Corp. Cutbacks Decreasing Hotels' Overall Profitability
<B>Corp. Cutbacks Decreasing Hotels' Overall Profitability</B>
By Bruce Serlen
The average U.S. hotel will suffer a 5.6 percent decline in operating profits for 2001, according to projections announced last week by Atlanta-based Hospitality Research Group, a division of PKF Consulting. The declining profit picture is a radical reversal from 2000, when the average property posted a healthy 10.1 percent increase in profitability. The 10.1 percent growth in profits was the strongest the industry has experienced since 1997.
For travel buyers, the deteriorating situation facing hotels this year--in occupancy rates and room revenues, in addition to profitability--should improve their leverage in rate negotiations for 2002, which begin in the next few months.
"The growth in profits achieved in 2000 is the result of moderate increases in both occupancy and average daily room rates," said Mark Woodworth, Hospitality Research Group executive managing director. "In 2001, however, we are in an environment of declining occupancies and minimal rate growth, so it becomes extremely difficult for hotels to maintain their bottom lines.
HRG based 2001's 5.6 percent decline in profitability on an estimated 1.2 percent decline in occupancy, combined with a 2.4 percent increase in average daily rates. "Hotels' ability to grow their ADR in excess of inflation was the real driver of the record growth in profitability during the 1990s," Woodworth said. "There have been years of decline in occupancy, yet growth in profits was sustained because hotels were able to raise their prices two to three times the pace of inflation. This year, the decline in occupancy is not being offset by strong ADR growth, and the cost of operating a hotel continues to rise above the pace of inflation."
Also last week, Smith Travel Research released preliminary U.S. occupancy and room revenue statistics for June. The numbers are further proof of the industry's downward spiral that began in February.
According to Mark Lomanno, Smith Travel Research president, both occupancy rates and revenue per available room were down 1 percent to 3 percent, compared with June 2000. Upper upscale hotels was the segment hit most severely in the month, with occupancies dropping 3 percent to 5 percent, and RevPAR falling 5 percent to 7 percent, compared with the prior year.