REPORT FROM THE U.S.—The U.S. hotel industry’s profit engine was churning in 2011, but hotel experts are questioning what effect health-care reform might have on those profits.
According to STR’s recently released 2012 HOST Study, the 3,593 limited-service hotels sampled in the United States reported gross operating profit of 48.8% during 2011—an increase from 48% during 2010. But a cloud of uncertainty surrounds President Obama’s health-care initiative. And wherever there is uncertainty, sources said, it’s possible that profits could take a hit. STR is the parent company of HotelNewsNow.com.
And the hotel industry is particularly at risk, said John J. McGowan Jr., a partner in the Cleveland office of law firm Baker Hostetler.
“The Supreme Court’s Affordable Care Act ruling leaves service sector businesses, such as hotel and motel chains, right where Congress put them in 2010: in the cross hairs, because those businesses generally have not provided health-care coverage to all or substantially all of their employees,” he wrote in an email.
The biggest portion of an individual hotel’s expenses comes on the labor line of the budget, said R. Mark Woodworth, president of PKF-HR. Hotels spend up to 45 cents of every dollar on labor.
“Year-over-year profit growth (for some hotels) continues to be under pressure,” he said.
Mike Hines, president and CEO of Birmingham, Alabama-based HP hotels said 2011 was a decent year for the sector, but that 2007 was the year hotel profits hit high gear.
Effect of uncertainty
Many hotels remain hobbled from the downturn of 2008-2009, Woodworth said. And, while PKF has not studied what effect health-care reform might have on industry profits, Woodworth said the prospect of potentially adding to labor costs “can’t be a good thing.”
“We’re just like any industry out there,” Hines said. “Anytime there are new regulations enacted, there’s flow-through” to the bottom line.
Similarly, 3,000-employee New Castle Hotels & Resorts of Shelton, Connecticut, is also studying the potential impacts of the law, said president and COO Gerry Chase.
Chase said the fog surrounding the reform measure could have an impact on hotel operations in the industry.
“Anytime there is uncertainty in our economic environment, not just in our industry, but in the economy as a whole, there is cause for concern.”
He added, “Uncertainty itself can cause a disruption in the business.”
Any reduction in staffing levels as a result of health-care reform could be disastrous for the hotel industry, Woodworth said.
“There is a clear correlation between jobs and demand,” he said.
Hines said his company is still trying to figure out the best way to address the reform. HP employs 1,500 and counts 32 operating hotels in its portfolio.
Looking at the larger industry overall, Hines does not believe that hotels will try to cut staffing levels or the number of hours employees work in an attempt to maintain profits and reduce labor- or health-care related costs.
“I doubt the issue will be very impactful on staffing,” he said. “We still have to service our guests.”
It will likely be some time before the final cost of the measure is fully known, Hines said. “Even for the insurance companies, it’s complicated to work through,” he said.