The already deteriorating economic climate of 2001, coupled with the effects of September 11th, made for a year of horrible hotel profit performance.  Nevertheless, some hotels managed to buck the current and fare rather well.

According to PKF Consulting�s 2002 edition of Trends in the Hotel Industry, the average hotel in the U.S. experienced a 19.4 percent decline in operating profits (after management fees, taxes, insurance, but before capital reserve, rent, interest, income taxes, amortization or depreciation).  While the vast majority of hotels in our Trends survey sample (74.9 percent) did achieve lower profits, conversely, many hotels (25.1 percent) managed to do better in 2001 than 2000. 

How did these properties manage to avoid a loss?  What were some of the characteristics of those hotels that lost less than the average?  And of the hotels that lost more, what did they do wrong?

Pursuing the answers to these questions, we examined the operating and physical characteristics of a sample of 1,720 hotels from our Trends in the Hotel Industry database.  The average hotel from this sample had 210 rooms with a 65.0 percent occupancy rate and an average daily rate (ADR) of  $91.71 in 2001.  This average hotel experienced a drop in occupancy of 6.1 percent from 69.2 percent in 2000 and an ADR drop of 1.0 percent from $92.62.  Our sample was then split up according to their relative year-to-year change in profits.  From these groupings, we identified some of their characteristics.

The Winners (growth in profits from 2000 to 2001)

Of the properties that experienced a growth in profits from 2000 to 2001, the average increase was 11.4 percent.  The 2001 occupancy and ADR for these properties were 66.9 percent and $74.60 respectively.  This group�s growth in profits was supported by a 4.61 percent growth in rooms RevPAR.   This growth in rooms revenue was the saving grace for these hotels.  While these hotels did not feel the pressure of declining profits, the managers did see the overall downturn of the hotel market and cut expenses by 0.3 percent per available room (PAR). 

�The Winners� made up 24.1 percent of the total sample, but only 18.6 percent of these were the independent properties, thus showing a tendency for �The Winners� to be chain-affiliated.  The majority of �Winners� were limited-service properties, although they made up 35.6 percent of the total sample.  This group also had a bias towards highway-located hotels, reflecting changing travel patterns as more people drove, rather than flew, to their destinations.  Finally, this group found 37.1 percent of its properties located in South Central states, compared to an overall sample average of 23.7 percent.

The Biggest Losers (loss in profits greater than 33.9 percent from 2000 to 2001)

�The Biggest Losers� represents hotels that experienced greater than a 33.9 percent drop in profits.  Of this group, the average decline in profit was 47.2 percent.  This drop in profits was due in large part to a 21.3 percent drop in rooms RevPAR or a 19.7 percent decline in total revenue. 

In 2001, the occupancy for this group was 57.0 percent, and the ADR was $96.02.  Of note was that the ADR was higher in this grouping than in �The Winners� grouping, but this �Biggest Losers� grouping had to work with a much lower occupancy rate.  This group did, however, do the best job of cutting expenses with an average drop of 6.5 percent in total expenses.  The �Losers� made up 15.4 percent of our total sample, but included 27 percent of the unaffiliated properties.  This group had a bias towards city center locations, as well as, convention hotels.  In terms of region, the group sample tended to be located in the North Central states.

Revenue was the Story

The most direct factor contributing to changes in hotel profits were the relative changes in revenue.  The hotels that experienced the greatest decline to profits were also the hotels that experienced the greatest declines in revenue.  Unfortunately, several of the factors that influenced hotel revenue are beyond the immediate control of management (i.e. location, size of property, type of hotel, etc.).

What a manager can control, however, are expenses.  Some managers did a better job of controlling expenses than others.  Typically, our sample showed a proportional relationship between revenue losses and declines in expenses.  This was not true, however, for the properties that experienced the greatest declines in revenue.  The �Biggest Losers� did have the largest decline in expenses, but not much more than the properties that had only modest declines in revenue.  Perhaps the large profit losers reached some maximum threshold in expense decline, or perhaps they were not aggressive enough in controlling costs.

As 2002 unfolds, and market conditions continue slowly to improve, managers can only do so much to increase revenue.  Cutting expenses is their best chance to maintain profitability. 

Alexander Feneck is a Research Assistant in the Atlanta office of the Hospitality Research Group of PKF Consulting (HRG).  Robert Mandelbaum, the Director of Research Information Services for HRG, assisted with the article.