Mid-Year 2002 Report: RevPAR Still Down, But Real Concern Is Profitability

ATLANTA— While RevPAR for U.S. hotels is still in sharp decline, the real concern for hotel owners and operators should be the drop in profitability they are facing, according to a mid-year 2002 analysis performed by The Hospitality Research Group of PKF Consulting (HRG). The report finds that the average U.S. full-service hotel suffered a 21.3% decline in profits during the first six months of 2002 compared to the same period in 2001. During this same period, limited-service hotel profits fell 18.8%. For this study, profits are defined as income before deductions for capital reserves, rent, interest, income taxes, depreciation, and amortization. The downturn in hotel performance during the later part of 2001 and into 2002 emphasizes the need for more frequent benchmarking of not just hotel revenues, but expenses and profits as well, according to HRG. The hotel industry has relied on RevPAR as the primary indicator of fiscal health, but for many in the industry it is the bottom-line that counts, said Jack Corgel, Ph.D., and Managing Director of Applied Research for HRG. While franchise fees and some portion of management fees are driven by revenue, a large portion of income for management companies— and all the income for owners— is derived from the profits of a hotel. In turn, the ability of hotel owners to pay financiers and distribute money to investors is totally dependent on the cash flows generated by the hotel. The full-service hotels averaged a RevPAR of $69.41 during the first half of 2002 compared to $80.25 in the first half of 200, according to HRG, representing a decline of 13.5 percent. With rooms’ revenue comprising 67% of total revenue at these full-service hotels, the decline in total full-service revenues was 12.7% during this same period, the study found. Meanwhile, limited-service RevPAR held up slightly better. From the first half of 2001to the first half of 2002, the RevPAR for the limited-service sample dropped from $43.42 to $39.09, for a decline of 10.0%, according to HRG. Because rooms’ revenue comprises most of the total revenue for limited-service hotels, the decline in total limited-service revenues was 10.3%, the study states. In response to the double-digit declines in revenues, hotel managers continued to cut expenses following the extensive cuts made during 2001. Operating expenses at the average full-service hotel in HRG’s sample werereduced 9.1% during the first half of 2002 from the dollars expended in the first half of 2001. Given the lower cost structure at limited-service hotels, operating expenses were cut by just 3.8% in this segment, according to the research. Overall, hotel managers cut their operating expenses 5.2% for the entire year in 2001 in light of the 9.9% decline in total revenue experienced for the year, HRG states. HRG is projecting U.S. hotel RevPAR to start growing again in 2003 and 2004. When it comes to cost reductions, the first place hotel managers look at is their labor costs, HRG said. Historically, labor costs have averaged approximately 40% to 45% of all dollars spent to operate a hotel, according to the company. During the first half of 2002, the practice of cutting labor costs continued, as 37.2% of all expense reductions at full-service hotels were attributable to a combination of salary/bonus reductions, reduced hours for hourly staff, and some layoffs, HRG research shows. With lower staffing needs, the cuts in limited-service labor costs comprised just 23.7% of the total expense reductions. On average, the typical full-service hotel in the study sample reduced their payroll and related expenses from $14,290 per available room (PAR) in the first half of 2001 to $13,243 per available room in the first half of 2002, according to HRG. For limited-service hotels, labor costs were cut from $3,593 PAR in the first half of 2001 to $3,508 PAR in the first half of 2002. Further, telephone revenue is also down. From the first half of 2001 to the first h