revpar, room rate and occupancy

The most commonly used measure of hotel company revenue is revpar, or average  daily revenue per available room.  It’s not my favorite indicator, although it does have the virtue of being a single number.  There’s no escaping it in the industry, however.  People love jargon–it makes you seem  like an insider.

Revpar is the product of two factors multiplied together:  room rate and occupancy rate.  Under a lot of conditions, you really don’t need to break revpar down into the component of any changes that comes from room rate and the one that comes from occupancy.  The present time is an exception.

the occupancy/room rate tradeoff

Staying in a hotel where there’s no one else can be scary.  At the very least, you’ll probably question your judgment in selecting an otherwise empty building.  You may also start to worry about your physical safety.  Not the kind of experience a hotel wants you to have–if it expects any repeat business.

So having a certain level of occupancy–maybe 30%–is crucial.  At the bottom of the economic cycle, if a hotel can’t generate enough customers itself, it will offer steep discounts to airline crews and tour groups, just to create a positive ambience of full-paying guests.  It may also put more rooms out for sale on internet travel sites.

On an incremental basis, it probably costs a four- or five-star hotel a little over $10 on an out-of-pocket basis to rent a room for a night.  That’s mostly changing the sheets and towels and replacing soaps, shampoos and other toiletries.  So it will generate positive cash flow at almost any room rate.  In recession, then, when an area is swimming in empty hotel rooms, a hotel will try to add occupancy and will keep its room rate low.  Trying to raise rates will simply drive customers into the arms of rivals.

Again as a general rule, a hotel will break even on an out-of-pocket basis at 50% occupancy, break even on a financial reporting basis at 60%, and begin to bring in profits in bushel baskets at 70% occupancy.  At some point, possibly when it is confident of rising past financial reporting breakeven, the four-star hotel will not renew its airline and tour group contracts (these customers will start their cyclical shift to lower-rated accommodations).  With a lag, that action alone will begin to raise room rates.

The final step in cyclical recovery comes when the hotel begins to gently raise rates for all customers, rather than just eliminate discounts.

the Marriott announcement

At a Goldman conference on lodging in New York earlier in the week, Marriott’s chief operating officer announced that in May, for the first time in almost two years, its room rates in the US had shown a small (1%) year on year increase.  Revpar was up 9%, meaning occupancy was up about 8% yoy.

He explained hat six weeks earlier, when reporting its March quarter results, MAR has said that its business in the US was recovering much faster than it had expected–it revised full-year revenue guidance up by 4.5%, the highest upward revision it has ever made–and said it was approaching the point where it might begin to see room-rate increases.

That point, to, has now arrived–again, faster than expected.

The rate increase doubtless comes from an improvement in business travel, which always leads more price-sensitive leisure travel in the economic cycle.  It implies that industry in the US is feeling better enough about its profit prospects to be willing to travel more.  Not only that, but it suggests that hotels are full enough with their colleagues that businessmen are being compelled to pay a bit more to be assured of having a room.

This is another piece of news suggesting that the US economy is in better shape than Wall Street currently wants to concede.