UK Chain Hotels Market Review – February 2013

London experiences profit decline despite an increase in revenue performance

Hotels in London experienced profit decline in February for the second month in a row despite an increase in revenue performance, according to the latest HotStats survey.

Demand levels increased as occupancy rose by 1.4 percentage points to 75.9%, albeit at the expense of average room rate (-1.8%).  As a result, RevPAR (Revenue per Available Room) remained flat. Encouragingly, TRevPAR (Total Revenue per Available Room) increased by 0.8%, underpinned by an increase in non-rooms departmental revenue performance (+2.6%) when compared with February 2012 performance.

An increase in the volume of leisure demand, both individual leisure and group tour segments, enhanced occupancy performance, although average sector rate performance in both these market sectors declined by 3.4% and 6%, respectively. 

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The increase in the volume of demand is a reflection on the significant pick-up in international arrivals in February. London Heathrow Airport experienced traffic flow of 4.85 million passengers, the highest ever achieved at the airport for February, with a 29.8% increase in passenger traffic from China, 4.1% from India and 3.1% from Russia.

The marginal increase in revenue performance was not enough to temper a greater rise in operating costs as GOPPAR (Gross Operating Profit per Available Room) declined by 2.7%. Whilst the majority of operating costs remained broadly similar when compared to February 2012 performance, rooms department profit conversion declined by 0.7 percentage points from 75.5% to 74.8% of rooms revenue.  This was due to a significant increase in rooms department direct expenses (ie the cost associated with the sale including agent commission and servicing of the bedrooms), up from 11.1% of rooms revenue to 12.2% of rooms revenue. 

Whilst gross operating profit performance declined in February, the increase in TRevPAR is encouraging, particularly when considering January 2013 performance which experienced a 3.1% decrease in TRevPAR, and 9.2% decline in GOPPAR.

“After a disappointing January, February 2013 results are a lot more encouraging. Post-Olympic Games it will be difficult to define what a successful 2013 is, given that we have witnessed an unprecedented increase in bedroom supply in the capital over the past two years, and the market will not have the benefit of a one-off event being held in London. All eyes will be on the key trading period between May and November, when the volume and value of corporate and leisure demand increases significantly, to understand how trading performance will fair this year,” said David Bailey, deputy managing director at TRI Hospitality Consulting.

Provinces experience revenue and profit growth over a rolling 12-month period for the first time since the recession
The latest HotStats survey showed positive results for the Provinces as revenue and gross operating profit performance increased for the month of February, resulting in positive gross operating profit performance over a rolling 12-month period for the first time since the recession began.

For February, both RevPAR (+1.8%) and TRevPAR (+2.7%) increased, resulting in GOPPAR performance rising by 1.2% in the Provinces.  The rise in RevPAR performance was due to a 1.4 percentage point increase in occupancy as the volume of roomnight demand in the corporate and leisure sectors increased.

Of greater significance is the fact that for the first time since 2009, the provincial hotel market achieved a positive increase in GOPPAR over a 12-month rolling period (+0.1%).  In the 12 months to February 2013, RevPAR also increased by 2.0% and TRevPAR by 1.4%, although the threat of higher operating costs wiping out the hard work of provincial hoteliers remains.

In February, Scotland’s three main cities experienced mixed fortunes.

Aberdeen is fast becoming the best performing hotel market in the UK outside of London. Full-service hotels in Scotland’s third city achieved an increase in RevPAR (+15.1%) as Best Available Rate (BAR) and corporate sector rates increased by 20.4% and 12% respectively. With Aberdeen’s economy inextricably linked to the oil sector, market performance is fast approaching pre-recession levels, as GOPPAR increased by 15.3%.  In the 12 months to February 2013, GOPPAR has increased by over 16%.

In contrast, Edinburgh experienced a GOPPAR decline of 20.3% as a combination of a decline in RevPAR (-2.5%) and increase in operating costs (+9.1%) affected bottom line performance. Scotland’s second city Glasgow experienced an increase in GOPPAR of 16.6% underpinned by a significant increase in corporate and leisure roomnight demand.

“Whilst trading performance is likely to be turbulent given recent news including the Government’s revised downward forecast for GDP growth this year and continued inflationary cost pressures, the latest market data highlighting an increase in gross operating profit performance over the 12-month period to February 2013 is positive.  However, as the contrasting February performance of Scotland’s main city hotel markets show, it is imperative to understand hotel operating performance at a local level,” said Bailey.

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©TRI Hospitality Consulting 2013
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