears that everyone’s worst fears have yet to materialize.  News of increased OPEC oil production has softened the rise in gas prices.  And, as the Travel Industry Association projected, strong consumer confidence has kept people on the roads and in the air.  No drop in U.S. travel can be ascertained from looking at hotel performance statistics for the first half of 2000.  Through those first six months, preliminary reports from The Hospitality Research Group of PKF Consulting show that occupancy in the nation’s major cities is up 1.6% from 1999, while average room rates have risen 5.1%.

Historically, travel tends not to disappear during energy crises, it just changes.  Group travel becomes more popular, and families focus on closer regional destinations.  However, while summer travel remained buoyant, there is still some concern regarding natural gas shortages and price increases this winter.

Having gone a good 10 years with only limited discussion on the topic, we decided to take at look at utility expenses in the hotel industry to measure just how vulnerable the industry is to an energy crises.

Variances By Property Type and Geography

In 1999, the average U.S. hotel spent $1,423 per available room for all utility expenses.  This includes the cost of energy from such sources as electricity, steam, gas, and oil, as well as the charges for water and sewer.  Notably, this figure has been on a decline since a decade high of $1,473 per available room in 1997.

As would be expected, the degree of food and beverage services at a hotel has a significant influence on the amount of energy purchased.  On average, full-service hotels spend almost twice the amount of money on utilities than a comparably sized limited-service property.  Resort and convention hotels, with their extensive banquet, meeting, and recreational facilities, spend the largest amount on utilities.

Analyzing utility expenditures on a regional basis produces some interesting findings.  Utility costs are highest for hotels in the Northeast and Mountain/Pacific regions of the nation.  However, given the relative high room rates charged by hotels in these two regions, utility costs measured as a percent of revenue are the lowest in the nation.

Somewhat surprising is the fact that hotels in the North Central region of the nation pay, on average, the second-lowest amount for utilities.  Given the cold winters experienced in this area, as well as the hit this region took during the early summer gas-pricing crisis, one would expect energy bills closer to those found in the Northeast.

Revenue Growth and Cost Controls

One reason for the relative lack of concern by hotel management for utility expenses is that, currently, they appear to be under control.  A review of utility expense growth during the 1990s shows that hotels have done an excellent job of controlling energy costs.

Utility costs have steadily taken less of a chunk out of hotel revenues throughout the decade.  Measured as a percent of total revenue, utility costs have dropped from a high of 4.7 percent in 1991 and 1993 to a low of 3.4 percent in 1999.

While it is true that the strong 4.8 percent compound annual growth rate (CAGR) for hotel revenues has helped to mask utility expenses as a percent of revenue, a closer look at the actual dollars spent also shows effective cost containment by management.  From 1990 through 1999, utility expenses for the average U.S. hotel increased at a (CAGR) of 1.7 percent.  This compares to a CAGR of 3.3 percent for all hotel operating expenses, and an average annual inflation rate of 2.7 percent for the same period.

No Need For The Wood Shed

On the revenue side, it appears that healthy consumer confidence should continue to stimulate lodging demand for the nation’s hotels during the upcoming winter.  On the expense side, it remains to be seen how potential fuel shortages will affect prices.

While we pride ourselves in our ability to forecast hotel performance, PKF Consulting definitely does not hold itself out to be predictors of weather or energy pricing.  However, after studying historical movements in hotel utility costs, we are confident that U.S. hotel managers will continue to adapt and respond to whatever uncontrollable external factors they are faced with in the area of energy consumption and costs.

Patrick Quek is president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.