Telecommunication evolution and its impact on the hotel industry

By Tanya Pierson and Elizabeth Lauer Ivey     HVS International

As hospitality industry professionals, we know better than to make a long distance call from a hotel room, but does the average Jane and Joe Traveler?  The answer is yes, and they’ve learned to use a cell phone or PDA, rather than even a calling card.  Recent history has illustrated the effects of an educated traveler on the hotel industry.  As if the ubiquitous ads for cell phone plans weren’t bad enough, long distance plans advertising 3 cents, 5 cents and 10 cents a minute alert the cognizant public of how much they have been taken advantage of when they use a hotel room telephone for a long distance call. 

So how badly has the hotel industry been impacted by improvements in mobile communications?  According to Smith Travel Research, over the last five years, telephone revenue on a per occupied room basis has decreased an average of 3.3% (compounded annually) for full-service properties and increased by 2.5% annually (less than inflation) for limited-service hotels.  As a percentage of total hotel revenue, full-service telephone revenues have dropped from 2.6% in 1997 to 2.0% in 2001.  Limited-service hotels realized a similar decline from 2.0% to 1.7% between 1997 and 2001.  Because of the high fixed costs associated with the telephone department, expenses have risen as a percentage of departmental revenue.  The bulk of the telephone expense consists of the cost of local and long-distance calls billed by the telephone companies that provide these services.  For full-service hotels, as a percentage of telephone revenue, telephone expense increased from 43.1% to 50.6% between 1997 and 2001.  Limited-service properties have always realized higher costs, and between 1997 and 2001, telephone expenses increased from 57.9% to 65.3% of departmental revenues. 

Although telephone revenue makes up only a small percentage of a hotel’s total revenue, it historically was a fairly lucrative department relative to other hotel `departments, many of which realize minimal profit, if not losses.  If hotels fail to keep pace with the evolution of telecommunications, we believe the telephone department will become a loss leader.  For hotels that lease their equipment, it already is. Through the course of our appraisal work, HVS has already seen signs of this happening.  Primarily in mid-price and economy-oriented properties, telephone expenses have ranged anywhere from 100% to 250% of telephone revenues.  Hotels located along a highway also have traditionally realized lower telephone revenues (as a percentage) and higher departmental costs on a per occupied room basis.   Some of this may be blamed for inadequate call accounting systems and others might attribute it to high communication costs in certain locations.  The majority will attribute it solely to technology advancements and cell phone adoption rate without recognizing their own responsibility to keep pace with important changes in telecom practices, products, and services.  In addition, the competitive nature amongst hotels to offer free local calls has had an impact on telephone revenues and profit levels. 

One hotel company we spoke with stated that they are budgeting at least a 5% decline in telephone revenues annually (on a POR basis) and even internet and 800 access charges can’t make up for the lost revenue due to wireless technology.  Many managers are writing off profit in the telephone department altogether.   Trends for mid-year 2002 confirm that the drastic decline continues.  White Lodging Services, which owns and operates over 75 hotels in the U.S., stated that phone revenues for their 10,000+ rooms have dropped nearly 70 cents (on a per occupied room basis) through August 2002, compared to the same period in 2001.   Worse yet, telephone profitability ratios have declined by more than 50% (per occupied room) during the same period as well. 

What can hotels and hospitality companies do to mitigate the decline in telephone department profitability?  Careful review of telephone bills is an important first step to reducing expense.  Despite the fact that telephone service is a regulated utility, it warrants constant monitoring and attention.   Billing service errors are rampant as commercial billing has become more complex.  Multiple bills for various lines and services only compound the challenge.   Hotels seldom have the in-house resources to scrutinize monthly bills to ensure accuracy and request adjustments, so erroneous phone bills are often paid without question. 

Review facility configuration.  Additional lines are often ordered to accommodate meeting groups or ensure adequate coverage for periods of high call volume.  Historically, this was a reaction to a rising number of complaints from guests unable to get an outside line.  This may have occurred during the height of guestroom telephone usage.  Even though usage has declined, few properties have revaluated the number of physical lines running to the hotel.  Based on a careful review of current call volume, properties may be able to actually reduce the number of lines or replace expensive copper lines with T-1 or shared T-1 services.  Keep in mind that in recent years, guests have been placing additional demands on the telephone switch by using dial-up Internet connections.  If a property has recently installed a high-speed Internet access solution, the number of lines needed to handle the voice traffic volume may have declined. 

Shop around!  It is a buyer’s market, and there is no reason hotels can’t take advantage of extremely competitive pricing and brand purchasing power of a plentiful commodity.   Most consumers are hotly pursued by telemarketers who promise lower long distance rates and bundled services all designed to reduce total monthly telephone costs.  While most consider this a nuisance, regular notification and evaluation of one’s telephone service does save money.  In contrast, many hotel properties are operating with services negotiated years ago.  There’s a good reason the phone companies don’t call commercial customers to advise them of money saving strategies but rest assured that they can be uncovered.   In one instance, an independent hotel was able to reduce their annual costs nearly 60% by negotiating local service through their long distance provider instead of relying on a local service reseller. 

Don’t leave the negotiation of telecom services to amateurs or operations people.   Professional telecom audits are relatively inexpensive services that can pay for themselves quickly through accumulated savings resulting from improved cost control.   Automation can reduce departmental costs by decreasing the number of operators required to handle inbound and in-house calls.  Auto attendant and call routing functionality can take PBX demands off of front office personnel and reduce the need for dedicated PBX staff.   Maintaining an outdated telephone switch may be more expensive than replacing it with more modern equipment. 

Getting guests to resume use of hotel phones is a greater challenge, but opportunities to stabilize or improve telephone revenue do exist for companies willing to revise the traditional telephone department operating model.   In an effort to maintain current customers and potentially attract new ones, hotel companies have begun to implement incentives and encourage guests to reach for the guestroom handsets.  The first major hotel company to do so, Wyndham, is offering free local and long distance calls, as well as Internet access, to all WyndhamByRequest members as of June 2002.  More recently, a group of Marriott hotels in the D.C. area began offering unlimited local, long-distance, and high-speed internet access for a daily fee of $9.95.   Other hotel companies are experimenting with IP Telephony.  Although still in its infancy, Voice over Internet Protocol (VoIP) is expected to dramatically reduce telecommunication costs by circumventing traditional long distance carrier networks and routing voice traffic over the Internet.  

By eliminating or reducing the consumer costs for long distance and Internet access, hotel companies achieve a competitive advantage.  As a result, to compensate for the lost profit, hotel managers are slowly increasing room rates or focusing additional attention on ancillary departments (business center, spa, meeting space, restaurants, etc.).  With additional attention paid to the current services offered to the property by a provider, incorporating additional automation, and/or through the use of a technology consultant, savings may be realized. 

Tanya Pierson
Elizabeth Lauer Ivey
2229 Broadway
Boulder, CO 80302
303-443-3933
303-443-4186 FAX

FelCor posts wider loss, will sell small hotels

(Reuters) - FelCor Lodging Trust Inc.FCH.N , the No. 2 U.S. hotel owner, announced on Tuesday a wider quarterly loss due to weak travel and investment losses from smaller hotels, which the company has decided to sell.

Irving, Texas-based FelCor, which warned in January it would miss Wall Street expectations for the fourth quarter, said it would defer further common dividends until room revenue begins growing 2 percent to 4 percent per year.

Few industry executives or analysts expect even that kind of tepid growth very soon, however, leading many analysts to rank the lodging sector as neutral or hold.

FelCor reported a fourth quarter net loss of $185.1 million, or $3.17 per share, compared with a loss of $35.4 million, or 67 cents per share, in the year-ago quarter.

The fourth-quarter loss of 2002 included a $157.5 million charge related to the sale of 33 small hotels FelCor plans over the next 24 to 36 months.

Funds from operations, a cash flow measure, was 11 cents per share, in line with a company warning on Jan. 14, when Wall Street on average had expected 21 cents per share.

Revenue in the quarter rose 2.3 percent from a year earlier to $309.8 million, reflecting higher hotel room occupancy but lower rates.

"The occupancy levels are back. It is just a rate issue," Chief Executive Tom Corcoran said in a telephone interview.

He forecast revenue per available room, or RevPAR, would fall 3 percent to 5 percent in the first quarter and FelCor said that January RevPAR was down 4 percent from the previous year.

Room revenue in 2003 would be between one percent down and one percent up compared with 2002, the company forecast.

Funds from operations would be between 14 cents and 18 cents per share in the first quarter, FelCor forecast.

NO "MAJOR WAR" FACTORED INTO FORECAST

Corcoran said that he had not factored in a potential major war with Iraq. "I don't think it's got the effect of a major war that stops people from traveling," he said.

FelCor also announced plans to sell off 33 smaller hotels from its portfolio of 169 units. Corcoran said he aimed over the next 24 months to 36 months to exit some smaller markets and put the proceeds into properties in larger markets. However, he did not forecast when, or what, he would buy.

Shares of FelCor dropped about 1 percent, or 10 cents, to $10.25 in regular trade before results were announced.

Former hotel manager awarded more than $11 million after suing Leona Helmsley for gay bias

(AP) -- A jury awarded more than $11 million to a former hotel manager Tuesday after concluding he was fired by real estate maven Leona Helmsley because he is gay.

The jury found that Charles Bell had endured a "hostile and abusive work environment" while running Helmsley's Park Lane Hotel. He was awarded $10 million in punitive damages and $1.2 million in compensatory damages.

State Supreme Court Justice Walter Tolub had told the jurors to take into account the defendant's financial condition and said Helmsley's net worth is estimated at $3.2 billion to $4 billion.

Helmsley looked impassively at the jurors as the decision was read, but said later that she was "shocked" by the award.

"I think it's shameful," she said. "It will encourage more people to lie, cheat and steal. He (Bell) broke every rule. I'm outraged."

Her lawyer, Steven Eckhaus, said he would move immediately to set aside the verdict and, failing that, would appeal.

Bell, 48, had sued Helmsley, 82, for $40 million, saying that once she found out he was gay she subjected him to almost daily verbal abuse until she fired him in March 2001.

Bell testified tearfully during the trial, saying that about a month before Helmsley fired him, "She started to yell at me. She said, `You look like a fag. You dress like a fag. You are a fag."'

Bell said Tuesday that he was happy the jury agreed Helmsley had discriminated against him, adding: "I don't believe that any gay person should ever have to go through this kind of treatment again, ever."

Eckhaus previously had said Bell was fired because he was unqualified, not because he's gay. He noted that Bell admitted that he had submitted a resume that was "phony baloney."

Two other gay former employees of Helmsley's have lawsuits pending against her.

Accor 2002 sales dip on slowdown, currencies

 (Reuters) - French hotel group Accor ACCP.PA reported a 2.1 percent decline in full-year sales on Tuesday as a sluggish economy and currency effects took their toll on its giant hotellery division.

The company whose 3,600 hotels range from the luxury Sofitel chain to the budget Red Roof inns for travelling salesmen, said in a statement that sales in 2002 totalled 7.139 billion euros after 7.290 billion a year earlier. On a comparable basis sales increased 0.9 percent.

Analysts surveyed by Multex had predicted 2002 sales of 7.295 billion.

In the fourth quarter alone, meanwhile, turnover emerged at 1.736 billion euros, down 3.2 percent on a published basis from 1.793 billion a year earlier.

Accor, which also operates service vouchers, casinos, and owns half of travel agency Carson Wagonlit Travel, said its full-year pre-tax profit should emerge "very close" to its target of 700 million euros.

Indonesia: Tourism showing signs of recovery

Jakarta (Bluebull) - Tourist arrivals to Bali almost doubled in December from the previous month to 68,000, signaling a recovery in an industry that has been devastated by the Oct 12 nightclub bombings, Indonesia's statistics bureau said. Still, Indonesia's tourist industry, which contributes about 5% to annual gross domestic product, suffered badly in 2002 due to the blast, the statistics bureau said in figures received today.

Overall tourist arrivals dropped 2.3% from the previous year to 5.03 million, it said, and December arrivals for Indonesia as a whole were still about 7% lower at 281,928. Foreign exchange from tourism also fell from USD5.4 billion in 2001 to USD4.3 billion in 2002, it said. 'Although tourism to Indonesia has improved after the Oct 12 Bali bombing, it hasn't yet recovered fully,' the bureau said in a statement.

Indonesia's success in capturing many suspects of the Bali attack has helped restore confidence among tourists, analysts say. Yesterday, police arrested the suspected leader of the Singapore branch of the al-Qaida-linked Jemaah Islamiyah terror network. Indonesia has said the group carried out the bombing, which killed 192 people, mostly foreign tourists.

Tourism officials say they were also helped by a strong holiday season and a domestic market lured back to Bali with reduced hotel and air rates. But they have said the next few months will determine if the rebound is strong enough to offset feared layoffs and business closures in Bali. /cf

Australian economy the big loser if tourism green paper

The Australian Tourism Export Council (ATEC) today called on the Federal Cabinet to fully support the 'Tourism Green Paper' and commit to investing in an industry that can deliver long-term benefits for the Australian economy.

"The Cabinet must support the work carried out by Minister's Ian Macfarlane and Joe Hockey who have driven the intensive Tourism Green Paper process. The green paper is due before Cabinet in the next few weeks and it would be a disaster if this key industry restructuring document is not supported by a credible resourcing contribution", said ATEC Managing Director, Peter Shelley. "We are asking the government to take a long term view on tourism. It is about the future growth of the economy and the substantial contribution tourism can make in the years ahead. It's an industry vision for the future that we want the government to share in. It's about real jobs, real people and real outcomes."

"We are not talking about short-term fixes. The Tourism Green Paper will assist in restructuring an industry that already contributes around 5 percent to GDP and employs 10 percent of the nations' workforce. The aim is to build on these sizeable foundations and take the industry to a new level of growth over the next decade in terms of exports and employment." "The Paper's recommendations have been developed over a 10-month period following extensive industry consultation. Tourism Minister, Joe Hockey, has travelled the length and breadth of Australia to familiarise himself with the issues and the impediments to sustained growth. He has been candid with the industry that it should brace itself for significant change in order to secure its position as a long-term growth generator for the Australian economy.

"The industry is prepared for such change and has proactively supported the government's agenda for the Paper. Therefore it also has high expectations that after such a detailed process the government will recognise tourism's growth potential and invest significant resources in its future." "ATEC is calling on the Friends of Tourism, the 40- member coalition tourism support group, to exert its influence in the party room on behalf of the one million people employed directly and indirectly by the tourism industry." "The industry's potential is well documented. However, projections about tourism's annual contribution surpassing $100 billion at the end of the decade and tourism exports reaching around $30 billion are one thing, delivery of this potential is another." "These projections will not be reached unless the government gets serious about the tourism industry. It will be a missed opportunity for Australia if the government fails to act. Never has there been a better time for the government to invest in the future of the industry and the national economy", added Mr Shelley.

Indonesian tourism shows sign of recovery

Indonesia's tourism figures have recovered significantly following the devastating Bali bomb attack last October.

Indonesia's Bureau of Statistics says foreign tourist visits rose 18 per cent in December.

In the weeks that followed the attack, occupancy rates at some Bali hotels fell to single-digit levels.

The Bali explosions killed almost 200 people, most of them foreigners.

Investigators look for cause of hotel fire in northeastern China

(AP) -- Investigators combed through charred restaurant supplies, wiring and space heaters as officials said Tuesday they were still uncertain what caused a hotel fire that killed 33 people in an icy northeastern city during the Chinese New Year weekend.

The investigation into the fire Sunday night at the Tiantan Hotel in Harbin was continuing, said a government official at Harbin's city hall who gave only his surname, Wang.

Footage on Heilongjiang provincial television Monday night showed firefighters carrying injured and overcome people from the hotel, down steps covered with soot and debris.

Harbin's newscast also showed the gutted innards of the hotel, including burned parts of a restaurant, charred shelves of liquor and food supplies and broken windows. The official Xinhua News Agency said people kicked out windows to escape the fire