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Hoteliers manage to turn a profit in 2002.

Article Excerpt
Hotel companies worldwide still are struggling with the financial setbacks they experienced in 2002. While still profitable, a claim that cannot be made by the airline industry, the hotel industry saw profits fall to $16.1 billion last year, from a peak of $22.5 billion in the banner year of 2000, according to consulting firm PricewaterhouseCoopers.

Led by the three large, U.S.-based multi-brand hotel owner/managers--Hilton Hotels Corp., Marriott International and Starwood Hotels & Resorts Worldwide--the industry now is seeking ways to lock in any increases in occupancy rates that occurred. Even more importantly, hotel companies are attempting to raise room revenues that were damaged badly in 2001 and 2002, first by the weak economy and then by lingering threats of terrorism and war.

"At the start of 2002, we predicted the year would represent the 'perfect storm' for the industry, and that prediction was borne out," said Chase Burritt, national director of Ernst & Young's hospitality services group. "Hotel operators had to prepare for the worst, cut expenses, lay off staff and generally ride it out until the storm broke."

In "battening down the hatches," hotel managers aimed to make it through with their operations intact. "We saw rates come down as operators tried to find a balance between occupancy and room prices," Burritt said. "The year will go down as the worst period for the hospitality industry in the past 20 years, with virtually every U.S. market negatively affected to some degree."

While hotel operators experienced sharp declines in revenue, the critical concern in 2002 was the precipitous drop in profitability, according to Alexander Feneck, research coordinator for Hospitality Research Group, which is an affiliate of PKF Consulting. The drop was most pronounced in the first half of the year. "Full service hotels in our sample achieved average revenue per available room of $69.41 during the first half of 2002, compared to $80.25 during the first half of 2001, a decline of 13.5 percent," Feneck said. On average, room revenue comprises 67 percent of total revenue at full-service hotels. "Accordingly, the decline in total hotel revenues was 12.7 percent for this same period," he added.

Feneck agreed with Burritt that in such an environment hotel operators had little choice but to trim operating expenses. The cuts were in addition to extensive cuts made during 2001. According to Feneck, operating expenses at an average full-service hotel were reduced 9.1 percent from January to July 2002 compared with the same period a year earlier. Some of the declines can be attributed to the drop in business volume, he said, but cuts also were made in such traditional fixed costs as labor.

Historically, full-service hotels spend approximately 45 percent of their operating budgets on labor. "Consequently, labor typically is the first place general managers look when it comes to cost reductions," Feneck said. For their part, travel buyers are concerned that hotels will cut hack too deeply on staffing and in other areas to the point where the traveler's experience will be adversely affected. Given the competition for their business in today's market, buyers won't be surprised to learn that typically one hotel department escaped the budget ax. "With such...

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