Hotel Industry finds silver lining over 25 years

Britain’s hotel industry has transformed itself into a significantly more profitable business in the last 25 years, according to PKF’s ‘UK Trends 2002’, which showed that profitability (IBFC) across the industry rose from 34.4% of revenue in 1977 to 41.9% in 2001.

The report says that the hotel industry has learned to tighten its belt over the last quarter of a century with departmental costs dropping from 44.8% of revenue to only 40.2% and total undistributed expenses (such as administration, maintenance and marketing) also curtailed from 20.8% to 17.9% of revenue.

The 25th edition of UK Trends covers more than 350 hotels and highlights the differing fortunes between the capital and the rest of the UK. PKF have produced the following summary of the report:

London occupancy fell 7.6% to 76.6% in 2001 but remained ahead of the rest of the UK, while rooms yield dropped 12.4% to £85.23. Profitability continued to be higher in the capital despite a 15.7% dip in IBFC – more than double the 7.0% fall in the regions – to £22,673 per available room. London suffered worst from the dearth of tourists during 2001 but still saw a raft of major openings such as Hilton’s The Trafalgar, the Victoria Park Plaza and the Sofitel St James. This was due to a mixture of the lengthy process involved in hotel development and the innate strength of the London market. The top end of the market was worst affected with rooms yield in the superior de luxe category down 18.6% and IBFC dropping 19.3%.

Outside London, hotels in England saw a second year of rooms yield growth, with a rise of 1.6% to £47.87. Average room rate was up 2.3% to £65.39, while occupancy fell by 0.7% to 73.2%. The smallest hotels in England, those with fewer than 100 rooms, fared best with rooms yield up 4.6% to £35.32. However, hotels with more than 100 rooms showed better profitability with the highest IBFC at £15,137 per available room.

Hotels in Scotland saw a third consecutive year of rooms yield decline in 2001/2, although only by a tiny margin – down to £42.80 from £42.83 the year before. Occupancy also dipped slightly from 69.8% to 68.5%. While total revenue edged up 1.9% to £31,599 per available room, IBFC dipped 2.4% to £10,396 per available room. Hotels with fewer than 100 rooms were the best performers, with a rooms yield increase of 8.4% to £40.25.

Wales was the main good news story with an occupancy leap of 9.4% to 76.3%, an average room rate rise of 5.0% to £58.57, and a rooms yield increase of 14.9% to £44.71. With revenues growing faster than departmental costs, IBFC was up 19.3% to £12,365 per available room. Cardiff helped fuel the rosy statistics with a bumper 2001 – occupancy rose 12.7% to 73.8% at an average room rate of £52.33, boosted by the settling in of newer properties and the success of the Millennium Stadium hosting major sports events.

Melvin Gold, managing director of hotel consultancy services at PKF, said: “The industry’s performance in 2001 must be viewed against the backdrop of foot and mouth disease, the economic malaise across the Atlantic and the terrorist attacks of 9/11. For the UK as a whole, the millennium proved to be only a temporary reprieve for occupancy. It fell in 2001/02 for the third time in four years. However, the performance figures for the UK overall mask two very different scenarios: a helter-skelter drop in London’s rooms yield and a modest rise in the rest of the UK.

“For London, which was at the heart of the Queen’s golden jubilee celebrations, the worst appears to be over and the focus is now on recapturing lost custom. The recovery is likely to gather pace towards the end of the year. Although we expect to see a further fall in rooms yield – as hotels win back occupancy at the expense of average rate – this drop will be only minor and will provide a platform for a solid comeback in 2003 and beyond.

“The rest of the UK, despite major events such as the Commonwealth Games in Manchester, is likely to have a rougher time in 2002, especially if the domestic economy falters further. We anticipate that the year will end with rooms yield easing back slightly, although this is likely to be won back in 2003 and reapplied with interest in 2004.

“On the hotel property front there is speculation about further sale and leaseback deals. There is neither a shortage of hotel companies keen to release capital this way nor a shortage of institutional investors prepared to diversify into a sector that offers steady yields over time, especially during a period of stock-market volatility.”

For copies of PKF’s UK Trends 2002, priced £300, e-mail: mailto:[email protected]. Please mention you read this information on TravelMole.

Note:
Definition of the key terms used in the report are given below:
Room occupancy: the ratio of total occupied rooms to total available rooms
Average achieved room rate (AARR): rooms revenue divided by the total number of guest rooms occupied during the year
Rooms yield: room occupancy multiplied by the average achieved room rate (also knows as RevPar)
IBFC: income before fixed charges – operating profit before deducting rates, rent, interest, insurance, depreciation and amortisation and income taxes.