|by Robert Mandelbaum, April 2005
Ever since the mid-1990s, hotel managers have noticed the guest use of in-room phones has stagnated. The reasons are fairly obvious – the increased use of cell phones and calling cards, as well as a backlash against telephone call surcharges.
For a typical U.S. hotel, the revenue derived from local and long-distance phone calls remained relatively flat from 1998 through 2000, and then declined severely from 2001 through 2004. While the drop in revenue since 2001 can be partially attributed to the industry-wide recession, it should be noted that phone revenue measured on a per-occupied-room basis has also declined since 2001. In 2000, U.S. hotels averaged $4.16 per occupied room in telephone revenue. This statistic fell to an estimated $2.00 in 2004, thus indicating that the magnitude of the decline in phone revenue was greater than the fall-off in rooms occupied.
Historically, telephone revenue has averaged between two and three percent of total revenue. Therefore, management has not given it a significant amount of attention. Prior to the 1980s, most hotels simply tried to re-coup the cost of calls charged by the phone company. In the 1980s and 1990s, surcharges were added in an attempt to cover such other costs as phone operators, equipment maintenance, and line charges.
The combination of surcharges, enhanced call accounting systems, and deregulation within the telecommunications industry transformed the “Telephone Department” from a breakeven operation to a profit center. During the late 1990s and into 2000, Telecommunications Departmental profit margins reached 50 percent. During the peak performance year of 2000, telecommunications revenue represented only 2.5 percent of total revenue. However, this department’s profit contributed 4.0 percent to the typical hotel’s net operating income (NOI).
With hotel managers counting on the Telecommunications Department to
add to the overall profitability of their hotels, the recent turmoil within
this department was even more painful, given the recent industry recession.
Not only have Telecommunications Department revenues declined to a greater
degree than total hotel revenues, so have the department’s profits.
From 2000 to 2003, the typical U.S. hotel experienced a decline in NOI
of $5,062 per available room, or 36.2 percent. During this same period,
Telecommunications Department profit dropped $421 per available room, or
72.7 percent. Therefore, the decline in Telecommunications Department
profitability made up 8.3 percent of the decline in total hotel profits.
This “Minor Operated Department” had a moderate impact on the overall decline
in hotel profitability during the recent recession.
Revenue Loss Management
In an attempt to stem the recent trend of declining revenue, hotel managers have employed different strategies. Most hotels continue to add surcharges to phone calls made from the guest rooms. Other hotels have entered the calling card business in an attempt to start a new source of revenue.
On the other hand, some hotels have begun to offer certain guests complimentary long-distance phone calls. Conceding the current low levels of revenue and profit contribution from the Telecommunications Department, these companies have attempted to leverage the marketing value of free phone calls. Free local calls have long been an amenity within the economy and all-suite segments.
In the ninth edition of the Uniform System of Accounts for the Lodging Industry, the name of the Telephone Department was changed to the Telecommunications Department. This was partially in recognition of the other revenue sources that are categorized within this department. Historically, other revenue sources within the Telephone Department were service charges, commissions from non-owned pay stations, and revenue from owned pay stations. In recent years, other telecommunications revenue sources have expanded to monies received from fax machines and internet charges.
It is important to note that, in the face of declining overall total revenues within the Telecommunications Department, revenue derived from the “other” sources has increased. From 2000 to 2003, total Telecommunications Department revenue declined 50.3 percent. However, during this same period, the revenue derived from such sources as fax machine, internet charges, and commissions has increased 9.1 percent. Therefore, the decline in Telecommunications Department revenue can be solely attributed to the drop in guest use of in-room phones.
There has been a lot of speculation on the future of Telecommunications
Revenue within hotels. Several people believe that the proliferation
of portable communication devices will lead to the extinction of in-room
phone units, and possibly fax machines and internet connections.
Whether or not phone units go the way of the in-room fly swatter, hotel
managers will need to adapt to new technologies. Guests continually
demand all the new amenities and services that they use at home and at
work. It is up to hotel managers to continue not only to provide
these evolving amenities and services, but to find a way to profit from
them as well.
Robert Mandelbaum is the Director of Research Information Services for PKF Consulting. He is located in the firm’s Atlanta office.
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|Perspectives on the Road to Recovery - U.S. Lodging Industry 2005 / HRG & PKF Consulting / November 2004|
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