The twin issues of lower demand and room stock capacity at its highest levels on record will be major challenges for the profit generating potential of hotels in Ireland for the next few years.
By end of 2008 Ireland had 58,467 hotel bedrooms forming part of 905 hotels.
Occupancy levels showed a decline of 6.2% from 69.7% to 63.5% in 2008. Average room rate was impacted significantly by heavy discounting across the sector to preserve volumes and attract business. In 2008 ARR fell 9.44 from 97.69 to 88.25. Not only were hotels selling rooms at an average 10% cheaper than in 2007 they were also selling fewer rooms.
The impact of the increasing pace of decline in the closing months of 2008 was clearly visible in the fall off in average room rate and occupancy during this period. Again if this is the base from which 2009 is building the outlook for the sector is extremely concerning.
Profit per room (EBITDA) fell from 9,339 to 7,056 a fall of 24.2% year on year The hotel sector will need to force its cost base down in all areas to help reduce the impact of lower sales levels and price competition on profitability. The 24.2% fall in profitability came as a result of an 8% fall in sales.
The higher profit margin achieved on room sales as opposed to food and beverage areas combined with the high propensity towards semi-fixed and fixed costs that exist in the hotel sector results in the small declines in sales having a much greater impact on profit levels.
This was certainly the case for luxury hotels where a 12% fall in sales resulted in a 45% fall in profit before tax. Profit before tax per room for luxury hotels fell from 13,954 in 2007 to 7,691 in 2008. The source of business from the domestic market at luxury hotels increased from 41.9% of guests to 47.7% of guests an increase of 5.8% and highlights an increasing reliance on the domestic market.
The global downturn and the strength of the Euro against both the dollar and sterling impacted on the number of overseas visitors to Ireland in 2008 which fell from 8m in 2007 to 7.8m in 2008.
Falling overseas visitors numbers had the greatest impact on hotels in Dublin and Southwest regions that have traditionally had strong reliance on overseas markets. In both these regions occupancies are down over 6%. As overseas visitor numbers in 2009 are likely to show further decline on 2008, hotels located in these regions will focus more on the domestic market which could impact on occupancy levels in Midlands and East and Western Seaboard regions.
The domestic market accounted for 65% of hotel Bednights in 2008, up from 53% in 2004. This segment grew its share year on year. The resilience of this sector will be a key factor in how the hotel industry performs going forward.
Falling activity levels resulted in payroll costs at Irish hotels increasing again in 2008. The survey findings show that when Dublin as a region is compared to Northern Ireland that payroll is an area where input costs are significantly higher.
Dublin
Northern Ireland
Difference
Payroll Cost as a % of turnover
41.6%
32.2%
9.4%
We expect to see hotels change their operating style over the next year where hotels will have more seasonal closures, floors of hotel rooms will be closed for periods, and components of hotels will be substituted for alternative uses. The lower level of demand for hotel rooms is likely to remain for 2009 and 2010. The focus will need to be centred on value for money, value added and not just lower prices. We would have serious concerns about the sectors ability to rebuild a higher room rate if existing trends of discounting continue.
The hotel sector will need all available support from Failte Ireland to maintain and increase overseas visitor numbers. Maintaining airline capacity into Ireland is a critical factor and incentives to maintain airline schedules at 2008 levels is important for the industry. Dublin is likely to benefit going forward from the opening of the O2 Arena, the Aviva Stadium and the National Convention Centre.
The other regions are more reliant on domestic and local business demand generators. As people adjust to the new economic reality of the slowdown, business and consumer sentiment should improve leading to higher spending at hotels. However as unemployment rates in Ireland are set to rise until the end of 2009 these uplifting supports for the industry are likely to be a more prominent feature in 2010 and beyond.
The hotel sector is now a major component of the Irish economy in terms of employment, support for our tourism sector and being a hub of activity in Irish towns and cities. Hotels do not lend themselves to change to alternative uses and making the maximum return possible from achievable sales during this downturn needs to be the focus to leave the sector well positioned to benefit from the upturn in economic conditions.
For further information please contact: Aiden Murphy Partner
aiden.murphy@hbc.ie
