Hotels Profit from Attrition and Cancellation Income
One of the lessons learned by hotel management during the 2001 to 2003 industry recession was the importance of attrition and cancellation clauses in group contracts. Because of 9/11 air travel stigma and the ensuing economic recession, meetings were canceled and attendance dwindled. All of the sudden, those attrition and cancellation paragraphs in the group contracts that were frequently viewed as “boiler plate” were rediscovered and helped to salvage some degree of revenue.
During the industry recovery of the mid-2000s, not only did hotel sales managers gain leverage at the negotiating table, but they remembered the benefits of the attrition and cancellation income received during the preceding downturn. At a negotiating disadvantage, meeting planners were forced to sign contracts with relatively punitive clauses. For hotels, the benefits of these negotiations became evident in 2009.
To understand the impact of the income earned by the enforcement of attrition and cancellation clauses in 2009, we examined data from 430 financial statements in our Trends® in the Hotel Industry database that reported attrition and cancellation income. Cancellation revenue is the income received from groups that cancel their reservations for rooms, food and beverage, and other services. Attrition income is received from groups that do not fulfill their guaranteed number of guest rooms, food and beverage, or other services.
In accordance with the 10th edition of the Uniform System of Accounts for the Lodging Industry, attrition and cancellation income are both recorded in Rentals and Other Income. They are not included in the calculation of average daily room rate (ADR). This differs from the handling of no-show revenue (individual reservation cancelations) which is included in Rooms Revenue and the calculation of ADR.
When discussing the performance of U.S. hotels in 2009, most of the conversation is dominated by the magnitude of decline. However, when talking about the revenue earned from attrition and cancelation fees, the conversation changes direction. In 2009, attrition and cancelation income grew 4.1 percent at the hotels in our study sample. This compares to a 19.5 percent decline in rooms revenue.
Because of their reliance on group business, it is not surprising that the growth in cancellation and attrition income was driven exclusively by the revenue collected at convention hotels and resorts. Both of these property types enjoyed attrition and cancellation revenue growth in excess of 12 percent.
Surprisingly, attrition and cancellation revenue at conference centers declined 34.1 percent from 2008 to 2009. The occupied room count at these properties did decline by 11.8 percent, so it appears that the exclusive dependence of conference centers on group demand impacted the degree to which sales personnel were willing to enforce the penalty clauses in their group contracts.
With attrition and cancellation income on the rise, this source of revenue grew as a component of total revenue. In 2009, attrition and cancellation income represented 1.3 percent of total revenue, up from 1.0 percent in 2008. Despite the decline referred to earlier, attrition and cancellation revenue made up 2.4 percent of total revenue at conference centers. For convention and resort hotels, this ratio averaged 1.2 percent and 2.1 percent respectively.
Since a minimal amount of variable expense is incurred to earn attrition and cancellation revenue, it can be assumed that most of the penalty payments received by hotels drop right to the bottom-line. Accordingly, it is proper to analyze this source of revenue as a percent of net operating income (NOI).
On average, attrition and cancellation revenue averaged 6.3 percent of NOI in 2009 at the hotels in the study sample. This is up from 3.8 percent in 2008. Attrition and cancellation revenue as a percent of NOI is greatest at conference centers (14.5 percent) followed by resorts (10.5 percent) and convention hotels (5.3 percent).
On average, NOI for the hotels in the sample declined 37.2 percent from 2008 to 2009. If not for the collection of attrition and cancellation penalties, the NOI for these sample properties would have dropped 38.9 percent.
Emotionally, it is tough for hotel managers to enforce attrition and cancellation contract clauses. Sales managers have to balance the need for short-term income with the long-term relationships they have with meeting planners. During good times when lost room nights can be replaced, hotel management will waive the clauses in exchange for promises of future bookings. However, during industry recessions, operators have now tasted the financial benefits of enforcement.
Robert Mandelbaum is the Director of Research Information Services for Colliers PKF Hospitality Research. He is located in the firm’s Atlanta office. To purchase a copy of the 2010 Trends® in the Hotel Industry report, please visit www.pkfc.com/store. This article was published in the October 2010 issue of Lodging.