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Horwath Asia Pacific Reports

Australian and New Zealand Hotel Profits Stabilise

Australian and New Zealand Hotel profits stabilised in 2002, ahead of adverse impacts from…

Australian and New Zealand Hotel profits stabilised in 2002, ahead of adverse impacts from SARS and the Iraq War, according to industry data released by hotel consultants, Horwath Asia Pacific Pty Ltd.

Horwath`s annual Hotel Industry Survey of Operators includes top to bottom line trading data for over 200 Australian and New Zealand hotels. The 2003 survey revealed a 1% decline in profit to 26% in 2002 for the surveyed hotels, for the second consecutive year.

Over a 7 year period, the Horwath Survey results have shown that the accommodation industry has had a roller coaster ride since achieving peak profit performance of 29% in Survey 1998, as detailed in the following graph. Since that time, the industry has had to endure the Asian economic crisis which saw profits fall to 25% (Survey 1999), which was followed by a period of profit consolidation in the lead up to the Olympic Games wherein hotel profit achieved 28% (Survey 2001), only to be dealt a further series of blows arising from the collapse of Ansett Airlines, the 9/11 terrorist attacks in America and the Bali bombings in October 2002.

Income before Fixed Costs % – Survey 2003 results are somewhat disappointing, as despite total revenues for the hotel accommodation sector being marginally up on prior year, a further reduction in profit occurred in 2002. Whilst the hotel industry displayed resilience in 2001 following the unprecedented terrorist attacks on September 11, the Ansett Airlines collapse and continued oversupply of rooms in some key local markets, the cost containment demonstrated in 2001 appears to have waned during 2002, says Vasso Zographou, managing director of Horwath Asia Pacific.

Economy Hotels achieved the highest increase in total revenue per available room of 4%, which gave rise to a profit of 27%, which remained constant with Horwath`s Survey 2002 results. Notwithstanding Luxury Hotels achieved a 2% increase in total revenue per available room, incremental profit conversion did not follow and in fact a decrease in profit to 21% was reported compared to 27% for the prior year. Mr Zographou commented, the size of this underperformance in profit conversions is both surprising and worrying – hotel owners will be hoping that it is a `one off` event.

In the Resort sector, profit increased by 2% to 22% despite a significant fall of 14% in room yields. This result was achieved predominantly through reductions in payroll expenses.

Serviced Apartments achieved an overall revenue per available room of $108 and a gross operating profit of 41% down from 46% reported in Horwath`s Survey 2002. Once more, Serviced Apartments outperformed hotels due to payroll and operational efficiencies derived from a combination of limited guest service delivery and providing limited food & beverage facilities, says Mr Zographou. However, in 2002 the Serviced Apartment sector appears to have followed the same trend as Hotels, particularly in the rooms division, and is experiencing diluted gross operating profits.

Change in Hotel Financial Performance 2001 to 2002

Most Australian key markets reported increases in rooms revenue per available room as highlighted in the following graph. The exceptions were the Sydney and Melbourne market which reported revenue per available room declines of 5% and 2% respectively. The Sydney market reported the slowest recovery in respect to the aftermath of the Ansett Airline collapse and September 11, which continued to impact 2002 trading performance.

The Gold Coast reported the largest increase of 25% in rooms revenue per available room, arising from the return of the higher yielding international traveller combined with the domestic drive holiday market.

Tropical North Queensland and Auckland both reported increases of 12% in revenue per available room. TNQ also benefited from the return of the international traveller generating significant average daily rate increases.

Auckland`s performance was driven by occupancy at the expense of reduced average daily rates.

The first half of 2003, has seen a continuance of soft trading performance, arising from the War in Iraq and the impact on international travel, particularly from Asia, arising from the Severe Acute Respiratory Syndrome (SARS) epidemic. The results have been mixed depending on the particular key market, with Sydney and Melbourne reporting negative room yield growth compared to last year. Hopefully we have seen the last of SARS and the industry can commence its recovery period. Unfortunately, immediate improvement in these markets is not likely as we enter what is expected to be a very competitive regional market during the traditionally quite Australian winter period. Multimillion dollar marketing campaigns targeting Australian and New Zealand travellers are planned over the next several months which are likely to soften domestic demand, says Mr Zographou.

However, Horwath Asia Pacific expect that market conditions will begin to improve during the second half of 2003, and some key markets (and in particular Sydney) will begin to show a strong rebound in performance during 2004 with international visitor arrivals forecast to increase by 10%.

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