|By Kyle Stock, The Post and Courier, Charleston, S.C.|
Knight Ridder/Tribune Business News
June 14, 2004 - Like other parts of the economy, the hotel industry is starting to see its first significant rebound since the Sept. 11 attacks. But the costs of employee health care, property insurance and utilities are rising, squeezing newfound profits and, in some cases, outpacing revenue growth.
"It is kind of taking away from the party," said Brian Lund, a hotel analyst for Chicago market research firm Morningstar Inc. "While things are getting better generally, they are not universally."
Hotels are charging more and selling more rooms as booking demand increases in step with the economy. There also is some evidence that business and group reservations are picking up.
But a closer look reveals a dark side to the news: fast-rising expenses that are eating into profits.
Marriott International Inc., a Maryland company that operates or franchises 2,700 hotels worldwide, including nine in the Charleston area, reported an 11.3 percent increase in revenue for the first three months of the year. However, expenses were up 6.9 percent from the year-earlier period, and the company's net income was down 1.7 percent.
The most recent quarterly results were similar at Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide Inc., two other lodging industry giants. Unlike Marriott, Starwood and Hilton reported higher profits, but expenses rose almost as much as revenues.
"It's definitely a more challenging environment to operate in, for sure," said Hank Holliday, whose real estate company owns the Planters Inn and the Doubletree Inn & Suites in downtown Charleston. "You've got to find a way to be a great manager or a smart manager and compensate."
Orient-Express Hotels Ltd., which owns or manages 29 lodgings and restaurants worldwide, including Charleston Place, has reported big revenue increases for the last two years, but both overall costs and operating costs have outstripped those gains. In the most recent quarter, Orient-Express booked a 5.7 percent increase in sales, but expenses jumped 10 percent, and the company's net loss increased by more than 75 percent to $4.6 million from $2.6 million a year earlier.
Most companies blame the bruising on a rash of cost increases in items like health coverage for employees, utilities and property insurance. Typically, these items account for between 6 percent and 15 percent of a hotel's total outlays, according to PKF Consulting Co., an Atlanta-based hospitality research firm.
"This is nickel-and-dime business, but it all adds up," said Everett Smith, who operates about 10 local hotels and owns six others as president and chief executive officer of Charlestown Management Hotels.
Costs for health insurance have surged since the late 1990s, in part because of an aging U.S. population, mounting drug costs and the rising use of expensive technology to treat and diagnose injuries and illnesses.
Health care spending in the United States grew to an estimated $1.7 trillion in 2003, about $5,800 per person, and insurance premiums are expected to rise 13.7 percent next year, according to a study by Illinois-based benefits consultant Hewitt Associates.
Most hotel companies are eating some, if not all, of the added costs. But others have decided to trim health coverage. Smith acknowledged that the policy his company maintains for its 550 employees isn't the very best, but its cost still went up 22.3 percent last year and will increase another 20 percent this month. He is shopping for a better deal, but said the health care issue is "almost unsolvable."
"We want to feel good about what we offer, so we try to pay our employees well and make sure they're satisfied. But when it comes to insurance, there's only so much you can do," he said.
Property insurance is another cost of doing business that has increased dramatically across industries, including the lodging sector. Insuring buildings has always been relatively expensive on the coast of South Carolina, where underwriters perennially hedge their bets against hurricane season. The Sept. 11, 2001, terror attacks didn't help.
Charlestown Management Hotels has seen increases of around 25 percent for the last two years. Insurance costs have slowed somewhat so far this year, but they are still going up faster than Smith would like.
While every business in the country is forking out more for health care and property insurance, Lund said hotel companies get pinched by those increases more than other industries because lodging is such a capital- and labor-intensive business.
"I feel like both things are something that can be overcome with time; but if they can't, the pricing will have to adjust," he said.
Gas and electricity costs are also outpacing inflation nationwide, mostly because worldwide demand for fuel has risen faster than supply. Utilities consume about 5.5 percent of an average hotel's costs.
A lot of big hotel chains, including Marriott and Starwood, have realized some savings through buying power in bulk contracts.
South Carolina Electric & Gas, a unit of Scana Corp., raised rates 5.8 percent overall early last year to pay for construction of a new natural gas-fired power plant. The Columbia-based utility plans to seek approval for another, unspecified rate increase this summer.
Charleston Place, which is Orient-Express' largest operation, started an energy-saving program about three years ago, according to Dean Andrews, head of the company's U.S. operations. The flagship property has been able to offset SCE&G's rate hikes by making small changes to use less electricity.
Charleston water and sewer rates also are going up about 5 percent this year to cover the cost of fixing and replacing much of the city's network of crumbling tunnels.
Business has stayed pretty steady at Charleston hotels the last few years. Local properties haven't seen big revenue gains or losses like lodgings in other parts of the country, but they are facing the same nasty growth on the expense side of their balance sheets.
Greenville-based JHM Hotels Inc., which owns about 30 lodgings around the Southeast and recently bought the Charleston Riverview Hotel, has managed to keep labor costs down on its 800 or so employees, but it's been a struggle, according to Luke Finlay, the company's chief financial officer.
Utilities and upgrading rooms with free high-speed Internet access also have chipped away at the bottom line. However, JHM has posted big profits so far this year, especially in properties hit hard by the travel slump.
"We focus a lot of attention on maintaining the efficiencies that we had to generate when things slowed down," Finlay said.
Interest rates, which are expected to go up in the months ahead, are likely to be a bigger problem than insurance costs for expanding hotel companies like JHM or those that didn't lock in low borrowing costs. And if the hospitality market grows as analysts expect, quality labor, which is usually in high demand in Charleston, is likely to become more expensive, too.
"It's a challenge, but you don't get everything going your way in life," Smith said.
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