After three consecutive years of declining profitability, the European hotel industry has started to recover lost ground. According to the Annual Profitability Hotel Benchmark Survey by Deloitte hotels across continental Europe reported seven per cent growth in profit per available room in 2004. On average hotels generated an additional e1,000 profit per available room in 2004 to reach e15,000 per available room. This compares to e14,000 in 2003.
The comparable equivalent for a five-star hotel room in Malta is €8,000 in 2004 and e6,000 in 2003 based on the MHRA Hotel Survey by Deloitte, which is conducted locally every quarter.
Some of the strongest performing markets were in Germany, where the biennial trade fair cycle helped boost performance. Profits in Düsseldorf rose a staggering 76 per cent mainly as a result of a e7,000 increase in total revenue. With costs kept under control all this incremental revenue fell to the bottom line resulting in profit per available room increasing from e8,000 in 2003 to e14,000 in 2004. Stuttgart was another star performer with profits up 17 per cent compared to the prior year.
During 2004 Eastern European markets were the region’s star performers with many cities reporting double-digit revenue per available room growth. This translated into strong profit growth with hotels in Prague and Budapest experiencing profit increases of 20 per cent and 19 per cent respectively. Malta’s 5-star hotel industry experienced a respectable 37 per cent growth in profits in 2004 as the hotel industry “bounced-back” after poor results in 2003 primarily relating to an increase in room supply which had caused a temporary blip in performance in 2003 and depressed room rates.
Moscow took the top spot when it came to converting revenue to profit. Of the 23 cities tracked by the European Profitability Survey, Moscow’s conversion rate was 53 per cent compared to just 22 per cent in Brussels. Malta’s conversion rate is lower, at 21 per cent. Moscow also achieved the highest profitability level at just under e39,000, representing a 31 per cent increase over the prior year.
While Moscow is dominated by luxury and upscale hotels leading to higher absolute profits per available room, operating costs remain relatively low. Furthermore, the potential arbitrage that exists between receiving revenues in US Dollars and paying local expenses in Russian Roubles also offers an opportunity to bolster operating profits.
The only Eastern European market where performance faltered was Warsaw. Profits for the year were down six per cent as the city continued to suffer from over-supply in the first-class and luxury segments. Supply growth has resulted in occupancy failing to break the 60 per cent level, while intense competition has placed pressure on average room rates. Over-supply has also dented operating profits in Madrid, where a 12 per cent decline was reported. However, Milan took the top spot as the worst performing market across continental Europe in 2004 with profits down 13 per cent.
Julia Felton, Executive Director of Hotel Benchmark at Deloitte said: “The profitability figures for continental Europe are very encouraging and highlight the diversity that exists within the European hotel market. From an operator perspective, top-line revenue growth bodes well for base management fees, while the conversion of revenues to profit should also be positive for incentive management fees.”
“As a result, we anticipate continued interest in Europe from an investment and management perspective. Mature, stable markets continue to offer reduced risk while areas such as Eastern Europe offer potentially greater rewards”.
Nick Captur, a Partner at Deloitte Malta who runs the MHRA Hotel Survey by Deloitte said: “Hotels in Malta are inevitably in competition with hotels in other European markets especially for conference business. The stark absolute gap in profitability between hotels in Malta and in these European cities suggests the potential prize to be had if Malta is more successful in uplifting its overall market and brand positioning.”