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Operations report has mixed results

Sydney Harbour aerial

Despite historically high occupancy and room rate levels, Australian hotel profit margins have failed to grow in the past five years, according to research released today by leading hotel consultants Horwath HTL Australia, in their annual Survey of Operations report.

The findings, based on trading results in 2012 from over 60 mostly city based 5-, 4- and 3-star hotels, were released at the HotelsWorld 2013 conference in Sydney this week (Jul 24-25).

Survey wide occupancy in 2012 reached an impressive 78%, the same level as reported in the 2007 Survey of Operations, before the onset of the global financial crisis. Room rates over the five-year period grew by over 5% per annum. Yet despite the combined effect of both high occupancies and strong room rate growth, Gross Operating Profit as a percentage of revenue declined marginally over the period, from 36% in 2007 to 34% in 2012.

Both rooms department and food and beverage department profit margins failed to grow over the period despite the higher revenues. Growth in undistributed expenses (that include marketing, administration, energy and maintenance costs) also matched revenue growth.

Accordingly, no operating efficiency benefits were derived from the higher revenue level.

Horwath HTL Australia CEO John Smith said the findings were disappointing, but not surprising given the high operating cost environment in Australian cities.

“The result highlights that Australia now has some of the most expensive cities in the world and hotels like all other businesses, have to work within the escalating cost environment imposed on them,” he said.

He said that whilst in profit percentage terms, Gross Operating Profit levels for the surveyed hotels failed to grow over the five-year period, in dollar terms there had been strong growth reflecting the strong growth in room rates.

The 2013 Survey revealed that Perth was the most profitable city in Australia for hotels, with the surveyed properties in that city achieving a Gross Operating Profit of over $40,000 per room per annum, compared to less than $40,000 in Sydney and Brisbane; and less than $35,000 in Melbourne. Canberra and Adelaide achieved less than $30,000 per room.

Outside the cities, Gross Operating Profits of less than $20,000 per room were indicated in the Survey, in part reflecting the challenges for resort markets that continue to be adversely impacted by the combined effect of a high Australian dollar and the growth in low cost carriers to alternative resort destinations.
Perth’s market leading result was achieved through revenues per available room in its surveyed hotels, being almost 20% higher than Sydney and Brisbane; and over 30% higher than the surveyed hotels in Melbourne.

Commenting on the Survey findings from a regional perspective, Horwath HTL Pacific Asia Managing Director, Robert Hecker noted that whilst Australian hotels are achieving a comparatively high revenue per available room level, their profitability levels remain below many other markets in the region.

“Australia’s Gross Operating Profit level of 34% compares to 43% for Singapore surveyed hotels and 48% for Hong Kong surveyed hotels,” he said.

Australia’s comparatively high labor costs, in what is a labor-intensive industry, accounts for its hotels comparatively lower profit levels.

However, Hecker noted that labor costs are also rising across the region and, even in markets where labor costs in dollar terms are comparatively low, what matters most in comparing performance is the relativity between revenue levels and labor costs.

Hence, whilst labor costs are comparatively low in China, so are hotel room rates and occupancy rates, such that Gross Operating Profit percentages in China are running at similar levels to those in Australia.

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