Lecture 5 - Introduction to Hotel Operations Lecture 5...

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Introduction to Hotel Operations Lecture 5 Hotel Economics and Operating Leverage Discounting in the Hotel Industry Optimizing Reservations Requests Rate Fences and Yield Lab— prepare for Lecture 6
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Hotel Economics Sales of room nights are roughly two-thirds of a “typical” full-service hotel’s overall revenue. “typical” = basic full-service hotel 195 room Holiday Inn $90 ADR 65% occupancy
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Typical P&L Statement Uniform System of Accounts contains the following components: Rooms department revenue and expenses F&B departments revenue and expenses Other revenue and expenses Undistributed expenses Management and franchise fees Fixed charges GOP EBITDA
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Profit and Loss Statements Rooms Department P&L Sales from room nights are roughly two-thirds of revenues Rooms is by far the most profitable business unit of the hotel with 75% profit margins
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Rooms Department P&L
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Profit and Loss Statements Rooms Department P&L Sales from room nights are roughly two-thirds of revenues Rooms is by far the most profitable business unit of the hotel with 75% profit margins Food & Beverage P&L F&B sales make up 30% of hotel sales Departmental profit margin is around 40%
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Operating Expenses Overall, costs and expenses for the entire hotel consume around 60% of revenues, leaving a GOP margin of about 40%. Of the total costs and expenses for a full- service hotel, more than two-thirds are fixed (or quasi-fixed) and less than one-third are variable.
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Operating Leverage Is a measure of how revenue growth turns into earnings growth. Fixed costs and variable costs are the operating expenses. The ratio between the two determines how growth in revenue impacts the operating margin.
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Operating leverage is a measure of how revenue growth turns into earnings growth. If all the operating costs are variable, then the operating margin should be constant as sales grow. If, however, fixed costs are high, then a 5% increase in revenue will generate quite a bit more than a 5% increase in operating earnings, essentially increasing the operating margin.
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Operating leverage is a measure of how revenue growth turns into earnings growth. In general, a 5% move in RevPAR for a full-service hotel will lead to a 10% move in EBITDA.
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Operating Leverage in Hotels The operating leverage varies depending on the nature of the change in revenue—ie., whether it is driven by room rates or occupancy. Rate driven RevPAR moves have a higher degree of operating leverage (and flow- through) than RevPAR driven by occupancy. Why?
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Operating leverage quantifies how much of each dollar in incremental revenues becomes incremental profits. Hotel 1 Revenue 100 rms. X $100 ADR $10,000 Expenses Fixed 4,000 Variable $20/rm 2,000 Profits 4,000 Profitability 40% 5% inc. in ADR Revenue 100 rms x $105 $10,500 Expenses Fixed 4,000 Variable 2,000 Profits 4,500 Profitability 42.9% ...a 12.5% inc. in profits
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Operating leverage helps to explain why a small decrease in ADR can result in a pronounced loss of revenues.
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