by: R. Mark Woodworth, September 2003
September 2003 – We announced several months ago that the average U.S. hotel suffered a second consecutive year of declining profits in 2002. According to the 2003 edition of Trends in the Hotel Industry-USA, published by PKF Consulting and the Hospitality Research Group (HRG), the operating profit for the average U.S. hotel dropped 9.6 percent in 2002, this after a 19.4 percent decline in profits in 2001.
In an effort to better understand the impact of the declining economic environment and the harsh realities stemming from the events of September 11, we conducted an in-depth analysis of the actual operating performance of a large sample of hotels for the first half of 2002. Our loyal readers will recall that key findings from that analysis were that the average U.S. hotel suffered an 11.1 percent decline in revenues and, as a result, realized a 21.2 percent decline in profits (defined as income before fixed charges) during the first six months of 2002 compared to the same period in 2001.
What Happened in the 2nd Half of 2002?
Most parties in the lodging industry believe that the second half of 2001 will be remembered as one of the lowest of low points in terms of poor financial performance. We thought an analysis of the second-half results of this past year would shed some light on this view. We saw it as a natural follow-up to the work we conducted last summer on the first six months of 2002. Our research reveals some interesting findings.
The first anniversary of the events of September 11, combined with the impending war in Iraq, led to an abysmal 0.9 percent increase in RevPAR for those hotels in our sample. Occupancy declined by 0.3 percent in the last half of 2002 as compared to the same period in 2001. ADRs increased by 1.2 percent for the same period.
Operating expenses at the average hotel in the sample increased by 3.8 percent during last half of 2002, which was somewhat surprising, given that occupancies actually declined for the period. The culprit was in the Rooms Department, where expenses increased by 3.0 percent, over three times the increase in room Sales for these same six months. The profitability in the Food and Beverage Department basically remained unchanged. Not surprisingly, Telecommunications Revenues once again declined (down 29.5 percent). Profits in this category continue to erode as Telecommunications Costs only declined by 9.2 percent.
Managers did a good job in controlling Administrative and General Expenses, which increased by just 0.5 percent. Marketing Expenses increased by 1.3 percent, which we attribute to the anticipated recovery that was expected in early 2003. The expense category that experienced the largest increase was Repairs and Maintenance, which grew by 7.7% during the period. Anecdotally, it appears that many activities that were postponed in late 2001 and in early 2002 were dealt with in the latter half of the year.
Variations by Property Type
The full-service hotels in the HRG sample averaged a RevPAR of $65.48 during the second half of 2002 compared to $63.52 in the second half of 2001. This represents an increase of 3.1 percent. With rooms revenue comprising 65.6 percent of total revenue at these full-service hotels, the increase in total hotel revenues was 3.3 percent during this same period. Thus, all other revenues increased only slightly.
Operating department expenses at the average full-service hotel in our sample increased by 5.4 percent during last half of 2002, well in excess of the 1.0 percent increase in occupancy for the period. Rooms Department expenses actually increased by 6.0 percent, indicating that managers may have been reacting to the need for improved guest services as well as to the desire to reduce stress among frontline employees. Telecommunications revenues declined by 17.0 percent for the period, while departmental expenses declined by only 3.4 percent. It appears that full-service managers need to effect better-cost management practices in this area.
Total undistributed expenses among the full-service hotels in our sample increased by 6.0 percent, not quite twice the increase in total revenues for the period. All of the increases were either in Property Operations and Maintenance (up 8.2 percent) or Energy (up 2.4 percent). While the higher occupancy during the period would be expected to increase Energy costs, it was a deferral of projects from late 2001 and early 2002 that resulted in the increase in maintenance-related expenses.
. Full-Service Hotels
Year to Year Change
Selected Hotel Revenues and Expenses
Second Half 2001 to Second Half 2002
.
The limited-service hotels in the HRG sample averaged a RevPAR of $36.19 during the second half of 2002, compared to $37.13 in the second half of 2001. This represents a decrease of 2.5 percent. Most of this was in occupancy, where performance levels declined by 1.6 percent. ADRs declined by 0.9 percent for the period.
Operating department expenses at the average limited-service hotel in the sample declined by 3.5 percent during last half of 2002, well in excess of the 1.6 percent decrease in occupancy for the period. Rooms Department expenses comprised the majority of these savings, where costs declined by 2.8 percent. Managers did an excellent job of controlling costs in this area. Telecommunications revenues declined by an astounding 59.0 percent for the period, while costs declined by only 20.7 percent. We suspect that much of the decline in occupancy realized during the period was the loss of full-service customers returning to their accustomed full-service digs after temporarily trading down to limited-service accommodations during the bleak post 9/11 period. Their greater propensity for Telecommunications service would explain this variance.
Total undistributed expenses among the limited-service hotels in our sample increased by 4.4 percent, which was noteworthy in view of the 2.2 percent decline in revenues realized during the period. Surprisingly, the only category to experience a decrease was Energy (down 1.0 percent). Significant increases were realized in Administrative and General (+7.2 percent), Marketing (+5.5 percent) and Property Operations and Maintenance (+6.8 percent).
. Limited-Service Hotels
Year to Year Change
Selected Hotel Revenues and Expenses
Second Half 2001 to Second Half 2002
.
The Ups and Downs of Profitability
The net effect was that profits in full-service hotels were 2.3 percent lower in the second half of 2002 as compared to the last half of 2001, while profits in limited-service properties declined by 5.7 percent.
In separate analyses conducted by HRG, it was found that managers tend to increase their operating expenses fairly dramatically during periods of industry recovery. The profit decline experienced among the hotels in our sample in the last half of 2002 supports this view. HRG research also reveals that profits tend to react with a greater degree of elasticity compared to movements in revenue, primarily because of the fixed/variable cost structure of the business. 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. Such was the case in the second half of 2002 compared to the last six months of 2001.
The considerable research that HRG and our partners at Torto Wheaton Research have conducted concerning the lingering effects of air travel stigma suggests that the current industry recovery will be uneven in nature. As such, watch for continued fluctuations in bottom-line profits in the periods ahead.
R. Mark Woodworth is the Executive Managing Director of The Hospitality Research Group of PKF Consulting (HRG). He is located in the firms Atlanta office.
Contact:
Mark Woodworth
Executive Managing Director
The Hospitality Research Group
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150 x222
Robert Mandelbaum
Director of Research
Information Services
The Hospitality Research Group
3340 Peachtree Road, Suite 580
Atlanta, GA 30326
(404) 842-1150 x223
robert.mandelbaum@pkfc.com
