PKF Predicts Better Year For Discounts

<B> PKF Predicts Better Year For Discounts</B>

By Cheryl Rosen

Seven good years for the hospitality industry are coming to an end, with flat revenues and declining profits in 1999, according to the annual "State of the Industry Report" released this month by PKF Consulting in New York.

At the same time, though occupancy rates and prices in many individual properties and cities will continue to rise, most hotels will improve their performance in 2000 and corporate discounts will become even more plentiful, PKF predicted.

The average hotel occupancy rate nationwide will fall in 1999 by 1.7 percent, from 71.8 percent to 70.6, with two-thirds of the cities studied by PKF reporting lower rates. But the occupancy gainers were the big business travel destinations, which were "relatively insulated from new competition" by the high cost of hotel construction. Room rates in Houston, New York, Philadelphia, San Diego and San Francisco, for example, are expected to lead the way, rising by more than 4 percent in 2000.

The Northeast as a whole will see the biggest rate increases, averaging 3.4 percent in 1999 over 1998, and 4.1 percent in 2000. Still, that's nothing compared with the 10 percent average rate increase the region saw between 1998 and 1999.

Overall, hotels dominated by corporate travelers raised rates 3.3 percent in 1999, compared with 3.7 percent increases in leisure-oriented properties. But groups did not fare as well, paying the highest rate gains, 3.9 percent, as hotels preferred to save their inventory for more lucrative transient business.

Still, negotiating success stories by the corporate market is an important theme. Robert Mandelbaum, director of information services for PKF's Hospitality Research Group, which produced the study, cited "a weakening of pricing policies on the supply side" as travelers downgraded their accommodations rather than pay higher prices. "Concurrently, after a few years of declining occupancies, hotel managers have decided to sacrifice ADR (average daily rate) growth in an effort to maintain market share," he said.

Agreed Jack Corgel, PKF's managing director of applied research, "Hotel general managers are telling us that the market is getting more price sensitive, and the flattening of ADR growth is the result of that price sensitivity. It's a significant story."

The other side of the coin, Corgel noted, is the fact that lower rates do not necessarily mean lower profits for hotel owners. With the average revenue projected to grow just 0.2 percent and costs--especially labor costs--growing much more rapidly, the average U.S. hotel should see its profit margin decline slightly, from 29.8 percent in 1999 to 29.3 percent in 2000, and a slim 3.9 percent growth in operating profits.

"Profit margins are still going to be solid, but they are definitely under pressure, and hotel managers are going to be more cost-conscious. If they can keep costs down, their investors are still going to be happy," he said.

That should give corporate travel buyers--with their long-term contracts and electronic commerce initiatives--an ace in the hole at the negotiating table.