Hotel profitability levels fall across Europe for second consecutive year

Global events - both economic and political - conspired to reduce hotel-operating profits again during 2002. According to figures released today from the HotelBenchmark Survey by Deloitte & Touche hotel profitability, measured in terms of the industry standard, Income Before Fixed Charges (IBFC), fell across Europe for the second consecutive year declining by 8% during 2002, compared with a 6% decrease in 2001.

These two years of falling profitability levels reverse the 16% growth recorded in 2000. The strength of Sterling relative to the Euro meant that UK hoteliers were once again hit harder with profitability levels falling 9%. However German hotels fared worst with profitability levels falling 14% as hoteliers struggled to reduce costs in line with the decline in revenue.

Outside Europe hoteliers fared rather better, reversing some of the reduction suffered in 2001. Across the Middle East profitability levels rose 0.7% whilst hotels in Asia Pacific averaged an impressive 7% growth.

With the industry currently experiencing some of the toughest trading conditions ever, owners and operators are looking to cut costs to rebuild profitability. There is a perceptible shift from building market share through growth in revPAR penetration to a focus on building IBFC and converting IBFC into cash for the benefit of both parties.

Almost 2,500 hotels in key markets across Europe, the Middle East and Asia Pacific contributed data to this year's publication, making this by far the most representative survey of global hotel profitability trends.

A key measure of efficiency is the ability of hotels to convert revenue in profit. The survey results reveal that hotels in the Middle East are the most effective at converting revenue to profit with 41 cents of every dollar being retained as profit. By contrast hotels in Asia were the least efficient with only 32 cents being retained as profit. Across Europe the profitability conversion rate was 36%. In pure monetary terms, hotels in Europe reported the highest IBFC per available some room at Euro 18,096 (USD 17,130). In contrast IBFC per available room in the Middle East was USD 15,238 and in Asia USD 14,365. Hotels in Germany under-performed the European average by some 50% reporting an average IBFC per available room of just Euro 9,485, whilst UK hotels out-performed the average recording IBFC of Euro 22,801 per available room. 

The survey shows that IBFC per available room in 2002, fell in over 80% of the surveyed European cities. Virtually all the European cities surveyed experienced a decline in profitability and only Birmingham, Cardiff, Edinburgh, Moscow and Leipzig reported any positive growth. For the second year running Cardiff was the UK's star performer reporting an 11% improvement in IBFC. Much of this growth is attributable to the improvement in average room rate in the city, as it is now recognized as both a sporting and commercial centre. German hotels were particularly badly affected by falling demand levels with total revenue per available room falling 8%. This translated into a 14% fall in profitability. Leipzig was the only German market to witness any growth during 2002 with an impressive 14% increase in profitability as both occupancy and average room rate improved during these challenging times. Hotels in Moscow also reported double-digit growth in profitability, up 14% over 2001 levels. Within the UK, unsurprisingly, hotels in London suffered the most. To compensate for the fall in demand from international travellers hoteliers have been discounting rates to attract the leisure traveller. The result was a fall in rooms revenue of 7% which translated into a dramatic 12% tumble in profitability.

Commenting on the results Julia Felton, executive director of the HotelBenchmark Survey at Deloitte & Touche, said, "2002 proved yet another challenging year for the hospitality industry as it sought to adapt to a fundamental shift in consumer buying patterns. Savvy leisure travelers looking for last minute deals combined with reduced corporate demand put average room rates under pressure. Within Europe this fall in revenue translated into a decline in profitability for the second consecutive year. With little prospect of an improvement on the horizon hoteliers will need to continue to carefully control costs, to ensure that profits levels are not eroded further during 2003".