Double-Digit Profit Growth for U.S. Hotels in 2004
Atlanta, February 28--The typical U.S. hotel achieved an estimated 13.3 percent increase in profits in 2004, and is projected to enjoy another 14.1 percent boost to the bottom-line in 2005, according to the 2005 P&L Forecast published by PKF Hospitality Research (PKF-HR).
This improved profitability follows a three-year industry recession that saw unit-level hotel profits decline 36.2 percent from 2000 to 2003. Hotel profits are defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation, and amortization.
The forecast is based on a preliminary analysis of U.S. hotel financial statements collected by PKF-HR for its 2005 annual Trends in the Hotel Industry survey, according to R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR. The analysis considered all hotel property types throughout the nation and incorporates the results of the PKF/Torto Wheaton Research (TWR) Winter 2005 Hotel Outlook forecast.
The turnaround in profitability starts with strong increases in hotel revenues. PKF-HR estimates that total hotel revenues grew 7.3 percent in 2004 and will increase another 7.0 percent in 2005.
"Leisure, business, and convention travelers began to hit the road again during the second half of 2003 and continued into 2004," notes Woodworth. "With hotel occupancy rates approaching pre-recession levels, hotel managers have been able to get more aggressive with their pricing strategies.
"In 2004, the hotels in our Trends sample are estimated to have increased their room rates by a healthy 3.7 percent. Look for an additional 5.3 percent jump in 2005."
Separate research conducted by PKF-HR has found that hotels are most profitable when they are able to drive their revenue by increasing room rates.
The recovery in hotel revenues and profits appears to be occurring across all types of hotels. All five property types tracked by PKF-HR are projected to experience double-digit increases in profits in 2005.
"While all hotels should enjoy strong profit gains in 2004 and 2005, we foresee the full-service, resort, and convention properties experiencing the greatest bottom-line growth," says Woodworth. "With more extensive facilities and services, the increased guest counts at these properties also generate additional sales in their restaurants, lounges, banquet halls, recreational outlets, and gift shops."
With guest counts and revenues on the rise, hotel managers find themselves in a different operating environment than the previous three years of austerity spending. PKF-HR estimates that hotel operating expenses rose 5.5 percent in 2004, and will increase another 4.6 percent in 2005.
"During the recession, hotel managers cut labor costs and other operating expenses in an effort to maintain as great a profit margin as possible. Now, the combination of increased business volume and deferred expenditures forces management to determine the best way to spend their newfound revenues," says Robert Mandelbaum, director of research information services for PKF-HR. "Some expenses are more controllable than others."
One operating expense that always concerns hotel managers is labor costs. PKF-HR believes that payroll and related costs are the dominant drivers of increased operating expenses in 2004 and 2005. "Naturally, increased business activity requires more employees. However, given the improvement in the economy, not only will it be increasingly difficult for hotel managers to find qualified employees, but there will be upward pressure on wage rates and salaries as well," says Mandelbaum.
"In addition, government statistics show that employee productivity gains are starting to wane after years of growth. This trend is particularly acute in the hotel industry where most operating functions are manually executed, not automated." Upward pressure on labors costs will have a great impact on the operating costs of such highly staffed operating departments as rooms, food and beverage, and recreational outlets.
Two other departments where PKF-HR has recorded relatively strong increases in costs are marketing and maintenance. However, increased expenditures in these two departments can be viewed as investments.
During the recession, several hotels had to defer renovation and refurbishment projects. This puts added pressure on the day-to-day maintenance of furniture, fixtures, and equipment. "The increase in spending for marketing is needed to preserve or increase a hotel's competitive position in the rising market," observes Woodworth.
