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2003 First Half Hotel Profits Plunge
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Average U.S. Hotel Suffered 11.9% Decline in IBFC 
During the First Six months of 2003
Second Half Recovery Will Not Compensate

Atlanta, GA, October 13, 2003 – The average U.S. hotel suffered an 11.9 percent decline in Income Before Fixed Charges (IBFC) during the first six months of 2003, according to the 2003 Mid-Year edition of Trends in the Hotel Industry, published by PKF Consulting and the Hospitality Research Group (HRG).

The 2003 first-half results come from the firm's recently completed Mid-Year edition of Trends in the Hotel Industry survey.  The survey, drawn from a sample of 1,300 hotels, compares the financial performance of U.S. hotels for the first half of 2003 (January through June) to the first half of 2002.  PKF Consulting and HRG announced the availability of the latest mid-year Trends report today (www.hrgonline.com).

According to the new mid-year Trends report, the average hotel in the survey sample experienced a 3.7 percent decline in total revenue from the first half of 2002 to the first half of 2003.  With operating expenses increasing 1.0 percent during the same period, IBFC fell 11.9 percent.  IBFC is defined as income before deductions for management fees, property taxes, insurance, capital reserves, debt service, rent, income taxes, depreciation, and amortization.

“After annual declines in IBFC of 16.1 percent in 2001 and another 7.3 percent in 2002, U.S. hotel owners and operators were hoping for some bottom-line improvement in 2003”, says R. Mark Woodworth, Executive Managing Director of Atlanta-based HRG.  “Unfortunately, the negative impact of such catastrophic events as SARS and the Iraq War has postponed the anticipated 2003 ‘top-line’ recovery.  Therefore, with revenues continuing to fall, and expenses continuing to rise, the picture of declining profits persists.” 

Additional Expense Cuts Hard To Find

In 2001 and 2002, hotel managers effectively cut their costs to offset the dramatic declines in revenue.  Hoteliers were able to cut operating expenses 5.9 percent in 2001 and another 2.1 percent in 2002.  Because expenses were cut so much in the prior years, managers were challenged to find additional cost savings during the first half of 2003.  Hotel operating expenses increased 1.0 percent during the first six months of 2003.

“With occupancy levels starting to stabilize, hotels are incurring all the variable expenses associated with each occupied room,” notes Woodworth.  “Unfortunately, the average daily rate charged for each rented room continued to decline, thus limiting the ability of management to cover the incremental costs of serving the additional guests.”  For hotels in the mid-year Trends sample, occupancy was off 1.4 percent, while ADR declined 2.9 percent during the first half of 2003.

A 2.5 percent increase in labor costs contributed significantly to the 1.0 percent increase in total operating expenses.  Salaries, wages, and employee benefits combine to make up 50 percent of a hotel’s direct operating expenses.  “Staffing levels at hotels were cut to the bone in 2001 and 2002.  The noticeable rise in labor costs during the first half of 2003 is indicative of the re-institution of previously cut amenities and services, restored hours for staff that had their hours reduced, and increases in the cost of employee benefits,” says Woodworth.

Maintenance and utility expenses also contributed to the rise in first half operating expenses.  “After moderating somewhat in 2002, we have witnessed another spike in utility costs.  The average energy bill for a U.S. hotel jumped 7.6 percent during the first half of 2003,” notes Woodworth.  “In addition, we continue to see hotel owners and operators spend the money required to maintain the physical structure of their hotel, as well as the furniture, fixtures, and equipment.  Large renovation projects may have been postponed, but not the day-to-day maintenance.”  Property Operations and Maintenance expenses increased 2.9 percent during the first six months of 2003.

Full-Service Bottom-Line Falls More Than Limited-Service

Full-service hotels saw their profitability decline to a greater degree than the limited-service segment during the first half of 2003.  For the first six months of 2003, the IBFC for full-service hotels fell 12.3 percent, compared to a 7.8 percent decline for limited-service hotels.  This bottom-line performance is opposite of the movements observed for revenues.  The 4.4 percent decline in limited-service revenues exceeded the 3.7 percent decline in full-service revenues.

“Despite suffering a greater decline in revenue compared to full-service hotels, limited-service hotels experienced less of a decline in IBFC,” says Robert Mandelbaum, Director of Research Information Services for HRG.  “Limited-service hotel managers need to be commended for their ability to reduce operating expenses 1.2 percent during the first half of 2003.  Full-service hotel managers were not as thrifty.  Their expenses grew 1.1 percent.”

Labor costs were a significant factor differentiating the ability of limited-service versus full-service managers to control their costs.  “While limited-service hotels suffered from a 3.3 percent drop in occupancy, the decline in rooms occupied did allow the managers of the limited-service properties to reduce their labor costs by 1.2 percent.  Full-service hotel managers, on the other hand, saw their labor costs rise 2.6 percent during the same period.  This was due to the relatively stabilized occupancy levels achieved in the full-service segment,” notes Mandelbaum.

Another factor influencing the relative profit declines of the two industry segments were the decisions made to control marketing and administration costs.  These costs remained relatively flat at full-service hotels, while the limited-service properties did cut their expenses in these two categories.

For both limited-service and full-service hotels, maintenance and utility costs grew significantly during the first six months of the year. 
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Second Half Up, But Losses Nevertheless

HRG, along with forecasting partner Torto Wheaton Research (TWR), projects an improvement in hotel performance during the second half of 2003.  By year-end, the HRG/TWR Hotel Outlook forecast calls for a 1.1 percent annual increase in occupancy, but a 1.5 percent annual decline in average daily room rates for U.S. hotels.  These year-end measurements imply a substantial pick-up in occupancy during the second half of 2003, but only limited improvement in average room rates.

“Unfortunately, given the relative movements of occupancy and ADR forecast for year-end 2003, we are still projecting a third consecutive year of declining profits for the average U.S. hotel.” says Woodworth.  “ The experience we are seeing in 2003 is consistent with observations we’ve made of past recessions and recoveries.  As soon as revenues start to rise, as they will during the second half of 2003, hotel managers relax their austere cost control practices.  This extends the profit recovery period.”

On the positive side is the outlook for 2004.  HRG/TWR is forecasting an 8.9 percent increase in RevPAR for 2004.  Based on historical patterns, the magnitude and make-up of this projected increase in RevPAR could result in double-digit percentage growth in operating profits.

The 2003 Mid-Year Trends in the Hotel Industry report presents the financial performance data for various property type, ADR, room count, and chain-scale categories.  The report costs $100 and can be purchased from the HRG website (www.hrgonline.com) or by calling (404) 842-1150, ext 237. 

The Hospitality Research Group (HRG), headquartered in Atlanta, is the research affiliate of PKF Consulting, the international consulting and real estate firm specializing in the hospitality industry.  HRG, along with PKF Consulting and the PKF Consulting Capital Markets Group, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, and San Francisco.

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Contact:

Mark Woodworth
Executive Managing Director
The Hospitality Research Group
3340 Peachtree Road Suite 580
Atlanta, GA  30326
(404) 842-1150, ext 222

Robert Mandelbaum 
Director of Research Information Services 
The Hospitality Research Group 
3340 Peachtree Road
Suite 580 Atlanta, GA  30326
(404) 842-1150, ext 223

Also See: Operating Profits for the Average U.S. Hotel Dropped 9.6% in 2002, This After a 19.4% Decline In 2001 / PKF Consulting - HRG Annual Hotel Trends Report / April 2003
Hotel Benchmarking Revisited; Bottom-Line Comparisons Among Similar Properties Are the 'Bottom Line' / May 2003


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