Typical US hotel increased profit by over 10% last year

The typical U.S. hotel achieved an 11.4 percent increase in profits in 2004 over 2003 according to the report recently released by PKF Hospitality Research.  This improved profitability follows a three-year industry recession that hotel profits decline 36.2 percent during the period 2001 through 2003.

While the turnaround in profitability is welcome news, the average hotel is just barely achieving the same bottom line dollars they did back in 1996.  “It is important to know that hotels currently are quite profitable; however, it may not be until 2006 or 2007 that the average U.S. hotel will match the profit margins and dollars achieved in the late 1990s,” noted R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR.

The profitability trend is reflected in Hilton Hotels Corp. 73% increase in its quarterly profits, announced on Tuesday, citing recovery in business travel fueled higher room rates and management fees.  “We are in the up part of the classic hotel cycle … it is a pattern that drives rates higher,” Hilton Chief Executive Stephen Bollenbach was quoted as saying by Reuters, on a conference call.

In 2004, the hotels in PKF’s Trends sample enjoyed a 7.6 percent increase in total revenue, which eventually led to the 11.4 percent growth in operating profits.  “In general, it appears that the larger hotels with higher room rates experienced the greatest increases in profitability during 2004,” notes Woodworth.  “Of course, these properties were some of the most severely impacted during the 2001-2003 industry recession and, therefore, have the greatest losses to recoup.”

Of all the different property categories, resort hotels achieved the greatest increase in profitability in 2004.  At the other end of the spectrum, profitability for limited-service hotels experienced a gain of only 6.2 percent, but these “drive-to” properties held up better after 9-11.  All other property types (full-service, suite, and convention hotels) saw their profits grow in excess of 10 percent in 2004.

Revenue from the rental of guest rooms accounts for 67.3 percent of the total revenue for the average hotel.  In 2004, revenues from most of the other operated departments (beside Rooms) within a hotel increased for the first time since 2001.  The lone exception was the Telecommunications Department.

“The combined revenues from the Food Department, Beverage Department, Other Operated Departments, and Rentals and Other Income increased by 6.3 percent from 2003 to 2004.  Food revenues grew the most, at 6.9 percent, while Rental and Other Income increased by just 4.3 percent,” said Robert Mandelbaum, director of research information services for PKF-HR.  “Since the number of occupied rooms grew only 4.3 percent for the year, it can be assumed that some of the increase in these additional revenue sources can be attributed to increased guest usage of hotel restaurants, lounges, retails shops, and recreational facilities.  In addition, the cost of operating these other departments grew just 5.9 percent, thus indicating that these supplemental revenue sources also contributed to the increase in overall hotel profitability.”

Telecommunications revenue for the Trends sample dropped another 9.8 percent in 2004.  This is the fourth consecutive year of Telecommunications revenue declines.  Telecommunications revenue is derived from guest use of telephones, faxes, and internet connection services.  “The increased use of cell phones and calling cards, along with the avoidance of surcharges by disgruntled guests, all contributed to the continued decline in Telecommunications revenue.  On the other hand, increased internet connectivity charges helped to partially offset this revenue decline,” Mandelbaum noted.

At 45.9 percent of all operating expenses, labor and related costs represent the largest expense item for hotels.  Therefore, the 6.3 percent increase in labor and related costs that occurred during 2004 contributed significantly to the 6.4 percent increase in total hotel operating costs.

Undistributed Operating Expenses rose 6.5 percent in 2004.  This covers such costs as Administrative and General (A&G), Marketing, Property Operations and Maintenance, and Utilities departments.  The majority of undistributed costs are “fixed” in nature and not heavily influenced by changes in the business volume at the hotel.  Therefore, most increases in undistributed operating expenses can be viewed as intentional additional expenditures by management.

Hotel Utility Costs have fluctuated dramatically during the past few years.  In 2001 and 2003 the industry experienced respective increases of 7.0 percent and 5.9 percent.  However, in 2002, hotel utility costs declined 5.5 percent.  During the first half of 2004, PKF believed there might be some moderation in Utility Costs for U.S. hotels.  According to PKF’s mid-year Trends survey, hotel energy costs grew 4.5 percent during the first six months of 2004 compared to the first half of 2003.  However, by year-end 2004, the annual Trends sample of hotels ended up with 6.0 percent more being spent for Utilities than in 2003.  This implies an increase in energy costs of approximately 7.5 percent during the second half of 2004.  Rising oil prices in early 2005 once again have U.S. hotel owners and operators concerned.