2010 Was A Budget Beater for Hotels

After suffering through record-breaking declines in revenues and profits during 2009, it is not surprising that U.S. hoteliers were a bit conservative when preparing their operating budgets for 2010.In the fall of 2009 (when the 2010 budgets were being prepared), hotel owners and operators were anticipating some degree of a turnaround in 2010. How could conditions possible get worse?

In hindsight, U.S. hoteliers were correct. According to Smith Travel Research (STR), revenue for the average property (RevPAR) increased 5.5 percent in 2010. This was the result of a 5.6 percent increase in occupancy, but a 0.1 percent decline in average daily room rates (ADR).

While the 2010 budgets for U.S. hotels did project a rise in revenue, the magnitude and composition of the revenue growth were a surprise. U.S. hotel budgets for 2010 severely underestimated the occupancy and revenue growth properties would enjoy, but overestimated the ability of management to implement price increases.

As U.S. hotel operators sit down to prepare their budgets for 2012, what lessons can be learned from past practices? To assist hotel managers, PKF Hospitality Research (PKF-HR) examined the accuracy of 687 hotel budgets for the year 2010. The data was taken from the Trends® in the Hotel Industry database of PKF-HR.

More Guests Than Expected

Looking towards 2010, the hotel managers in our survey sample budgeted for a paltry 1.2 percent increase in total revenue. Fortunately, at the end of the year, total revenue grew by 5.0 percent.

An underestimation of the number of rooms expected to be occupied was the main reason for the discrepancy in budgeted total revenue. The properties in our research sample anticipated just a 0.7 percent increase in occupied rooms in 2010, but actually ended up accommodating 5.8 percent more rooms.

To be fair to hoteliers, PKF-HR's Hotel Horizons® econometric forecasting model also underestimated the increase in lodging demand that took place in 2010. Given the stagnation in the employment and housing sectors of the economy, the degree to which travelers returned to the road was remarkable.

Given the anticipated improvement in market conditions, hotel managers were hoping to terminate the severe rate discounting practices that occurred throughout 2009. Accordingly, they forecast a 0.4 percent increase in ADR for 2010. While the need to discount eased throughout the year, on an annual basis average rates did decline 0.1 percent in 2010 for the survey sample. The softness in hotel room rates can partially explain the greater than expected rise in occupied rooms.

More Guests = More Costs

To serve the projected increase in occupied rooms, the hotel managers in our survey anticipated the need to schedule more employees and purchase additional goods and services. Total operating expenses (operated departments, undistributed departments, fixed charges) were forecast to increase 1.3 percent from 2009 to 2010. As 2010 progressed and occupancy levels rose, management gladly spent more money than budgeted to operate their properties. By year end, the hotel operators in our survey sample paid an extra 2.1 percent over budget for operating expenses.

Despite the 2.1 percent expense overage, the surplus in total revenue enabled the hotels in the survey sample to surpass their target net operating income (NOI). NOI was anticipated to increase just 2.6 percent in 2010, but the sample properties actually enjoyed a 12.0 percent rise on the bottom-line. At the end of the year, hotels exceeded their budgeted dollar profit levels by 9.2 percent.

Budgeting For 2012

Through the first half of 2011, lodging demand continued to rise, occupancy was up, and room rates began to increase. However, concerns over oil prices, the housing market, and the overall economy persist. These factors combine to make hotel managers cautiously optimistic as they prepare their budgets for 2012.

Based on STR historical lodging performance data and economic forecasts provided by Moody's Analytics, PKF-HR is projecting strong growth in both revenues and profits for 2012. According to the September 2011 edition of Hotel Horizons®, a 2.4 percent rise in occupancy, combined with a 4.8 percent increase in ADR, will result in a 7.5 percent increase in total revenue for the average U.S. hotel next year.

For multiple reasons, PKF-HR expects a significant amount of the additional revenue will flow through to the bottom-line in 2012. First, ADR will be the main driver of revenue growth, thus sufficiently covering the incremental variable expenses that will be incurred because of the increase in occupied rooms. Second, the continued high rate of unemployment, and resulting lack of pressure on salaries and wages, will help to suppress increases in labor costs.

The net result is a forecast increase of 5.0 percent in operating expenses, which should result in a 15.2 percent rise in profits for the average U.S. hotel in 2012.

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Robert Mandelbaum is the Director of Research Information Services for PKF Hospitality Research. He is located in the firm's Atlanta office. For more information on the reports PKF-HR offers to assist hoteliers in the budgeting process, please visit www.pkfc.com/store. This article was published in the September 2011 edition of Lodging.

photo of Robert Mandelbaum