PricewaterhouseCoopers Forecasts Lodging Industry Expenses Will Rise in 2003

NEW YORK--As a result of some expenses that will rise, or costs that will need to be reinstituted, PricewaterhouseCoopers forecasts that the total expenses per available room will rise by 1.9 percent, or $21,800, to $22,200 in 2003, or expressed differently, total expenses per occupied room basis will increase by 0.8 percent, or from $36,700 to $37,000.

In 2002, aggressive cost controls and expense reductions were continued and "fine-tuned" from 2001. Because expenses per available room declined by four percent over the last two years, industry break-even occupancy has declined to a record low of 47.4 percent. Until 1995, break-even occupancy was above 60 percent. Without the cost controls and reductions, profits would have decreased to $13.6 billion in 2002, or $2.5 billion less than PricewaterhouseCoopers' estimate of industry profits of $16.1 billion.

Some of the lower expenses in 2002 were due to lower occupancy, but others have been because of extraordinary management efforts as described in the attached table.

Therefore the decline in profits was reduced and the trend is shown in the attached chart.

"Some of the cost reductions that management initiated in 2001 and 2002 will become institutionalized, but some can only continue for a limited time or they will increasingly affect the quality of facilities and guest service," said Bjorn Hanson, Ph.D., global industry leader, PricewaterhouseCoopers Hospitality & Leisure Practice.

PricewaterhouseCoopers research indicates that the following expenses will rise or need to be reinstituted in 2003:

1. Approximately 40 percent of hotels reduced sales and marketing budgets. These budgets will need to increase in efforts to maintain or stimulate demand and market share.
2. Selected staff positions will need to be re-instated with the recovery of occupancy levels and to meet guest service expectations. Approximately 60 percent of hotels eliminated positions or shifts for job titles including front office manager, assistant managers (in multiple departments) and reduced hours of operations of food and beverage outlets, room service, fitness centers, and business centers.
3. Payroll costs, the single largest expense category for lodging, will increase approximately two to five percent primarily because of rising medical benefit costs in 2003.
4. Insurance costs, which represented 0.9 percent of total sales at full-service hotels and 1.1 percent at limited service hotels in 2001 according to Smith Travel Research, will typically increase between 15 and 35 percent in 2003.
5. Utility costs could increase between four and eight percent in 2003, given the recent disruptions to oil sources and uncertainties in the global oil market.

PricewaterhouseCoopers Hospitality & Leisure research specialists develop lodging industry forecasts using econometric models. They assist clients in understanding past and future lodging industry trends. Hospitality & Leisure research specialists have applied advanced statistical and econometric techniques on a variety of engagements, making a difference to clients' profitability, market share, strategic direction, and visibility in the marketplace.

PricewaterhouseCoopers (www.pwcglobal.com) is the world's largest professional services organization. Drawing on the knowledge and skills of more than 125,000 people in 142 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance in an Internet-enabled world.

PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organization.