The addition of much new hotel stock in 2006 and 2007 brought many new challenges to the sector. However, buoyant demand particularly from the domestic market, coupled with careful management of costs, kept the bottom line in reasonably good shape then.
2008 however brought the impact of falling demand on hotel profits to the forefront. Indeed the twin issues of lower demand and bedroom stock capacity at its highest level ever, will be major challenges for the profit generating potential of Irish hotels over the next few years.
So says the recent Hotel Industry Survey produced by Horwath Bastow Charleton (HBC).
The number of Irish hotels has doubled in the past 13 years, according to John Power, Chief Executive of the Irish Hotels Federation. Even more telling perhaps is that bedroom stock has grown from 40,000 in 2002 to 61,000 presently, an increase of more than one third. The IHF reckon that represents an over capacity of 20%, or about 12,000 rooms for the anticipated demand levels of the next few years.
The HBC report which deals with 2008 is sobering in its analysis of the impact on profitability of falling demand and over-capacity.
Last year occupancy levels declined by 6.2% to 63.58%, while heavy discounting saw average room rates fall by €9.44 to €88.25. Not only were hotels selling rooms at an average 10% cheaper than in 2007, they were also selling fewer rooms.
The relatively small decline in sales however had a much greater impact on profit levels. This was particularly so in luxury hotels where a 12% fall in sales led to a 45% fall in profits before tax. The reliance of this sector on the domestic market also increased from 41.9% of guests to 47.7% last year.
Over the entire hotel sector the domestic market in 2008 accounted for 65% of total bednights, up from 53% in 2004. There is obvious concern that the resilience of the domestic market will be severely tested in the next couple of years.
Falling activities resulted in payroll costs at Dublin hotels increasing again in 2008, reaching an unsustainable level of 41.6% of revenue. This was almost 10 percentage points higher than hotel payroll costs in Northern Ireland. Given the continued weakness in revenue, this metric is likely to see further deterioration in 2009.
The HBC report concludes that:
We expect to see hotels change their operating style over the next year where hotels will have more seasonal closures, floors of hotel rooms will be closed for periods, and components of hotels will be substituted for alternative uses. The lower level of demand for hotel rooms is likely to remain for 2009 and 2010. The focus will need to be centred on value for money, value added and not just lower prices. We would have serious concerns about the sector’s ability to rebuild a higher room rate if existing trends of discounting continue.
The Irish Hotels Federation believes that a substantial number of hotels may be transferred to the National Asset Management Agency (N.A.M.A.), and it is anxious to know how the Agency will deal with these businesses. The IHF is in discussions with Government about finding a way to deal with the bedroom over-capacity in an orderly fashion. That’s a desirable outcome, and quite a challenge at any time, but all the more complex in these times of weak demand.
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August 11th 2009