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RevPAR Decline Only Tells Part Of The Story;
Drop In Hotel Profits Is the Real Concern

By Alexander Feneck, Hospitality Research Group of PKF Consulting
January 2003

Hotel owners and operators across the U.S. are experiencing sharp declines in RevPAR (revenue per available room), but the real concern in 2002 should be the double-digit declines in profitability.  As the RevPAR declines of 2001 continued into 2002, The Hospitality Research Group of PKF Consulting (HRG) decided to assess the extent of the declines in profitability and profile some of the changes managers have made to operating expenses.

HRG conducted a study of financial statements from full-service hotels in the U.S. for the periods of January through June in 2001 and 2002.  The preliminary results show that the average U.S. full-service hotel suffered a 21.3 percent decline in profits during the first six months of 2002 compared to the same period in 2001.  For this study, profits are defined as income before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization.  Further discussion on our preliminary findings follows.

Profit Margins Show Some Health, Hotels Still Generate Profits

Profits margins have fallen over the past 18 months, but from a historical perspective, they remain healthy.  Full-service hotel margins peaked in 2000 at 30.5 percent.  In the first half of 2002, they have fallen to 26.2 percent.  To place this in a historical perspective, full-service hotels in the U.S. averaged a 21.0 percent profit margin from 1960 through 2001.  While hotel revenue has declined, the relatively high profit margin illustrates management�s effectiveness.

Management Does React

The full-service hotels in the HRG sample achieved an average RevPAR of $69.41 during the first half of 2002, compared to $80.25 during the first half of 2001.  This represents a decline of 13.5 percent.  With rooms revenue comprising 67 percent of total revenue at these full-service hotels, the decline in total hotel revenues was 12.7 percent during this same period.

In response to the double-digit declines in revenue, hotel managers continued to cut expenses following the extensive cuts made during 2001.  Operating expenses at the average hotel in the sample were reduced 9.1 percent during the first half of 2002 from the dollars expended in the first half of 2001.  In 2001, hotel managers cut their operating expenses 5.2 percent for the entire year in light of the 9.9 percent decline in total revenue.  Although some of the declines can be attributed to the decrease in business volume, the study noted declines in some of the traditional �fixed� costs of hotel operations as well.

HRG is projecting full-service hotel RevPAR to increase 9.2 percent in 2003 and another 6.5 percent in 2004.  In a separate study, HRG found that managers tend to increase their operating expenses fairly dramatically as the industry recovers.  If hotel managers can continue to hold down costs, the hotel industry could see some dramatic improvements in profits over the next two years.

A historical analysis of full-service revenue and profit data from HRG�s Trends in the Hotel Industry database finds that profits tend to react with a greater degree of elasticity compared to movements in revenue.  During periods of industry recovery, profit growth has outpaced increases in revenue.  Conversely, when industry revenues have declined, profits have dropped an even greater extent.

 


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Labor Pains

Full-service hotels have historically spent approximately 45 percent of their operating budgets on labor.  Thus, labor is typically the first place a hotel manager looks when it comes to cost reductions.  This trend was evident in the first half of 2002, when 37.2 percent of all cost reductions were attributable to a combination of salary/bonus reductions, reduced hours for hourly staff, and some layoffs.  On average, the typical hotel in the study sample reduced its payroll and related expenses from $14,290 per available room in the first half of 2001 to $13,243 per available room in the first half of 2002.

While all departments experienced cuts to their labor costs, the lowest percentage reduction in payroll occurred in the marketing department.  This was in line with the trend observed in 2001.  With such competitive market conditions, the need to maintain sales and marketing personnel continued to be of great importance for hotel management.

Telephones Down, Booze Up

Since occupancy for the hotels in the survey sample declined, it follows that guest telephone revenue also would drop.  From the first half of 2001 to the first half of 2002, the rooms occupied for the survey sample fell seven percent.  At the same time, telephone revenue was off 28.3 percent.  This represents the largest percentage decline of any hotel revenue source.

While hotel guests may be avoiding the phone, they don�t appear to be leaving the lounge as quickly.  Like all other revenues, full-service beverage (alcohol) revenue dropped from the first half of 2001 to the first half of 2002.  However, the 7.4 percent decline in beverage revenue was the lowest percentage decline of any hotel revenue source.  The beverage department was the only operating department to have achieved a higher profit margin during this same period.

Little Differences Among Size, Market Position, and ADR

When analyzing the lodging industry, HRG frequently finds differences in performance among different groups of hotels, be they divided by geography, market orientation, size, or room rate categories.  This underscores the notion that each individual hotel is typically driven by local market conditions.  

From our preliminary results, we did not observe any significant differences in performance from 2001 to 2002 among the various descriptive categories.  It would seem, then, that the extreme and unique factors that caused this industry recession have affected full-service hotels uniformly. 

A Better Measurement

Hotel managers tend to look at RevPAR as an indicator of the fiscal health of their properties.   However, for owners and investors, the bottom-line is what really counts.  Instead of looking at RevPAR to assess the operator�s effectiveness and ownership�s wealth, HRG believes profit per available room (ProfPAR) is a more accurate indicator.  This statistic, in conjunction with profit as a percentage of revenue (profit margin), provides a clearer picture of a hotel�s bottom line and operating performance.

Alexander Feneck is a Research Coordinator with The Hospitality Research Group, the research affiliate of PKF Consulting.   Robert Mandelbaum, Director of Research Information Services, assisted with the article.

To purchase a copy of PKF Consulting�s 2002 Mid-Year Trends Survey, please contact Alexander Feneck at (404) 842-1150 Ext. 241 or visit www.hrgonline.com.

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Contact:
For additional information contact 
Robert Mandelbaum at the firm:
email [email protected]
PKF Consulting 
3391 Peachtree Road
 Suite 420 
Atlanta, GA  30326 
phone  (404) 842-1150 
fax  (404) 842-1165


 
Also See Managing Interest Payments / Alexander Feneck, Hospitality Research Group of PKF Consulting / Dec 2002
By Mid-Year 2002, Hotel Profits Were Again Down, But Not Out; RevPAR Decline Only Tells Part Of The Story / PKF / Nov 2002
Optimism and Budgeting / Alexander Feneck, Hospitality Research Group of PKF Consulting / Nov 2002
With Hotels, Does Spending Money Make Money? / Robert Mandelbaum / Sept 2002
What Made Profits Drop in 2001? / PKF Consulting / Oct 2002
Commissions in the Hotel Industry: Agents for Change? / Robert Mandelbaum / PKF / Aug 2002
Will Hotel NOIs and Property Prices Follow Revenues in Their Downward Spiral? / John (Jack) B. Corgel, Ph.D / Hospitality Research Group of PKF Consulting / June 2002
Hotel Room Sales Now Unaffected by Travel Fears; Only Economic Conditions Affecting Demand in Most Markets / August 2002


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