U.S. Hotel Profits Up 13.1% in 2006

. October 14, 2008

ATLANTA, GA, November 28, 2006. The U.S. lodging industry continues to benefit from double-digit profit growth in 2006. According to a recent study, the gross operating profit (GOP) for the typical U.S. hotel increased 13.1 percent from the first half of 2005 to the first half of 2006. However, during this period hotel managers continued to struggle to control such costs as salaries and wages, employee benefits, utilities, and maintenance. This analysis is based on data presented in the recently released 2006 mid-year edition of Trends in the Hotel Industry published by PKF Hospitality Research (PKF-HR), an affiliate of PKF Consulting.

"Due to the strength of the economy, U.S. hotels posted healthy increases in occupancy and room rates during the first half of 2006," said R. Mark Woodworth, president of Atlanta-based PKF-HR. "Given where the lodging industry is in the business cycle, the strong gains in room rates were expected, and the sustained growth in occupancy augurs well for continued profit growth. While the resulting 9.7 percent gain in total revenue is certainly welcome, it is the 7.8 percent increase in operating expenses that concerns hotel owners and operators."

"Compared to other industries, the hotel business does not benefit to the same degree from gains in productivity due to automation," Woodworth noted. "Hotels are very labor-, marketing-, and management-intensive. They are 24/7 operations that require a complete re-sell of the inventory each and every day. The 13.1 percent increase in profit over the first six months of 2006 has been achieved because the marketplace has generated revenues that outpaced the sharp rise in these burdensome operating expenses."

The PKF-HR 2006 mid-year edition of Trends in the Hotel Industry presents detailed revenue and expense data for both full-service and limited-service hotels for the periods January through June of 2006 and 2005. For the purposes of this report, operating expenses and GOP are calculated before deductions for management fees, property taxes, and insurance.

Strong Revenue Growth

Total hotel revenue grew 9.7 percent during the first half of 2006, the result of strong sales in most operating departments. The survey sample averaged a 1.9 percent gain in occupancy, along with an 8.5 percent increase in average room rates (ADR). The net result was a 10.6 percent boost in rooms revenue, the main driver of total revenue.

"A benefit of the strong gain in occupied rooms is the contribution it made to increased business in the restaurants, lounges, and other operated departments of the nation's hotels," Woodworth noted. "Except for the telecommunications department, all minor sources of hotel revenue achieved growth in excess of 7.0 percent."

Unallocated and Uncontrollable

Hotel operating expenses grew an average of 7.8 percent during the first half of 2006. This is more than twice the 3.8 percent U.S. inflation rate recorded during the same period.

"When analyzing the data, all expense items experienced strong increases during the first half of 2006," said Woodworth. "A closer look reveals that the greatest increases in operating costs occurred in the areas where management has the least control."

Total operated department expenses grew 6.7 percent in the first six months of 2006, compared to a 9.5 percent growth in undistributed department expenses. Undistributed department costs, such as administration, marketing, maintenance, and utilities, are typically viewed primarily as fixed expenses. In other words, they do not vary as much with business volume as the expenses in the rooms, food, and beverage departments.

"The fact that undistributed operating expenses grew faster than the operating department costs is indicative of the rise in the base cost of the goods and services that hotels must purchase to sustain their operations," Woodworth said. "For example, hotel management has very little control over a sharp rise in utility costs, or increases in royalty payments based on the terms of their franchise contract. On the other hand, operators do have the ability to adjust the staffing of room attendants or bartenders to control labor costs."

Limited-Service Thriving

Through the first half of 2006, limited-service hotels enjoyed greater gains in revenue and profits compared to full-service properties. During the first six months of 2006, limited-service revenues grew 11.1 percent, which resulted in a 17.7 percent gain in GOP. Concurrently, full-service hotels saw their revenues grow 9.5 percent, while enjoying a 12.4 percent increase in profits.

"Limited-service hotels did not experience as severe a decline in performance during the 2001 - 2003 recession, thus positioning the segment a little behind full-service hotels in the long-term business cycle. Limited service hotels are currently experiencing great gains in revenue and profits because their recovery has occurred at a slower pace," Woodworth said. "Full-service properties have already reached the peak of their recovery and are now entering a period of more modest profit growth."

Slower Finish, Yet Still Strong

Due to the impact of Hurricane Katrina on industry performance during the fourth quarter of 2005, as well as a moderation in the nation's economic growth, PKF-HR is expecting a slight slowdown in the pace of performance gains during the later part of 2006. "The lingering Katrina and economic impacts on lodging industry performance during the fourth quarter of 2006 will result in annual revenue and profit gains somewhat less than those achieved during the first half of the year. However, PKF-HR is still projecting that 2006 will mark the third consecutive year of double-digit profit growth for U.S. hotels," Woodworth concluded.

PKF Hospitality Research (PKF-HR), headquartered in Atlanta, is the research affiliate of PKF Consulting, a consulting and real estate firm specializing in the hospitality industry. PKF Consulting has offices in Boston, New York, Philadelphia, Washington DC, Atlanta, Indianapolis, Houston, Dallas, Los Angeles, and San Francisco.

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