Revenue growth doesn't mean profits for Europe hotels: HotStats

Now that most of the large hotel companies have reported their Q3 earnings, HotStats has released a new analysis examining how the big brands stood up to the aggregate numbers in Europe.

While European hotels reported rooms revenue improving at a higher year-over-year pace for the quarter, profit actually declined. Report author David Eisen, HotStats’ director of hotel intelligence and customer solutions (and former editor-in-chief of Hotel Management) noted that this disparity illustrates how strong revenue doesn’t always equal bottom-line success.

Revenue per available room was up 1.1 percent in Q3 over the same period last year and average room rate grew 0.9 percent against a 0.1-percentage-point uptick in occupancy. Total revenue in Europe’s hotels grew at a lower rate, up 0.7 percent in the quarter over the same period last year. Expenses increased, however, with a 2 percent year-over-year growth in total overheads on a per-available-room basis and a higher 2.5 percent year-over-year increase in hotel labor costs per available room.

Ultimately, Europe’s hotels reported a 1 percent decrease in gross operating profit per available room over the same period last year, indicative of a small uptick in revenue whittled down by cost, resulting in overall profit drop.

This did not, however, hurt London’s hotels, which reported a “generous” 3.7 percent RevPAR increase in Q3, corresponding with a 2.1 percent growth in profit.  

How the Chains Fared

These trends match the Q3 numbers from most of the publicly traded hotel companies. Marriott International reported comparable global systemwide constant dollar RevPAR growth of 1.5 percent for the quarter, but in Europe, the company’s RevPAR was 2.1 percent over Q3 2018. But while Marriott’s revenue was up year over year, its profit was not. The company reported net income of $387 million in the third quarter—compared to 2018 third quarter reported net income of $503 million—a 23 percent drop. 

Marriott’s total expenses for the third quarter were 5 percent higher than the same period in 2018, and the company exceeded the year-over-year rise in RevPAR by 350 basis points. “This lopsidedness naturally is a profit killer and proof of how Marriott’s Q3 net income dipped so much,” Eisen wrote in the report.

For Hilton, systemwide RevPAR increased 0.4 percent in Q3 over the same period last year, another example of slowing industrywide RevPAR growth trends.

“RevPAR is contracting and expenses are rising, which is a recipe for profit deterioration over time,” the report claimed. “The issue at hand is that operating expenses are not receding and some, such as payroll, are increasing on a quarterly basis.”  

Talking with Hotel Management, Eisen acknowledged that while there is no “silver bullet” for making sure a hotel is profitable on a month-to-month and quarterly basis, there are things operators can do to improve flow-through, or how much revenue falls to profit over a given period of time. “The greatest deliverer of revenue is from the rooms department, so make sure rate is optimized [because] it’s the greatest contributor of performance,” he said. “But even [if] rate and top-line revenue are optimized, expenses can quickly erase those gains. Beyond expenses incurred in the rooms and [food-and-beverage] departments, hoteliers need to watch their costs in nonoperating departments, such as [administrative and general] and maintenance. A strong balance and vigilant eye on both revenue and cost is key to ensuring bottom-line profitability.”