The typical U.S. hotel achieved an 11.4 percent increase in profits in 2004 over 2003 according to the recently released 2005 edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.  This improved profitability follows a three-year industry recession that saw unit-level hotel profits decline 36.2 percent during the period 2001 through 2003. While the turnaround in unit-level profitability is certainly welcome news, the average hotel in the Trends sample is just barely achieving the same bottom line dollars they did back in 1996.  “It is important to know that hotels currently are quite profitable; however, it may not be until 2006 or 2007 that the average U.S. hotel will match the profit margins and dollars achieved in the late 1990s,” noted R. Mark Woodworth, executive managing director of Atlanta-based PKF-HR.  “Looking at historical ‘financial recovery’ patterns for the lodging industry, the strongest gains in profits usually begin to occur in the third or fourth year of recovery.”  PKF Hospitality Research projects profit growth in the range of 14 to 16 percent for 2005. Industry-wide profits started to improve in 2003, but the greater number of hotels in operation influences this statistic.  “Changes in unit-level profits are much more meaningful for hotel owners, operators, investors, and lenders,” Woodworth said.  “Understanding unit-level changes in hotel profitability is critical to measuring management efficiency, incentive management fees, changes in values, return on investment, debt coverage, and industry solvency.” The 2005 Trends in the Hotel Industry report marks the 69th annual review of U.S. hotel operations conducted by PKF.  This year’s sample draws upon year-end 2004 financial statements received from more than 5,000 hotels across the country.  Profits are defined as income after management fees, property taxes, and insurance, but before capital reserves, debt service, rent, income taxes, depreciation, and amortization

Profit Growth Outpaces Revenue Growth

In 2004, the hotels in PKF’s Trends sample enjoyed a 7.6 percent increase in total revenue, which eventually led to the 11.4 percent growth in operating profits.  “In general, it appears that the larger hotels with higher room rates experienced the greatest increases in profitability during 2004,” notes Woodworth.  “Of course, these properties were some of the most severely impacted during the 2001-2003 industry recession and, therefore, have the greatest losses to recoup.” Of all the different property categories, resort hotels achieved the greatest increase in profitability in 2004.  With total revenue growing 9.0 percent, operating profits in this segment grew 17.2 percent.  At the other end of the spectrum, profitability for limited-service hotels experienced a gain of only 6.2 percent, but these “drive-to” properties held up better after 9-11.  All other property types (full-service, suite, and convention hotels) saw their profits grow in excess of 10 percent in 2004.

Other Revenue Sources

Revenue from the rental of guest rooms accounts for 67.3 percent of the total revenue for the average hotel.  In 2004, revenues from most of the other operated departments (beside Rooms) within a hotel increased for the first time since 2001.  The lone exception was the Telecommunications Department. “The combined revenues from the Food Department, Beverage Department, Other Operated Departments, and Rentals and Other Income increased by 6.3 percent from 2003 to 2004.  Food revenues grew the most, at 6.9 percent, while Rental and Other Income increased by just 4.3 percent,” said Robert Mandelbaum, director of research information services for PKF-HR.  “Since the number of occupied rooms grew only 4.3 percent for the year, it can be assumed that some of the increase in these additional revenue sources can be attributed to increased guest usage of hotel restaurants, lounges, retails shops, and recreational facilities.  In addition, the cost of operating these other departments grew just 5.9 percent, thus indicating that these supplemental revenue sources also contributed to the increase in overall hotel profitability.” Telecommunications revenue for the Trends sample dropped another 9.8 percent in 2004.  This is the fourth consecutive year of Telecommunications revenue declines.  Telecommunications revenue is derived from guest use of telephones, faxes, and internet connection services.  “The increased use of cell phones and calling cards, along with the avoidance of surcharges by disgruntled guests, all contributed to the continued decline in Telecommunications revenue.  On the other hand, increased internet connectivity charges helped to partially offset this revenue decline,” Mandelbaum noted.

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