London ADR continues upswing, outpaces UK provinces

UNITED KINGDOM London hotels achieved profit levels 2.5-times higher than hotels in the UK provinces during March, according to the latest survey of approximately 550 full-service hotels across the UK by TRI Hospitality Consulting.

At £65.31, gross operating profit per available room (GOPPAR) at London hotels in March was only slightly below the rolling 12 month average for the capital, at £67.78, but was significantly above the profit per room achieved in the provinces, at £25.92. Furthermore, at 46.9%, the profit conversion of hotels in the capital was considerably above those in the provinces, at 29.6% of total revenue.

Although ancillary revenue suffered an overall decline in March, the 4% growth in TRevPAR levels was driven by increases in ADR across all sectors, including corporate (5.6%), conference (12.9%) and leisure (6.9%).

The 6.8% growth in ADR for the month suggests that London is showing no signs of being negatively impacted by the economic situation in the wider UK, which during March included unemployment rising to its highest level since 1994, inflation rates creeping up to 4.4% and the government budget encouraging considerable belt-tightening.

The first quarter is historically the most challenging period due to a reduction in the level of activity in both the commercial and leisure sectors, evident in the 2.2 percentage point decline in room occupancy levels in the period, hotels in London have successfully achieved year-on-year growth in both TRevPAR (2.5%) and GOPPAR (1.6%).

“Despite the strong performance of the capital during this period, London hoteliers will be glad to see the back of the first quarter of the year,” says Jonathan Langston, managing director for TRI Hospitality Consulting. “Whilst hoteliers were fortunate not to have the challenges of the snow this year, profitability levels remained more than 20% below the rolling 12-month average. Moreover, whereas London hotels will typically achieve a profit conversion of approximately 48% of total revenue, in Q1 hotels in the capital were left languishing at approximately 43%.”

Cost increases pull provincial profitability into negative territory

While hotels in the UK provinces enjoyed a third consecutive month of total revenue growth, underlying cost issues revealed further year-on-year declines in profitability levels, TRI says.

It was the first time since 2007 that provincial hoteliers achieved a first quarter increase (of 0.6%) in TRevPAR, to £79.71 from £79.25. However, in line with the first quarter performance in recent years, GOPPAR suffered a decline of 3.6%. Although this is an improvement on declines of 5.3% and 19.9% in 2010 and 2009, respectively, this is the first year in which high costs have resulted in such a swing from a positive to a negative position.

For the month, the achieved TRevPAR growth of 0.5% to £87.47 from £87.00 was quickly diminished by increases in cost levels in both payroll (0.9-point increase to 32.3% of total revenue) and total overheads (1-point increase to 24.2% of total revenue). As a result of the increase in costs, year-on-year GOPPAR levels for March declined by 4% to £25.92 from £27.01.

Despite the decline in overall profitability levels, provincial hoteliers appear to be more effectively managing one of the major challenges of 2010—conference rates—with the average rate in this sector stabilizing at £76.22.

However, consumers continue to seek discounts in other parts of the conference package, and provincial hoteliers have obliged by reducing ancillary spends and, more specifically, room hire charges.

“A lack of business demand, and fewer leisure travelers typically means the first quarter of the year is a challenge for provincial hoteliers, and the timing of the school holidays and the Easter break will mean that those challenges will remain for at least another month,” Langston says. “Further consideration will also need to be given to the impact of the 0.5% increase in national insurance contributions next month.”