Unlike airlines, hotels failing to cash in on ancillary charges

By Danny King

Courtyard By Marriott LobbySince 2008, airline revenue generated from ancillary services such as meals, onboard WiFi and preferred seating has almost quadrupled. Hotel companies haven't been nearly as fortunate.

Lodging operators who have long counted on high-profit revenue streams from services such as phone calls, WiFi and parking are finding that milking those cash cows has become progressively more difficult.

The reason, according to a recent report by PKF Consulting, is that as room rates rise, guests are looking to save elsewhere.

While revenue from room rates rose 4.4% last year, accounting for almost 68% of total hotel revenue, sales from food and beverage and revenue from leasing hotel space to vendors such as magazine racks and gift shops were little changed in 2012. Revenue from what PKF calls "other operated departments" — a catch-all for things like WiFi, parking, phone charges and in-room entertainment — also was virtually unchanged, falling just 0.8% from 2011.

Some of this decline has been self-inflicted, as hotel owners looked to recoup losses from the recession, first by dropping rates, then by throwing in complimentary services like parking, local phone calls and business provisions such as fax services.

"Up until now, 90% of the focus has been getting the guest into the hotel," said Robert Mandelbaum, director of research at PKF. "We're just starting to see room rates rise above their long-run average."

Terming the trend "a real problem," Rick Swig, president of hotel consultant RSBA & Associates, said, "We're giving stuff away that we used to charge for, and incremental revenues are slipping."

Additionally, while leisure travel has bounced back, group travel has been less robust as businesses continue to hold back on their travel spending. While the Global Business Travel Association last month boosted its 2013 U.S. spending-growth forecast to 5.1% from its prior estimate of 4.6%, business-travel spending rose just 1.8% last year, according to the association.

That means that hotels have less opportunity to generate revenue through renting out meetings rooms or catering business conferences.

But while freebies and group spending may be a cyclical effect, there could be more permanent factors forcing hoteliers to look beyond room charges for revenue. The most notable factor is technological, as the ubiquity of mobile phones has all but eliminated the need for hotel room phone calls.

Additionally, with more travelers using their laptops to access the Internet — through WiFi that hotels are being pushed into providing for free — in-room entertainment demand is on the decline as guests use Netflix and other streaming video providers to access movies.

That trend was reflected in this year's bankruptcy filing by LodgeNet Interactive Corp., which makes in-room entertainment systems for hotels. With movie rentals per occupied room dropping by half during the past decade, LodgeNet hasn't earned an annual profit since 2006, and its number of rooms served has dropped every year since 2008.

Either way, the numbers can add up. According to PKF, its catch-all category of other operated departments accounted for 4.7% of total hotel revenue, down from 4.9% in 2011. And while that drop might appear small, the industry generates about $160 billion in annual revenue, implying a decline of hundreds of millions of dollars per year in revenue from high-margin services.

It's not a subject that will cause hoteliers to wax poetic. Hilton and Hyatt declined to comment on the subject, and neither Marriott International nor Starwood Hotels & Resorts responded to requests for comment.

Still, hotel operators and investors have responded to such trends by cutting out many ancillary services altogether and looking to limited-service properties as their growth vehicles. While food and beverage accounts for about a quarter of overall hotel revenue, limited-service properties eschew features such as table-service restaurants and room service in favor of self-service bars and vending machines.

Indeed, as of March, the number of U.S. limited-service hotel rooms stood at about 2.7 million, up 16% from the approximately 2.3 million a decade earlier, according to Smith Travel Research. During the same time, full-service hotel-room supply increased just 5.7%, to about 2.2 million rooms.

And that trend will only accelerate during the next few years.

InterContinental Hotel Group's Holiday Inn Express, Marriott's Residence Inn and Hilton's Hampton Inn & Suites lead a group of limited-service brands that have the largest number of rooms in the U.S. development pipeline. In fact, of the 20 U.S. brands with the largest room pipelines, only Holiday Inn (No. 7) and Marriott's flagship badge (No. 19) qualify as full-service brands.

That's not to say hoteliers won't find other ways to generate high-margin revenue streams. Last summer, the New York University School of Continuing and Professional Studies said U.S. hotels would collect $1.95 billion in surcharges and so-called resort fees in 2012, up 5.4% from a year earlier and more than triple the amount collected a decade earlier.

Surcharges also include cancellation fees, early-departure charges and room-service delivery fees. These charges are profit centers, with margins in the range of 80% to 90%.

Still, such fees account for just a fraction of overall ancillary fees, furthering the debate over the hoteliers' prospects for recovering their ancillary revenue from guests.

"Right now, occupancy is on the rise, and therefore, leverage is swinging back toward hotel management," Mandelbaum said.

Swig countered, "The margins in the hotel business have shrunk dynamically over the last 15 to 20 years. Lately, it's been a buyers' market."

Follow Danny King on Twitter @dktravelweekly. 

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