Tips for improving hotel revenue include sustainable operations, employee engagement, and internet technology
Improved, profitable operations keynote ten case studies presented by Cornell's Center for Hospitality Research (CHR). The cases included in the third set of the CHR series include concepts for improving hotel revenue from sustainable operations, employee engagement, and internet technology. The authors are Cathy Enz, Rohit Verma, Kate Walsh, Sheryl Kimes, and Judy Siguaw. Enz, Verma, Walsh, and Kimes are members of the faculty at the Cornell School of Hotel Administration. Siguaw is dean of the College of Human Ecology at East Carolina University.
The Cornell Hospitality Report, "Cases in Innovative Practices in Hospitality and Related Services: Set 3," features Cayuga Sustainable Hospitality, Chic & Basic, JetBlue Airlines, Jumeirah Essex House, The Ritz-Carlton Hotel Company, Runtriz, The Seaport Hotel, Thayer Lodging, TripTelevision, and Xsense Experiential Design Consulting. The hospitality report is available at no charge, at www.hotelschool.cornell.edu/research/chr/pubs/reports/2010.html.
The cases are as follows:
•Cayuga Sustainable Hospitality has applied a sustainable management approach to remote lodges in Costa Rica, both to improve revenues and to ensure environmental protection;
•Chic & Basic has opened upscale hostels in Spain, with low-cost design and amenities unlike most of the typical dormitory-style facilities, including private rooms with baths, free internet, and plasma TVs;
•JetBlue Airways has adapted the net promoter score, a customer-satisfaction scale to measure its employee satisfaction, as a means of improving service throughout the company;
•As part of its property renovation, the Jumeirah Essex House hired a curator who created an artist-in-residence program that has resulted in installations in several media, all designed to reinforce the hotel's connection with New York City and Central Park;
•Building on its tradition of legendary guest service, The Ritz-Carlton Company has created a training program called "Radar On—Antenna Up," which is designed to improve employees' ability to anticipate guests' needs, even before they express them;
•Runtriz has developed an application that uses an interactive touch-screen technology to allow guests at luxury hotels to make service requests, get information, and order food via their mobile devices—thereby speeding employees' and concierges' responses;
•Boston's Seaport Hotel, a harborside convention property, has made a wide-ranging sustainability initiative into its chief competitive differentiation, both increasing revenue and cutting costs;
•Thayer Lodging has focused on offering Pure Air Solutions in guest and meeting rooms as a means of improving guest satisfaction and charging a premium, with such favorable results that it has increased the number of "clean" rooms;
•TripTelevision takes web video to its next logical level by connecting video clips of hotels and destination amenities with marketing analysis to improve travelers' knowledge and boost sales; and
•XSense Experiential Design Consulting uses intense research to help developers connect their resort properties to their location, so that guests gain a more favorable experience by immersing themselves in the history and culture of a destination.
Each case study in the hospitality report describes the innovation, gives details on its execution, reviews the outcomes, and offers insights, with a goal of helping all hospitality innovators.
Meet and interact with Professor Verma and Professor Walsh, active members of the executive education faculty at the School of Hotel Administration, when they present sessions in the Professional Development Program: www.hotelschool.cornell.edu/industry/executive/pdp/.
Thanks to the support of the CHR partners listed below, all publications posted on the center's website are available free of charge, at www.chr.cornell.edu.
Thursday, July 1, 2010
World's Most Outrageous Hotel Fees
More and more hotels are adding fees to room bills. But you can take steps to protect yourself if you look before you book.
There's nothing new about outlandish hotel surcharges. The October 6, 1904, edition of The Daily Star in Fredericksburg, VA, published a list of unscrupulous lodging fees, mainly in Europe, that included fees for towels, nightshirts, heat, hot water, horse stabling (whether the guest brought a horse or not), and, in one hotel, a one-penny fee for each ascent and descent in the hotel elevator.
My own distaste for hotel surcharges began years ago on my first business trip, when I ate an entire jar of what appeared to be complimentary macadamia nuts. At checkout I discovered the snack had cost me $12 (not to mention an upset stomach). If anything, the add-ons since then have gotten worse for guests, but much more profitable for the hotels. The lodging industry stands to earn more than $1.75 billion this year in surcharges alone, which means extra fees are likely to be with us for years to come.
The inflated cost of some surcharges raises the ire of many guests: $5 to have a package delivered to your room, $20 for Internet connection, $30 or more for mandatory valet parking. But more important than the dollar amount is whether the fee was made clear to you at check-in. "The recent trend for hotel surcharges is disclosure," says Robert Mandelbaum, director of research information services for PKF Hospitality Research. "More and more often you will see tent cards telling you what costs extra in your room. And that's fair. But there are some horror stories of surcharges, like towel fees, mini-bar restocking fees, and housekeeping fees."
Other surcharge surprises include additional fees to pay with a credit card, a charge of $1–$3 for the in-room safe (whether you use it or not), and even a fee to use the in-room coffeemaker. "Resort fees" of $25 a day or more are commonplace. And some hotels, especially in the Caribbean, are still tacking on energy surcharges—despite the absence of an energy crisis. The list is as long as it is upsetting.
Don't expect relief any time soon, if ever. According to PKF Hospitality Research, 2010 will still be a very soft year for the lodging industry. Revenues probably won't return to pre-recession levels until at least 2012. For now, hotels need to keep their rates low to be competitive, but they also need to add on as many surcharges as possible to be profitable.
Remember the old newspaper article, above? Another hotel charge it listed was for "table decorations" at hotels in Corsica. "Anyone who wishes to avoid this exaction," said the writer, "should instruct the head waiter to put no flowers on his table." At least that's one surcharge modern-day hotel guests don't have to worry about. Yet.
In the meantime, here are some tips on sidestepping surcharge surprises:
•Be proactive. Ask when you book if there are any mandatory fees (and taxes) that will be added to your bill. Seasoned travelers know to look for these charges before they book and to complain about them in advance.
•Check your bill carefully before you sign it. It's easier to dispute a charge at checkout than afterward.
•Calmly object if you think a fee is unfair or was not disclosed in advance. Desk clerks often have the authority to remove them.
•If not, ask for the manager.
•Forget it—until the next time you book a hotel. Then go somewhere that charges guests fairly.
There's nothing new about outlandish hotel surcharges. The October 6, 1904, edition of The Daily Star in Fredericksburg, VA, published a list of unscrupulous lodging fees, mainly in Europe, that included fees for towels, nightshirts, heat, hot water, horse stabling (whether the guest brought a horse or not), and, in one hotel, a one-penny fee for each ascent and descent in the hotel elevator.
My own distaste for hotel surcharges began years ago on my first business trip, when I ate an entire jar of what appeared to be complimentary macadamia nuts. At checkout I discovered the snack had cost me $12 (not to mention an upset stomach). If anything, the add-ons since then have gotten worse for guests, but much more profitable for the hotels. The lodging industry stands to earn more than $1.75 billion this year in surcharges alone, which means extra fees are likely to be with us for years to come.
The inflated cost of some surcharges raises the ire of many guests: $5 to have a package delivered to your room, $20 for Internet connection, $30 or more for mandatory valet parking. But more important than the dollar amount is whether the fee was made clear to you at check-in. "The recent trend for hotel surcharges is disclosure," says Robert Mandelbaum, director of research information services for PKF Hospitality Research. "More and more often you will see tent cards telling you what costs extra in your room. And that's fair. But there are some horror stories of surcharges, like towel fees, mini-bar restocking fees, and housekeeping fees."
Other surcharge surprises include additional fees to pay with a credit card, a charge of $1–$3 for the in-room safe (whether you use it or not), and even a fee to use the in-room coffeemaker. "Resort fees" of $25 a day or more are commonplace. And some hotels, especially in the Caribbean, are still tacking on energy surcharges—despite the absence of an energy crisis. The list is as long as it is upsetting.
Don't expect relief any time soon, if ever. According to PKF Hospitality Research, 2010 will still be a very soft year for the lodging industry. Revenues probably won't return to pre-recession levels until at least 2012. For now, hotels need to keep their rates low to be competitive, but they also need to add on as many surcharges as possible to be profitable.
Remember the old newspaper article, above? Another hotel charge it listed was for "table decorations" at hotels in Corsica. "Anyone who wishes to avoid this exaction," said the writer, "should instruct the head waiter to put no flowers on his table." At least that's one surcharge modern-day hotel guests don't have to worry about. Yet.
In the meantime, here are some tips on sidestepping surcharge surprises:
•Be proactive. Ask when you book if there are any mandatory fees (and taxes) that will be added to your bill. Seasoned travelers know to look for these charges before they book and to complain about them in advance.
•Check your bill carefully before you sign it. It's easier to dispute a charge at checkout than afterward.
•Calmly object if you think a fee is unfair or was not disclosed in advance. Desk clerks often have the authority to remove them.
•If not, ask for the manager.
•Forget it—until the next time you book a hotel. Then go somewhere that charges guests fairly.
Wednesday, June 30, 2010
ADA enforcement "sweeps" hit the West Coast - Exactly what does this mean to the lodging industry?
As discussed below, the new sweeps are a "warning shot" - something that all lodging operators should take very seriously, and they should start working NOW to be prepared for these investigations.
But this is only the tip of the iceberg in terms of what lodging professionals should be thinking of in terms of accessibility compliance. In this article and the next one, I will interview two of the Senior Members of JMBM's Global Hospitality Group® who lead our ADA defense practice for owners and operators.
Marty Orlick is one of the top ADA lawyers in the country, with more than 300 ADA lawsuits and investigations under his belt, and he is actively involved in defending hotels that are included in the DOJ's ADA survey. Jim Abrams, who retired as the President & CEO of the California Hotel & Lodging Association, has advised hundreds of lodging operators about, and written and lectured extensively on, all aspects of accessibility laws that apply to the hospitality industry.
What if I receive an ADA Compliance Questionnaire from DOJ?
Jim Butler: If I am the owner or manager of a hotel and get an envelope from the DOJ with one of its ADA Compliance Review questionnaires, what should I do?
Marty Orlick: First, take it very seriously! Get the questionnaire to the right person as quickly as possible. You want an experienced ADA defense lawyer to walk you through these deceptively simple questions. DOJ is surveying both hotel owners and managers, and the last thing you want is for this document to be sitting in someone's inbox while the person tries to figure out what it means and who should be dealing with it. Every question on the form has been carefully drafted to elicit important information about ADA compliance. The survey is specifically focused on identifying architectural and communications (e.g., signage) access barriers and, equally important, your hotel's ADA policies and procedures. It is very detailed. Completing the questionnaire will take time and careful thought.
Don't complete it yourself. Have an ADA defense lawyer review it and advise you, first!
Jim Butler: Why can't a knowledgeable hotel professional answer the questionnaire? Why should a lawyer -- much less an ADA defense lawyer -- get involved?
Marty Orlick: Each question is designed to obtain precise information about complex, technical compliance with the ADA guidelines. The forms must be completed under penalty of perjury, so wrong answers could subject someone to criminal penalties or create other unfortunate liabilities. Your answers can also help you to clarify the hotel's accessability features, policies and procedures.
In this very technical, legal context, hoteliers are unlikely to understand the legal issues in answering these critical questions. Even lawyers are unlikely to understand the implications unless they specialize in ADA matters. The questions must be thoroughly understood from a "Standard of Compliance" perspective as defined by law.
The wrong answer to a misunderstood question can cause serious problems that could cost you dearly. And the fact that your hotel has spent a lot of time and money to make the property accessible to the disabled does not mean the property will be fully compliant with the ADA.
Jim Butler: Give us an example of a question that could cause a hotelier problems.
Marty Orlick: Questions about guest rooms have to be answered with great care. The questionnaire will likely ask for a description of all room categories in the hotel, and the number of accessible rooms in each distinct room class, because the ADA generally requires hotels to provide accessible rooms in each class. The thing you have to ask is: "What is a "category" or "room class"? In answering the questionnaire, you should NOT list each marketing or price-point category, as opposed to room types that are actually functionally the same accommodations but have minor differences. If you did, you would create a problem. Your hotel may have many marketing-driven categories for rooms, but in actuality your rooms may simply be singles, doubles, queens, kings and suites.
For example, if you have typical guest rooms and upgrade some of them slightly, such as with an extra lamp, higher-end bath amenities and a few extra square feet, you may call them "suites" for marketing purposes. From a functional standpoint, these suites are no different than your normal guest rooms in terms of accessibility. Similarly, if rooms cost an additional five dollars per floor, but there is no difference between the rooms on the 17th and 18th floors, they should not be listed in separate categories for purposes of the accessibility questionnaire. You want to list on the questionnaire the fewest number of functionally different room types/categories, even if they are different than the types/categories you show on your web site for marketing purposes.
Jim Butler: Does the survey focus solely on accessibility-related building standards?
Marty Orlick: No. Not by a long shot. The ADA Compliance Review also specifically focuses on the hotel's written accessibility policies and procedures -- or lack of them. So, the ADA defense lawyer should ask you to start pulling together documentation. We need to review the written ADA policies and procedures that are provided to staff to see what they look like. Policies and procedure manuals should detail all the devices installed and all the processes the hotel has established for serving disabled guests.
Jim Butler: Give us some examples of what those policies and procedures should include.
Marty Orlick: Any hotel's written policies and procedures manuals should cover all aspects of its operations as they pertain to disabled individuals and those who travel or are associated with them. This would include such things as:
•How to easily identify which ADA compliant rooms are available when customers call for reservations.
•Procedures for hooking up telephone "TDD" devices or smoke alarms for the hearing or seeing impaired, or any other specialized equipment needed for specific disabilities including repositioning furniture and guest amenities.
•Procedures for the evacuation of disabled guests in event of emergency, and how to work with disabled guests who have service animals.
•Procedures used to train and monitor how the reservations, sales and operating staff are trained in all these procedures.
Many hotels surveyed will likely have technical ADA barrier violations. Those hotels can do things the easy way, by working cooperatively, through its legal counsel, with DOJ to correct the deficiencies, or they can do things the hard way--by refusing to cooperate or dragging their feet. As we know from our experience in Manhattan, the latter approach will be very lengthy, costly, and difficult.
Simply put, this is too important to mess up. You want an ADA expert's guidance to do this right and avoid unnecessary problems.
But this is only the tip of the iceberg in terms of what lodging professionals should be thinking of in terms of accessibility compliance. In this article and the next one, I will interview two of the Senior Members of JMBM's Global Hospitality Group® who lead our ADA defense practice for owners and operators.
Marty Orlick is one of the top ADA lawyers in the country, with more than 300 ADA lawsuits and investigations under his belt, and he is actively involved in defending hotels that are included in the DOJ's ADA survey. Jim Abrams, who retired as the President & CEO of the California Hotel & Lodging Association, has advised hundreds of lodging operators about, and written and lectured extensively on, all aspects of accessibility laws that apply to the hospitality industry.
What if I receive an ADA Compliance Questionnaire from DOJ?
Jim Butler: If I am the owner or manager of a hotel and get an envelope from the DOJ with one of its ADA Compliance Review questionnaires, what should I do?
Marty Orlick: First, take it very seriously! Get the questionnaire to the right person as quickly as possible. You want an experienced ADA defense lawyer to walk you through these deceptively simple questions. DOJ is surveying both hotel owners and managers, and the last thing you want is for this document to be sitting in someone's inbox while the person tries to figure out what it means and who should be dealing with it. Every question on the form has been carefully drafted to elicit important information about ADA compliance. The survey is specifically focused on identifying architectural and communications (e.g., signage) access barriers and, equally important, your hotel's ADA policies and procedures. It is very detailed. Completing the questionnaire will take time and careful thought.
Don't complete it yourself. Have an ADA defense lawyer review it and advise you, first!
Jim Butler: Why can't a knowledgeable hotel professional answer the questionnaire? Why should a lawyer -- much less an ADA defense lawyer -- get involved?
Marty Orlick: Each question is designed to obtain precise information about complex, technical compliance with the ADA guidelines. The forms must be completed under penalty of perjury, so wrong answers could subject someone to criminal penalties or create other unfortunate liabilities. Your answers can also help you to clarify the hotel's accessability features, policies and procedures.
In this very technical, legal context, hoteliers are unlikely to understand the legal issues in answering these critical questions. Even lawyers are unlikely to understand the implications unless they specialize in ADA matters. The questions must be thoroughly understood from a "Standard of Compliance" perspective as defined by law.
The wrong answer to a misunderstood question can cause serious problems that could cost you dearly. And the fact that your hotel has spent a lot of time and money to make the property accessible to the disabled does not mean the property will be fully compliant with the ADA.
Jim Butler: Give us an example of a question that could cause a hotelier problems.
Marty Orlick: Questions about guest rooms have to be answered with great care. The questionnaire will likely ask for a description of all room categories in the hotel, and the number of accessible rooms in each distinct room class, because the ADA generally requires hotels to provide accessible rooms in each class. The thing you have to ask is: "What is a "category" or "room class"? In answering the questionnaire, you should NOT list each marketing or price-point category, as opposed to room types that are actually functionally the same accommodations but have minor differences. If you did, you would create a problem. Your hotel may have many marketing-driven categories for rooms, but in actuality your rooms may simply be singles, doubles, queens, kings and suites.
For example, if you have typical guest rooms and upgrade some of them slightly, such as with an extra lamp, higher-end bath amenities and a few extra square feet, you may call them "suites" for marketing purposes. From a functional standpoint, these suites are no different than your normal guest rooms in terms of accessibility. Similarly, if rooms cost an additional five dollars per floor, but there is no difference between the rooms on the 17th and 18th floors, they should not be listed in separate categories for purposes of the accessibility questionnaire. You want to list on the questionnaire the fewest number of functionally different room types/categories, even if they are different than the types/categories you show on your web site for marketing purposes.
Jim Butler: Does the survey focus solely on accessibility-related building standards?
Marty Orlick: No. Not by a long shot. The ADA Compliance Review also specifically focuses on the hotel's written accessibility policies and procedures -- or lack of them. So, the ADA defense lawyer should ask you to start pulling together documentation. We need to review the written ADA policies and procedures that are provided to staff to see what they look like. Policies and procedure manuals should detail all the devices installed and all the processes the hotel has established for serving disabled guests.
Jim Butler: Give us some examples of what those policies and procedures should include.
Marty Orlick: Any hotel's written policies and procedures manuals should cover all aspects of its operations as they pertain to disabled individuals and those who travel or are associated with them. This would include such things as:
•How to easily identify which ADA compliant rooms are available when customers call for reservations.
•Procedures for hooking up telephone "TDD" devices or smoke alarms for the hearing or seeing impaired, or any other specialized equipment needed for specific disabilities including repositioning furniture and guest amenities.
•Procedures for the evacuation of disabled guests in event of emergency, and how to work with disabled guests who have service animals.
•Procedures used to train and monitor how the reservations, sales and operating staff are trained in all these procedures.
Many hotels surveyed will likely have technical ADA barrier violations. Those hotels can do things the easy way, by working cooperatively, through its legal counsel, with DOJ to correct the deficiencies, or they can do things the hard way--by refusing to cooperate or dragging their feet. As we know from our experience in Manhattan, the latter approach will be very lengthy, costly, and difficult.
Simply put, this is too important to mess up. You want an ADA expert's guidance to do this right and avoid unnecessary problems.
Tuesday, June 29, 2010
PKF-Hospitality Research Releases Hotel Horizons® Forecast Accuracy Assessment
Lessons Can Be Applied To 2011 Budgeting Process
Atlanta GA -- Hotel industry forecasting is not for the faint of heart. During the recession that began in earnest in 2008, the magnitude of the economic declines deviated so far from long run norms that it was virtually impossible for econometric models to predict what ultimately occurred in the hotel industry. Despite the challenge, the lodging forecasts still provided meaningful guidance for owners and investors trying to operate through the historic downturn. Because of the severity of the decline and its length, lodging forecasts had to be updated based on the ever changing economic outlook. These are some of the conclusions of a whitepaper recently published by PKF-Hospitality Research (PKF-HR) whose purpose was to quantify the accuracy of their proprietary Hotel Horizons® reports. The assessment compares forecast changes in hotel market performance measures and actual changes at two critical points during the recent economic cycle (2007 – 2009). The whitepaper report is available on a complimentary basis to all industry participants (www.pkfc.com/accuracy).
“When we initially entered the econometric forecasting business over 10 years ago, we committed ourselves to a process of continuous self-evaluation,” said R. Mark Woodworth president of PKF-HR. “Overall, we remain pleased with our demonstrated accuracy. We have learned that our forecasts are extremely reliable during less volatile periods in the business cycle, but less accurate during turbulent times. These findings will be used to inform our ongoing forecasting efforts.”
PKF-HR’s Hotel Horizons® is a series of periodic hotel forecast reports that analyze the historical and expected performance of U.S. lodging markets. Driven by an econometric forecasting model, the Hotel Horizons® reports cover five years of supply, demand, occupancy, ADR, and RevPAR for 50 major U.S. markets, as well as six national chain-scale segments. Within each market forecast, separate estimates are prepared for upper-price and lower-price hotels. The model relies on historical lodging data from Smith Travel Research, as well as historic and forecast economic data from Moody’s Economy.com.
Ups and Downs
“To assess the accuracy of our macro U.S. and MSA hotel forecasting models, we analyzed two forecast periods,” Woodworth said. “The first ran from the fourth quarter of 2007 through third quarter of 2008. This represents a fairly traditional expansion phase which culminates at the eventual turning point of the business cycle. The second period of the analysis covers calendar year 2009, a period of extreme stress within the lodging industry.”
“These points in time highlight two very different periods of economic expectations: pre-financial crisis, and post-financial crisis,” said John B. (Jack) Corgel, Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “Econometric models have a difficult time performing at the turning points of a cycle, and have no ability to predict shocks, such as hurricanes and terrorist attacks. Therefore, we focused on how the model performed during a ‘normal’ period of economic growth, and during a time of economic stress, post-turning point.”
The Results
These distinct periods in the economic cycle yield varying degrees of accuracy. The following conclusions come from the research findings:
1.Hotel Horizons® forecasts closely approximate changes in hotel performance at the national level, and to a slightly lesser extent the MSA level.
2.Hotel Horizons® forecasts are incapable of predicting hotel performance during natural disasters and severe economic shocks; and for the short-term period following these events because of the unique nature of each event.
3.Hotel Horizons® forecasts are very accurate in periods leading up to turning points.
4.The accuracy of Hotel Horizons® forecasts is somewhat inconsistent during periods following a turning point, which are typically unstable periods for the economy.
The following chart shows the average percentage point difference between forecast and actual change of five key variables (supply, demand, occupancy, average daily rate and RevPAR) at the national level during the aforementioned time periods.
Forecast vs Actual Performance – All U.S. Hotels
Implications for Budgeting
Other analyses conducted by PKF-HR have found that hotel managers also struggle to forecast during industry downturns. During the two most recent recessions, hotels have missed their budgeted revenue targets by 8 to 10 percent. Starting in the summer, most hotels will begin to prepare their budgets for 2011.
“As we proceed through the turning point of the current business cycle, U.S. hotel owners and operators are hoping for recovery to begin in 2011. Our forecasts for most markets indicate that these hopes are well founded. The lessons we have learned about forecasting during a turning point are outlined in the accuracy whitepaper and can be of great value to managers as they prepare their budgets for next year,” Woodworth said. “And fortunately, we now know that our forecasts are most accurate during this time in the cycle.”
To download a complimentary copy of the “Assessing Accuracy: Hotel Horizons® Forecasts” whitepaper, please visit www.pkf.com/accuracy.
* To learn more about PKF-HR’s Hotel Horizons® forecast reports, please visit www.hotelhorizons.com.
Atlanta GA -- Hotel industry forecasting is not for the faint of heart. During the recession that began in earnest in 2008, the magnitude of the economic declines deviated so far from long run norms that it was virtually impossible for econometric models to predict what ultimately occurred in the hotel industry. Despite the challenge, the lodging forecasts still provided meaningful guidance for owners and investors trying to operate through the historic downturn. Because of the severity of the decline and its length, lodging forecasts had to be updated based on the ever changing economic outlook. These are some of the conclusions of a whitepaper recently published by PKF-Hospitality Research (PKF-HR) whose purpose was to quantify the accuracy of their proprietary Hotel Horizons® reports. The assessment compares forecast changes in hotel market performance measures and actual changes at two critical points during the recent economic cycle (2007 – 2009). The whitepaper report is available on a complimentary basis to all industry participants (www.pkfc.com/accuracy).
“When we initially entered the econometric forecasting business over 10 years ago, we committed ourselves to a process of continuous self-evaluation,” said R. Mark Woodworth president of PKF-HR. “Overall, we remain pleased with our demonstrated accuracy. We have learned that our forecasts are extremely reliable during less volatile periods in the business cycle, but less accurate during turbulent times. These findings will be used to inform our ongoing forecasting efforts.”
PKF-HR’s Hotel Horizons® is a series of periodic hotel forecast reports that analyze the historical and expected performance of U.S. lodging markets. Driven by an econometric forecasting model, the Hotel Horizons® reports cover five years of supply, demand, occupancy, ADR, and RevPAR for 50 major U.S. markets, as well as six national chain-scale segments. Within each market forecast, separate estimates are prepared for upper-price and lower-price hotels. The model relies on historical lodging data from Smith Travel Research, as well as historic and forecast economic data from Moody’s Economy.com.
Ups and Downs
“To assess the accuracy of our macro U.S. and MSA hotel forecasting models, we analyzed two forecast periods,” Woodworth said. “The first ran from the fourth quarter of 2007 through third quarter of 2008. This represents a fairly traditional expansion phase which culminates at the eventual turning point of the business cycle. The second period of the analysis covers calendar year 2009, a period of extreme stress within the lodging industry.”
“These points in time highlight two very different periods of economic expectations: pre-financial crisis, and post-financial crisis,” said John B. (Jack) Corgel, Ph.D., the Robert C. Baker professor of real estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. “Econometric models have a difficult time performing at the turning points of a cycle, and have no ability to predict shocks, such as hurricanes and terrorist attacks. Therefore, we focused on how the model performed during a ‘normal’ period of economic growth, and during a time of economic stress, post-turning point.”
The Results
These distinct periods in the economic cycle yield varying degrees of accuracy. The following conclusions come from the research findings:
1.Hotel Horizons® forecasts closely approximate changes in hotel performance at the national level, and to a slightly lesser extent the MSA level.
2.Hotel Horizons® forecasts are incapable of predicting hotel performance during natural disasters and severe economic shocks; and for the short-term period following these events because of the unique nature of each event.
3.Hotel Horizons® forecasts are very accurate in periods leading up to turning points.
4.The accuracy of Hotel Horizons® forecasts is somewhat inconsistent during periods following a turning point, which are typically unstable periods for the economy.
The following chart shows the average percentage point difference between forecast and actual change of five key variables (supply, demand, occupancy, average daily rate and RevPAR) at the national level during the aforementioned time periods.
Forecast vs Actual Performance – All U.S. Hotels
Implications for Budgeting
Other analyses conducted by PKF-HR have found that hotel managers also struggle to forecast during industry downturns. During the two most recent recessions, hotels have missed their budgeted revenue targets by 8 to 10 percent. Starting in the summer, most hotels will begin to prepare their budgets for 2011.
“As we proceed through the turning point of the current business cycle, U.S. hotel owners and operators are hoping for recovery to begin in 2011. Our forecasts for most markets indicate that these hopes are well founded. The lessons we have learned about forecasting during a turning point are outlined in the accuracy whitepaper and can be of great value to managers as they prepare their budgets for next year,” Woodworth said. “And fortunately, we now know that our forecasts are most accurate during this time in the cycle.”
To download a complimentary copy of the “Assessing Accuracy: Hotel Horizons® Forecasts” whitepaper, please visit www.pkf.com/accuracy.
* To learn more about PKF-HR’s Hotel Horizons® forecast reports, please visit www.hotelhorizons.com.
Saturday, June 26, 2010
The Meaning of Success...What is Means..
Years ago I began as a Houseman in a 395 room Luxury Hotel, a couple of years later it became a 710 room, 2 block structure...I cleaned lobbies, and hallways, did routine stuff, and did floors, carpets, windowws, and cleaned rooms. I learned that Housekeeping was the backbone of the hotel. Even in slow times we cut back, closed floors, did deep cleaning, sold the rest, and maintained them. Today it seems that beyond the movement that the "Green people" began 10 years ago with towels not being changed everyday.That was a good move, we learned to conserve water, electricity and water...There are a few variables that make this a new concern for hotels...It usually boils down to labor, and what is the best way to "cut corners" ,
I think that if more GM's knew how to inspect rooms, which some do, it goes farther and they may see more and or find discrepancies that need to be corrected. Turn down service at the Luxury level cannot be replaced or reduced without a long time frequent guest would notice the most subtle changes.
I recall operations where we coordinated the amenity program with Housekeeping and Room Service.
and then there was the turndown amenity...Cookies and Milk....Another Resort put out trays of Graham crackers and pitchers of cold milk with trays of glasses.. I have seen alot in almost 30 years of Hospitality and 5 of it within Five Star, Five Diamond properties...But remember it all begins with the first "Hello"
I think that if more GM's knew how to inspect rooms, which some do, it goes farther and they may see more and or find discrepancies that need to be corrected. Turn down service at the Luxury level cannot be replaced or reduced without a long time frequent guest would notice the most subtle changes.
I recall operations where we coordinated the amenity program with Housekeeping and Room Service.
and then there was the turndown amenity...Cookies and Milk....Another Resort put out trays of Graham crackers and pitchers of cold milk with trays of glasses.. I have seen alot in almost 30 years of Hospitality and 5 of it within Five Star, Five Diamond properties...But remember it all begins with the first "Hello"
Friday, June 25, 2010
Lessons From the Field: Paying it Forward Means Everyone Wins
From John Hogan, I studied under John years ago...very valuable information.
In the spring of 2009, I published a three part series titled “Getting the most out of your hotel franchise investment.” The series included an overview on franchising and branding as integral parts of the hotel and hospitality landscape, and identified that roughly 56% (at the end of 2008) of the 49,500 hotels in the US belonging to a branded or franchised organization. It is a challenge to define an exact number of hotels in most locations on any given day, as supply changes weekly as buildings change function, open or close or ownerships redefines their use. The purpose of this article is to expand on one critical element of all hotels - that of providing proper staff training so that they may successfully serve their customers on an ongoing basis. While economic forecasts vary by region and market segment, the overall feeling shared at many recent industry meetings, in professional publications and online services is that of a more upbeat outlook in hospitality and the hotel industry in the foreseeable future. This positive upswing will mean the need for both additional staff and increased training in evolving markets
For the past several years, I have been sharing LESSONS FROM THE FIELD as a series of best practices, suggestions and “HOW TO" columns that have addressed many areas in hotels. As I was preparing this column, I selected to showcase what I referred to in the title as “ a best kept secret.” In fact, this resource is not really a secret, as it premiered in 1993. This resource offers many hospitality and hotel industry professionals both the opportunity to share their experiences and best practices, while learning from others in areas they want to increase their knowledge.
The resource I am referring to is THE ROOMS CHRONICLE (TRC) Focusing on improving quality, efficiency, and profits, TRC has built a positive reputation for its hands-on, common-sense, operational “how-to’s”. The articles generally address topics for front office, housekeeping, laundry, reservations, telephone, engineering, energy, purchasing, risk management, and related departments. These articles incorporate the experience and skills of many leading hotel people — people who currently work full time in the industry and many articles contain real examples from hotels that have found solutions to challenges.
HOW THE ROOMS CHRONICLE CAME TO BE
Professional organizations and magazines are plentiful for the sales & marketing staff, for food/beverage and human resources professionals, but Aleta A. Nitschke, CHA observed that the hotel front office manager and housekeeper were often overlooked even though they were integral parts of the largest areas in the hotel. Recognizing this lack of operational information for rooms division employees, Nitschke, founded The Rooms Chronicle in 1993 and The Rooms Chronicle…online in 1999. Ms. Nitschke had the opportunity to see many hotel operations during her career, beginning with a summer job of cleaning rooms at a tiny resort inn. Over the years, she worked for six companies, in 10 cities, and 13 hotels. She served as Radisson Hotels’ corporate director of rooms where she supervised the rooms operations of over 200 hotels. Ms. Nitschke is co-author of several editions of the American Hotel & Lodging Association Educational Institute’s Managing Housekeeping Operations textbook.
In 2003, the College of Hospitality and Tourism Management of Niagara University became the publishers of the print edition of TRC. With William D. Frye, Ph.D., CHE, as Executive Editor, the journal continues its mission of providing hands-on educational information for the hospitality industry. Dr. Frye possesses over 20 years management experience and has been associated with the hospitality industry for the past 18 years, primarily in hotel operations and hospitality education. Prior to arriving at Penn State, Dr. Frye was the general manager of a resort lodging property in Taos, New Mexico. He has also been employed previously by The Copley Plaza-A Wyndham Hotel, a historic, world-class luxury hotel located in Boston, Massachusetts as a night manager, as well as the Sonesta Hotel Corporation, Wyndham Hotels & Resorts, and Hilton Hotels in rooms’ division operations. Along with Aleta Nitschke, he is co-author of AH&LA EI’s current housekeeping textbook, Managing Housekeeping Resources.
I contacted Dr. Frye, CHE , who I know to be very involved in both academic and industry associations and asked him to comment on the evolution of The Rooms Chronicle and what he viewed as opportunities and challenges for the future.
On the evolution of TRC
The TRC continues to be well received and requested by many department heads, managers and owners of small properties and supervisors who are looking to increase their knowledge and skills. We serve both independent and branded properties, as the information and best practices found in our work support many different types and sizes of hotels. While most subscribers continue to receive the traditional hard copy version of TRC, an online edition is made available for master subscription contracts and select customers. Recognized by The Educational Institute of The American Hotel & Lodging Association for our work, TRC has established itself as a journal that can make a difference in the way a hotel is operated in customer service, operations, generating more revenue per guest visit and retaining employees. In short, the mission of TRC is to educated hoteliers on the tricks of the trade so they can operate their hotels more efficiently and profitably.
Where does your material come from?
From 3000-room casinos to 5-room bed and breakfasts, every brand and every type of hotel contributes to and reads TRC. I liked your expression on Paying it Forward , because that is where much of our most read material comes from - industry professionals in the various specialties associated with the lodging industry who are willing to share their experiences with others. This cadre of experts range from general managers, department managers, corporate executives, attorneys, expert consultants, professors, and even line-level employees that possess unique industry knowledge and are willing to help others by sharing their expertise through the medium of TRC. Putting things in an article is an excellent way for them to fine-tune their thoughts as well as sharing it with others.
Do you use TRC material in classroom work at Niagara University?
The TRC venue gives many of our honor students the opportunity to research specific topics and problem areas identified to us by industry or readers. Some of the students are also encouraged to contribute their findings in articles published by TRC (after faculty review, of course) TRC is incorporated into the readings and coursework within the College of Hospitality and Tourism Management at Niagara University, especially in the Advanced Hotel Operations course and independent research topics.
Could other colleges use this option?
We at Niagara University and TRC are always open to working with other universities and industry. Professors and graduate students from other universities have previously collaborated with TRC cadre and authored columns for publication.. Specifics would have to be detailed, but contact us to start a discussion.
What are your current opportunities and challenges?
The growth of the journal is primarily due to word of mouth, as readers consistently praise its contents. The highest recommendation is that TRC readers re-subscribe at a rate three times the national average for magazine publications. We do not have a marketing “arm” or manager and so we do rely on those word-of-mouth referrals. For eight years, TRC has offered a 100% money-back guarantee on the cost of the subscription; to date,, no subscriber has ever requested a refund.
While we do not have a marketing budget or manager, we have already developed many special services and personalized services for management companies and brands. Check the site for details or contact us to see how we can assist.
As mentioned earlier, the articles written by industry professionals are well read and appreciated by so many readers and students. I believe those who submit columns find that their careers are likely enhanced as well, as their organizations and managers recognize the value of their knowledge and want to retain them.
Are there particular areas you plan to stress in the next 18 months? What areas could you use articles from industry most?
The entire rooms division is very important to the success of every hotel, but we plan to emphasize three areas and would welcome industry contribution in:
1.Sustainability (including energy efficiency)
2.Housekeeping
3.Reservations and rooms marketing (a rapidly changing area)
Real world problems and real world solutions are always of interest and may help other hotel staff to approach their challenges with the information shared in TRC.
“Few men during their lifetime come anywhere near exhausting the resources dwelling within them. There are deep wells of strength that are never used.” Richard E. Byrd
Dr. Frye is an Associate Professor at Niagara University, teaches classes in hotel operations and management, hospitality and tourism law, club management, and hospitality marketing, and is the professor in charge of several of Niagara's hospitality and tourism internship and cooperative education programs. He is the current chair of the Lodging Special Interest Group for the International Council on Hotel, Restaurant, and Institutional Education. Dr. Frye has been certified three times as a Certified Hospitality Educator and served on the nominating board of the International Council of Hotel, Restaurant, and Institutional Education. Dr. Frye is also the editor of the Electronic Journal of Hospitality Legal, Safety and Security Research and in 2008, he co-authored a textbook, Managing Housekeeping Operations, published by the American Hotel & Lodging Educational Institute.
Dr. Frye is a Founding Associate of a consortium of successful corporate and academic mentors delivering focused and affordable counsel in solving specific challenges facing the hospitality industry. Services are designed to help individual hoteliers and hospitality businesses improve their market penetration, deliver service excellence and increase their profitability.
Coming soon www.HospitalityEducators.com
Keys to Success Hospitality Tip of the Week: Focus on Hotel Operations
Late June and July is the best time to work on both capital and operating budgets for next year. The economic roller coaster will likely continue in some markets but those who plan with well-defined goals and measurements will be much more likely to succeed than those who “play it by ear.”
In the spring of 2009, I published a three part series titled “Getting the most out of your hotel franchise investment.” The series included an overview on franchising and branding as integral parts of the hotel and hospitality landscape, and identified that roughly 56% (at the end of 2008) of the 49,500 hotels in the US belonging to a branded or franchised organization. It is a challenge to define an exact number of hotels in most locations on any given day, as supply changes weekly as buildings change function, open or close or ownerships redefines their use. The purpose of this article is to expand on one critical element of all hotels - that of providing proper staff training so that they may successfully serve their customers on an ongoing basis. While economic forecasts vary by region and market segment, the overall feeling shared at many recent industry meetings, in professional publications and online services is that of a more upbeat outlook in hospitality and the hotel industry in the foreseeable future. This positive upswing will mean the need for both additional staff and increased training in evolving markets
For the past several years, I have been sharing LESSONS FROM THE FIELD as a series of best practices, suggestions and “HOW TO" columns that have addressed many areas in hotels. As I was preparing this column, I selected to showcase what I referred to in the title as “ a best kept secret.” In fact, this resource is not really a secret, as it premiered in 1993. This resource offers many hospitality and hotel industry professionals both the opportunity to share their experiences and best practices, while learning from others in areas they want to increase their knowledge.
The resource I am referring to is THE ROOMS CHRONICLE (TRC) Focusing on improving quality, efficiency, and profits, TRC has built a positive reputation for its hands-on, common-sense, operational “how-to’s”. The articles generally address topics for front office, housekeeping, laundry, reservations, telephone, engineering, energy, purchasing, risk management, and related departments. These articles incorporate the experience and skills of many leading hotel people — people who currently work full time in the industry and many articles contain real examples from hotels that have found solutions to challenges.
HOW THE ROOMS CHRONICLE CAME TO BE
Professional organizations and magazines are plentiful for the sales & marketing staff, for food/beverage and human resources professionals, but Aleta A. Nitschke, CHA observed that the hotel front office manager and housekeeper were often overlooked even though they were integral parts of the largest areas in the hotel. Recognizing this lack of operational information for rooms division employees, Nitschke, founded The Rooms Chronicle in 1993 and The Rooms Chronicle…online in 1999. Ms. Nitschke had the opportunity to see many hotel operations during her career, beginning with a summer job of cleaning rooms at a tiny resort inn. Over the years, she worked for six companies, in 10 cities, and 13 hotels. She served as Radisson Hotels’ corporate director of rooms where she supervised the rooms operations of over 200 hotels. Ms. Nitschke is co-author of several editions of the American Hotel & Lodging Association Educational Institute’s Managing Housekeeping Operations textbook.
In 2003, the College of Hospitality and Tourism Management of Niagara University became the publishers of the print edition of TRC. With William D. Frye, Ph.D., CHE, as Executive Editor, the journal continues its mission of providing hands-on educational information for the hospitality industry. Dr. Frye possesses over 20 years management experience and has been associated with the hospitality industry for the past 18 years, primarily in hotel operations and hospitality education. Prior to arriving at Penn State, Dr. Frye was the general manager of a resort lodging property in Taos, New Mexico. He has also been employed previously by The Copley Plaza-A Wyndham Hotel, a historic, world-class luxury hotel located in Boston, Massachusetts as a night manager, as well as the Sonesta Hotel Corporation, Wyndham Hotels & Resorts, and Hilton Hotels in rooms’ division operations. Along with Aleta Nitschke, he is co-author of AH&LA EI’s current housekeeping textbook, Managing Housekeeping Resources.
I contacted Dr. Frye, CHE , who I know to be very involved in both academic and industry associations and asked him to comment on the evolution of The Rooms Chronicle and what he viewed as opportunities and challenges for the future.
On the evolution of TRC
The TRC continues to be well received and requested by many department heads, managers and owners of small properties and supervisors who are looking to increase their knowledge and skills. We serve both independent and branded properties, as the information and best practices found in our work support many different types and sizes of hotels. While most subscribers continue to receive the traditional hard copy version of TRC, an online edition is made available for master subscription contracts and select customers. Recognized by The Educational Institute of The American Hotel & Lodging Association for our work, TRC has established itself as a journal that can make a difference in the way a hotel is operated in customer service, operations, generating more revenue per guest visit and retaining employees. In short, the mission of TRC is to educated hoteliers on the tricks of the trade so they can operate their hotels more efficiently and profitably.
Where does your material come from?
From 3000-room casinos to 5-room bed and breakfasts, every brand and every type of hotel contributes to and reads TRC. I liked your expression on Paying it Forward , because that is where much of our most read material comes from - industry professionals in the various specialties associated with the lodging industry who are willing to share their experiences with others. This cadre of experts range from general managers, department managers, corporate executives, attorneys, expert consultants, professors, and even line-level employees that possess unique industry knowledge and are willing to help others by sharing their expertise through the medium of TRC. Putting things in an article is an excellent way for them to fine-tune their thoughts as well as sharing it with others.
Do you use TRC material in classroom work at Niagara University?
The TRC venue gives many of our honor students the opportunity to research specific topics and problem areas identified to us by industry or readers. Some of the students are also encouraged to contribute their findings in articles published by TRC (after faculty review, of course) TRC is incorporated into the readings and coursework within the College of Hospitality and Tourism Management at Niagara University, especially in the Advanced Hotel Operations course and independent research topics.
Could other colleges use this option?
We at Niagara University and TRC are always open to working with other universities and industry. Professors and graduate students from other universities have previously collaborated with TRC cadre and authored columns for publication.. Specifics would have to be detailed, but contact us to start a discussion.
What are your current opportunities and challenges?
The growth of the journal is primarily due to word of mouth, as readers consistently praise its contents. The highest recommendation is that TRC readers re-subscribe at a rate three times the national average for magazine publications. We do not have a marketing “arm” or manager and so we do rely on those word-of-mouth referrals. For eight years, TRC has offered a 100% money-back guarantee on the cost of the subscription; to date,, no subscriber has ever requested a refund.
While we do not have a marketing budget or manager, we have already developed many special services and personalized services for management companies and brands. Check the site for details or contact us to see how we can assist.
As mentioned earlier, the articles written by industry professionals are well read and appreciated by so many readers and students. I believe those who submit columns find that their careers are likely enhanced as well, as their organizations and managers recognize the value of their knowledge and want to retain them.
Are there particular areas you plan to stress in the next 18 months? What areas could you use articles from industry most?
The entire rooms division is very important to the success of every hotel, but we plan to emphasize three areas and would welcome industry contribution in:
1.Sustainability (including energy efficiency)
2.Housekeeping
3.Reservations and rooms marketing (a rapidly changing area)
Real world problems and real world solutions are always of interest and may help other hotel staff to approach their challenges with the information shared in TRC.
“Few men during their lifetime come anywhere near exhausting the resources dwelling within them. There are deep wells of strength that are never used.” Richard E. Byrd
Dr. Frye is an Associate Professor at Niagara University, teaches classes in hotel operations and management, hospitality and tourism law, club management, and hospitality marketing, and is the professor in charge of several of Niagara's hospitality and tourism internship and cooperative education programs. He is the current chair of the Lodging Special Interest Group for the International Council on Hotel, Restaurant, and Institutional Education. Dr. Frye has been certified three times as a Certified Hospitality Educator and served on the nominating board of the International Council of Hotel, Restaurant, and Institutional Education. Dr. Frye is also the editor of the Electronic Journal of Hospitality Legal, Safety and Security Research and in 2008, he co-authored a textbook, Managing Housekeeping Operations, published by the American Hotel & Lodging Educational Institute.
Dr. Frye is a Founding Associate of a consortium of successful corporate and academic mentors delivering focused and affordable counsel in solving specific challenges facing the hospitality industry. Services are designed to help individual hoteliers and hospitality businesses improve their market penetration, deliver service excellence and increase their profitability.
Coming soon www.HospitalityEducators.com
Keys to Success Hospitality Tip of the Week: Focus on Hotel Operations
Late June and July is the best time to work on both capital and operating budgets for next year. The economic roller coaster will likely continue in some markets but those who plan with well-defined goals and measurements will be much more likely to succeed than those who “play it by ear.”
Hotel Management Agreement Performance Standards Analyzing A Typical Operator Provision
The Hotel Management Agreement or HMA is one of the most important factors in the financial success or failure of a hotel, and the value of an owner's or lender's interests in the property.
With experience gained in negotiating, re-negotiating, litigating, arbitrating and advising on more than 1,000 hotel management agreements and more than $60 billion of hotel transactions, the members of JMBM's Global Hospitality Group® wanted to share some lessons learned.
If you would like to review why getting a great operator and a fair HMA are so critical to the success of your hotel, or if you missed any of the earlier series on this subject, please go to www.HotelLawBlog.com, look under the TOPIC tab at the top of the home page, and then select "Hotel Management Agreements" to see some great information.
What does a typical Operator performance clause look like?
Operators may propose an HMA without any performance standard. That would be in their interest, because a performance standard can only be used to their disadvantage - to reduce their income, subordinate their fees, or possibly terminate the management contract. And of course, the right to terminate is the right to re-negotiate the agreement as well. So failure of a performance standard does not mean you have to terminate the Operator, but it might be used as the basis to re-negotiate the allocation of financial and other risks.
The typical performance standard clause proposed by a branded hotel operator often looks something like this:
In addition to the other rights of termination in this Agreement, the Owner shall have the right to terminate this Agreement if, for any two consecutive Fiscal Years beginning after the completion of the third (3rd) Full Fiscal Year, both (a) the Annualized RevPAR for the Hotel for such Fiscal Year is less than 80% of the average Annualized RevPAR for the Competitive Set for such Fiscal Year (the "RevPAR Test"), and (b) the Gross Operating Profit of the Hotel is less than 80% of the Gross Operating Profit of the Hotel as set forth in the Annual Budget for such Fiscal Year (the "GOP Test") (the RevPAR Test and the GOP Test are collectively referred to as the "Performance Standard").
This provision is fairly short, but it contains a number of moving parts, and we need to discuss some of the key components.
What is RevPAR?
RevPAR is acronym for "Revenue Per Available Room." RevPAR is calculated by dividing the gross revenues for a hotel for a period of time by the total number of available room nights over the same period. The resulting number will tell you how much money you are generating from each room in your hotel for a particular period. It is a way of combining the results of two other key factors -average daily rate or ADR and Occupancy. The ADR is included in the revenue component of RevPAR, and the occupancy is encompassed in the available room night component.
What is the Competitive Set?
The competitive set is a group of hotels that are similar to your hotel. For example, a 100 room select-service hotel might be compared to a nearby Courtyard by Marriott, but not the local Ritz-Carlton which would be excluded. Picking the competitive set is a critical issue and something of an art. The data for the competitive set is provided by independent data sources, like Smith Travel Research, and usually require a minimum of five different hotels in the set (in addition to your hotel) to ensure confidentiality and anonymity of hotel data particpants.
What is the Budget test?
The budget test requires that the Hotel achieves a minimum percentage (often less than 100%) of the profit that the operator anticipated in its budget for a particular year. This standard raises a very important issue for owners, since operators prepare the budgets for the hotel and therefore have the ability to propose a budget that is easier to achieve. While owners typically have budget approval rights (or at least they should!), operators are in a much better position to forecast the potential profitability of the hotel. Even more importantly, the operator, by virtue of its management of the hotel, is in a position to manipulate the operations of the hotel to achieve the necessary level of performance. For example, an operator might choose to push certain expenses into a following year to meet the operating test or accelerate certain income.
Why is it measured over two consecutive years?
Operators prefer to structure a performance test so that the operator is only in breach if it fails to meet the budget in two consecutive years. This helps protect operators, since the operator isn't in danger of being terminated if it suffers one bad year out of a series of good years. However, it also emphasizes one of the concerns that an owner should have about the budget test - since it takes two years of failure to trigger the owner's right to terminate, the operator can, in the second year of a down cycle, revise its projections to make it less likely that they will fail, and also make it easier to maneuver the financial performance of the property and avoid termination. It also means that a hotel could perform poorly for several years, which reduces the value of the hotel and the ability to finance it.
Is this two tests, or one?
The performance test usually proposed by an operator is designed so that the operator has to fail each of the tests in both years of the test period to be subject to termination - in other words, the operator might not achieve the necessary profits, but if it operates on par with its competitors, that year doesn't count as having failed the test. An operator wants this because it doesn't want to be penalized if the hotel doesn't make its predicted profits, but operates at least as well as its competitors; conversely, a hotel operator would not want to be subject to termination if it achieves anticipated profitability, even if other hotels in the area operate more profitably.
"Cures" and other parts of the performance test
There are often additional components or matters that relate to the Operator's performance test. For example, an operator performance provision will often provide that the Operator can avoid termination if it "cures" the performance failure by paying the owner the difference between the actual profits and budgeted profits for the year. Should the Operator have any cures if the performance standard is to be meaningful? If so, how many? Must the cure be made on the first year of performance test failure? If not, does the two consecutive year test completely reset or just need one more failing year? What is the right measure of a "cure" payment? Does the missed profit really cover all the damage? Certainly not!
Well, the "cure provision" of a performance test are extremely prolix and cannot be treated here except to alert you to its importance.
Additionally, don't forget that the Operator will typically be excused from the performance tests for any period of time that involves an event that qualifies as a "force majeure." There are typically also "passes" from the test or "lockouts" from exercising any rights under it for an initial stabilization or lockout period that may run from 12 months to 7 years, or longer, or during periods when the property is being upgraded.
And any breach of the HMA by Owner claimed by the Operator - such as failure to fund a big capital improvement program - may also excuse the Operator from being held accountable under a performance test.
What should I consider when negotiating the performance standard? EVERY LITTLE THING MATTERS. The test looks simple, but every part of it is meaningful. For example, constructing the competitive set alone raises many issues:
•Are there really 5 hotels in your market that compete directly with your hotel? Many times it is difficult to find those hotels, and you have to consider adding hotels that are in different classes or different locations.
•What is the right percentage for the test? If the average RevPAR for the hotels in the competitive set is lower than your hotel, a target RevPAR of 90% of your hotel's projected RevPAR may be too low, making the test less than meaningful. A new hotel should significantly outperform an older set of hotels. Maybe your hotel should be at 120% of the competitive set.
•What happens when new hotels come into the market area, or existing hotels in the competitive set close, or when hotels are rebranded? Should that change the RevPAR test?
These are only a few of the most obvious issues, and taken in the light of a complex hotel management agreement, a hotel owner needs expert assistance to ensure not only that the performance test itself is meaningful, but also that it works seamlessly with the remainder of the agreement and all of the parties' goals.
Hotel Management Agreement Resources
If you found this article helpful, you may also find of interest other articles on Hotel Management Agreements and related brand topics at Hotel Management Agreements.
With experience gained in negotiating, re-negotiating, litigating, arbitrating and advising on more than 1,000 hotel management agreements and more than $60 billion of hotel transactions, the members of JMBM's Global Hospitality Group® wanted to share some lessons learned.
If you would like to review why getting a great operator and a fair HMA are so critical to the success of your hotel, or if you missed any of the earlier series on this subject, please go to www.HotelLawBlog.com, look under the TOPIC tab at the top of the home page, and then select "Hotel Management Agreements" to see some great information.
What does a typical Operator performance clause look like?
Operators may propose an HMA without any performance standard. That would be in their interest, because a performance standard can only be used to their disadvantage - to reduce their income, subordinate their fees, or possibly terminate the management contract. And of course, the right to terminate is the right to re-negotiate the agreement as well. So failure of a performance standard does not mean you have to terminate the Operator, but it might be used as the basis to re-negotiate the allocation of financial and other risks.
The typical performance standard clause proposed by a branded hotel operator often looks something like this:
In addition to the other rights of termination in this Agreement, the Owner shall have the right to terminate this Agreement if, for any two consecutive Fiscal Years beginning after the completion of the third (3rd) Full Fiscal Year, both (a) the Annualized RevPAR for the Hotel for such Fiscal Year is less than 80% of the average Annualized RevPAR for the Competitive Set for such Fiscal Year (the "RevPAR Test"), and (b) the Gross Operating Profit of the Hotel is less than 80% of the Gross Operating Profit of the Hotel as set forth in the Annual Budget for such Fiscal Year (the "GOP Test") (the RevPAR Test and the GOP Test are collectively referred to as the "Performance Standard").
This provision is fairly short, but it contains a number of moving parts, and we need to discuss some of the key components.
What is RevPAR?
RevPAR is acronym for "Revenue Per Available Room." RevPAR is calculated by dividing the gross revenues for a hotel for a period of time by the total number of available room nights over the same period. The resulting number will tell you how much money you are generating from each room in your hotel for a particular period. It is a way of combining the results of two other key factors -average daily rate or ADR and Occupancy. The ADR is included in the revenue component of RevPAR, and the occupancy is encompassed in the available room night component.
What is the Competitive Set?
The competitive set is a group of hotels that are similar to your hotel. For example, a 100 room select-service hotel might be compared to a nearby Courtyard by Marriott, but not the local Ritz-Carlton which would be excluded. Picking the competitive set is a critical issue and something of an art. The data for the competitive set is provided by independent data sources, like Smith Travel Research, and usually require a minimum of five different hotels in the set (in addition to your hotel) to ensure confidentiality and anonymity of hotel data particpants.
What is the Budget test?
The budget test requires that the Hotel achieves a minimum percentage (often less than 100%) of the profit that the operator anticipated in its budget for a particular year. This standard raises a very important issue for owners, since operators prepare the budgets for the hotel and therefore have the ability to propose a budget that is easier to achieve. While owners typically have budget approval rights (or at least they should!), operators are in a much better position to forecast the potential profitability of the hotel. Even more importantly, the operator, by virtue of its management of the hotel, is in a position to manipulate the operations of the hotel to achieve the necessary level of performance. For example, an operator might choose to push certain expenses into a following year to meet the operating test or accelerate certain income.
Why is it measured over two consecutive years?
Operators prefer to structure a performance test so that the operator is only in breach if it fails to meet the budget in two consecutive years. This helps protect operators, since the operator isn't in danger of being terminated if it suffers one bad year out of a series of good years. However, it also emphasizes one of the concerns that an owner should have about the budget test - since it takes two years of failure to trigger the owner's right to terminate, the operator can, in the second year of a down cycle, revise its projections to make it less likely that they will fail, and also make it easier to maneuver the financial performance of the property and avoid termination. It also means that a hotel could perform poorly for several years, which reduces the value of the hotel and the ability to finance it.
Is this two tests, or one?
The performance test usually proposed by an operator is designed so that the operator has to fail each of the tests in both years of the test period to be subject to termination - in other words, the operator might not achieve the necessary profits, but if it operates on par with its competitors, that year doesn't count as having failed the test. An operator wants this because it doesn't want to be penalized if the hotel doesn't make its predicted profits, but operates at least as well as its competitors; conversely, a hotel operator would not want to be subject to termination if it achieves anticipated profitability, even if other hotels in the area operate more profitably.
"Cures" and other parts of the performance test
There are often additional components or matters that relate to the Operator's performance test. For example, an operator performance provision will often provide that the Operator can avoid termination if it "cures" the performance failure by paying the owner the difference between the actual profits and budgeted profits for the year. Should the Operator have any cures if the performance standard is to be meaningful? If so, how many? Must the cure be made on the first year of performance test failure? If not, does the two consecutive year test completely reset or just need one more failing year? What is the right measure of a "cure" payment? Does the missed profit really cover all the damage? Certainly not!
Well, the "cure provision" of a performance test are extremely prolix and cannot be treated here except to alert you to its importance.
Additionally, don't forget that the Operator will typically be excused from the performance tests for any period of time that involves an event that qualifies as a "force majeure." There are typically also "passes" from the test or "lockouts" from exercising any rights under it for an initial stabilization or lockout period that may run from 12 months to 7 years, or longer, or during periods when the property is being upgraded.
And any breach of the HMA by Owner claimed by the Operator - such as failure to fund a big capital improvement program - may also excuse the Operator from being held accountable under a performance test.
What should I consider when negotiating the performance standard? EVERY LITTLE THING MATTERS. The test looks simple, but every part of it is meaningful. For example, constructing the competitive set alone raises many issues:
•Are there really 5 hotels in your market that compete directly with your hotel? Many times it is difficult to find those hotels, and you have to consider adding hotels that are in different classes or different locations.
•What is the right percentage for the test? If the average RevPAR for the hotels in the competitive set is lower than your hotel, a target RevPAR of 90% of your hotel's projected RevPAR may be too low, making the test less than meaningful. A new hotel should significantly outperform an older set of hotels. Maybe your hotel should be at 120% of the competitive set.
•What happens when new hotels come into the market area, or existing hotels in the competitive set close, or when hotels are rebranded? Should that change the RevPAR test?
These are only a few of the most obvious issues, and taken in the light of a complex hotel management agreement, a hotel owner needs expert assistance to ensure not only that the performance test itself is meaningful, but also that it works seamlessly with the remainder of the agreement and all of the parties' goals.
Hotel Management Agreement Resources
If you found this article helpful, you may also find of interest other articles on Hotel Management Agreements and related brand topics at Hotel Management Agreements.
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