How attrition, cancellation fees hit your bottom line
 
How attrition, cancellation fees hit your bottom line
05 JULY 2016 8:54 AM

The hotel industry has changed its stance on imposing cancellation fees on guests, so how has that trend affected revenues and income since the recession?

Historically, if a guest notified the hotel at 6 p.m. on the day of arrival that he or she would not be checking in, that was usually sufficient to waive any cancellation fees.

However, given the proliferation of online booking programs that have empowered consumer’s purchasing practices, travelers have learned to take advantage of the fairly unrestrictive cancellation policies by booking multiple reservations and simply waiting until 5:59 p.m. to select the best rate. In turn, hotels received inflated reads on potential occupancy levels, which have a significant impact on revenue-management decisions.

In an attempt to gain better control over their inventory and pricing, hotels have begun to tighten their transient cancellation policies. Starting in 2015, some of the major hotel companies began to extend the minimum notice of cancellation for guests to avoid fees. Prior to that, hotel companies introduced discounted nonrefundable room rates similar to airlines.

According to the Uniform System of Accounts for the Lodging Industry, the income received from transient reservation cancellations is recorded as rooms revenue and is frequently difficult to identify as a discrete source of income on the standard hotel operating statement format. On the other hand, the fees hotels receive from the cancellation of group meetings are usually presented as a separate line item in miscellaneous income.

Because of the greater transparency, our firm is able to capture cancellation and attrition fee data when conducting our annual “Trends in the hotel industry” survey. The USALI defines cancellation fees as “income received from transient guests and groups that cancel their reservations for guestrooms, food and beverage, and other services after a contracted or cutoff date.” Attrition fees are defined as “income received from groups that do not fulfill their guaranteed number of reservations for guestrooms, food and beverage, and other services.”

Based on a sample of 304 U.S. full-service, resort and convention hotels that reported attrition and cancellation fees each year from 2007 through 2014, we are able to analyze recent trends in this source of income.

Changes in fee income
When observing annual changes in attrition and cancellation fee income from 2007 through 2014, we see correlations with the health of the overall U.S. lodging industry and the group demand segment.

In 2008, the initial year of the industry recession, the income from attrition and cancellation fees increased by 34.7% over 2007. This was the result of the increased incidence of outright meeting cancellations, as well as shortfalls in meeting attendance. Attrition and cancellation income increased another 5.8% as the recession continued into 2009.

After 2009, this revenue source abruptly experienced two years of declines in 2010 (-52.1%) and 2011 (-13.1%). The declines can be attributed to a combination of fewer meetings, as well as some leniency in the inclusion of attrition and cancellation clauses contained in the group contracts that were negotiated during the depths of the recession in 2008 and 2009.

According to STR, accommodated group roomnights in the U.S. returned to pre-recession levels in November of 2014. With the return of group demand and high occupancy levels, hotel sales managers now feel empowered to be more aggressive in the inclusion and enforcement of attrition and cancellation policies. (STR is the parent company of Hotel News Now.)

Contribution to revenues

With changes in attrition and cancellation fee income, this revenue source has fluctuated as a percentage of total revenue. In 2007, attrition and cancellation income equaled 0.7% of total revenue. This metric jumped up to 1.3% in 2009, but has since leveled off at 0.5% of total revenue.

By property type, attrition and cancellation revenue has been most significant as a source of revenue at resort hotels. From 2007 through 2014, this source of income averaged 0.9% of total revenue at resort hotels, followed by 0.8% at convention hotels and 0.5% at full-service properties. During the recession, several corporate and association meetings scheduled to be held at high-end resorts were cancelled to avoid the appearance of wasteful spending. This phenomenon became known as “the AIG Effect.”

Contribution to profits
While attrition and cancellation income has been a minor source of revenue for hotels, it can have a significant impact on profitability. Since a minimal amount of variable expense is incurred to earn attrition and cancellation revenue, it can be assumed that most of the penalty payments received by hotels drop right to the bottom line. Accordingly, it is proper to analyze this source of revenue as a percent of net operating income.

As a percentage of NOI, attrition and cancellation fees have averaged 3.1% from 2007 through 2014. In 2009, this ratio peaked at 6.8%. Once again, resort hotels have benefited the most among property types from attrition and cancellation fees with an average NOI ratio of 4.2% between 2007 and 2014.

Adapting
Due mainly to recent advancements in guest-booking technology, hotels have only recently started to adjust their no-show policies regarding the cancellation of transient guest stays. However, changes in group attrition and cancellation policies have occurred frequently over the years as managers have adapted to current market conditions.

Robert Mandelbaum is Director of Research Information Services for CBRE Hotels’ Americas Research. The firm offers reports that allow owners and operators to benchmark the financial performance of their hotel(s) to comparable properties (https://store.pkfc.com/custom-financial-benchmarking-reports). This article was published in the May 2016 edition of Lodging.

The opinions expressed in this column do not necessarily reflect the opinions of HotelNewsNow.com or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

2 Comments

  • Howard Hammerman July 5, 2016 11:23 AM Reply

    I can see a RM model that takes into account probability of cancellation by source of business by days to arrival. When there are many reservations from a high cancellation source, the hotel should allow a certain amount of overbooking to accommodate the cancellations. Interesting and important article.

  • L.Rozgonyi November 3, 2016 11:00 AM Reply

    "According to the Uniform System of Accounts for the Lodging Industry, the income received from transient reservation cancellations is recorded as rooms revenue" - This is incorrect - Under USALI 11th edition it is recorded as Miscellaneous Income.

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