European hotel profitability levels tumble for third consecutive year

Hotels across Europe reported the third consecutive year of profitability declines according to a new report released by the HotelBenchmark Survey by Deloitte. In 2003 the European hotel industry converted just 34 percent of revenue to profit compared to 39 percent in 2000. As a consequence profitability per available room has fallen by over Euro 5,000 since 2000 – the peak of the cycle.

Tough trading conditions caused by global economic and political events are the primary cause for the decline. Since 2000 occupancy levels have fallen six percentage points as travel has been scaled back, particularly post the events of 9/11 and during the Iraq war in early 2003. To stimulate demand hoteliers have discounted prices resulting in average room rates now being 8 Euros cheaper than in 2000. With fewer people travelling and less money being spent it is hardly surprisingly that hotel revenue has fallen by an average of 7,000 Euros per available room during this time.

Encouragingly the cost cutting measures put in place during the last recession (in the late 1990’s) mean that the industry is leaner and so better able to respond to a changing operating environment. During this time costs – both direct operating expenses and undistributed operating expenses – have been controlled, falling by nearly 2,000 Euros per available room. The most notable savings have been made in administration and general and property operations maintenance. The latter is  hardly surprising as a number of hotels have scaled back their capital expenditure plans after the events of 9/11.

Commenting on the results, Julia Felton, Executive Director of HotelBenchmark said: "2004 results indicate that a gradual recovery is beginning in the industry. With revPAR growth expected this year we are confident that the industry will experience positive growth in profitability in 2004, helping reverse the 12 percent decline experienced in 2003."