Because of the various fixed costs associated with operating, maintaining and staffing hotels, there is a specific point, both in terms of dollars generated and room nights sold, where the hotel will start to realize a profit. Until the hotel reaches that magical number of guestrooms sold and revenue generated, all sales up to that point will essentially be used to pay for the fixed costs to operate the hotel plus the variable costs to supply and maintain the guestrooms that are used.
Look at the figure below as an example. For the time period in question, the hotel would have to sell 3,000 guestroom nights and in the process generate $280,000 in room revenue (not including occupancy taxes) before its operation of selling guestrooms was to be deemed profitable. Interpreted another way, this would mean that the hotel must sell at least 3,000 guestrooms at an average daily rate of $93.33 during the time period before it would generate a profit. The hotel could sell a fewer number of guestrooms at a higher ADR or a greater number of guestrooms at a lower ADR in order to reach the breakeven point in sales, but bear in mind that the breakeven point in sales may not be the same because of the variable costs associated with providing guestrooms for use.
Total Fixed Costs
To calculate the breakeven point for a given time period, a manager must first be able to calculate the total fixed costs that the hotel will incur. Total fixed costs are the sum of all the expenses that a hotel must pay for during a time period that will not fluctuate because of occupancy. Typical fixed costs may include mortgage and insurance expenses, managers’ salaries and benefits, property taxes, the payroll and benefits expenses of the least number of employees that must work even if the hotel has no guests, and the expenses of the utilities that must be maintained even if the hotel has zero occupancy (e.g., such as maintaining a minimum amount of heat to keep water pipes from freezing in the Winter). With each of these aforementioned expenses, the amount of the expense will not deviate regardless of how many or how few guestrooms are sold.
Variable Costs
The next step is that a hotel manager must calculate the variable costs associated with selling each unit, in this case a guestroom. Variable expenses are deemed “variable” because they are only incurred if a room is sold or used. If the guestroom remains vacant for the night, there are no variable costs that the hotel must pay for; any required costs associated with maintaining a non-used guestroom would be considered a fixed cost.
Variable costs for guestrooms will typically include the expense of labor and supplies to service the room after use (e.g., room attendant labor, chemicals, amenities, and utility expense), the labor, chemical and utility expense associated with servicing the guestroom’s linens, the expense of the utilities associated with the guest’s occupancy (e.g., electricity, water, heat, etc.), and the guestroom’s fare share contribution towards a capital budget for replacing furniture, fixture, and equipment in the guestroom every 3-7 years as part of a regularly scheduled refurbishment.
Selling Price
It is no surprise that hotels set the minimum selling price for each guestroom at or above the variable expenses for each guestroom. Failure to do so would be foolish and lead to assured deeper financial loss with every room sold. But the room price must also reflect its contribution towards supporting the hotel’s total fixed costs. Knowing the total fixed costs for the entire hotel and the variable costs associated with each sold guestroom, when coupled with the average selling price, a hotel manager can easily calculate the breakeven point for the hotel, both in terms of number of guestrooms that must be sold but also in guestroom revenue that must be generated, in order for the hotel to realize a point of profitability.
Using Breakeven Analysis Formulas
Here is an example to illustrate how to use the breakeven analysis formulas. Let’s assume that the Ambassador Hotel has 900 guestrooms. The total fixed costs for the hotel on any given night are $22,350.00. The variable costs per guestroom are $9.54, broken down as follows:
Labor expense to service guestroom: $4.00
Laundry expense: $1.70
Cleaning chemicals and supplies: $1.00
Amenity items: $1.30
Utilities consumed by guest and to clean room: $1.54
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Total variable expense per guestroom per night: $9.54
Now let’s assume that the average daily rate for the hotel last night was $88.93. To calculate the Breakeven Point in Units for a given time period use the following formula:
BEP units = Total Fixed Costs for the Hotel ÷ Selling Price per unit – Variable Costs per unit = $22,350.00 ÷ ($88.93 – $9.54) = 281.52rooms
This means that given the total fixed costs, variable costs per guestroom, and an average room rate of $88.93 the Ambassador hotel would have to sell at least 282 guestrooms before it realized profitability last night. If it sold 281 or fewer guestrooms at an ADR of $88.93 or less, the hotel would not generate sufficient gross revenue to meet its expense obligations. Yet, for every room above 282 guestrooms that were sold last night, the hotel is generating a pre-tax profit of $79.39 per room. Obviously, the more guestrooms it sells over and above 282 rooms, the greater the profit amount.
To calculate the Breakeven Point in Sales one merely needs to multiply the Breakeven Point in Units by the selling price. In the above example, the selling price would be the average daily rate for the previous evening:
BEP sales = (Breakeven Point Units) (Selling Price) = (281.52 rooms) ($88.93) =Total Fixed Costs for the Hotel $25,035.57
Hence, if the selling price is set at $88.93 (or if the ADR for a given time period was $88.93) the Ambassador Hotel must generate at least $25,035.57 in guestroom sales before its operation is considered profitable. As an example, if the hotel generated gross guestroom revenue of $53,358 (600 guestrooms sold at an ADR of $88.93), then it would realize a profit of $25,284.13. This is calculated as follows:
Profit beyond BEP = [(Units sold beyond BEP units) (Selling Price – Variable Costs per Unit )]
Profit beyond BEP = [(600 rooms – 281.52 rooms) ($88.93 – $9.54)]
Profit beyond BEP = (318.48 rooms) ($79.39) = $25,284.13
Conclusion
Breakeven analysis is a powerful analytical tool that hotels managers can use for any item or service that they sell, not just guestrooms. As long as the business operation’s total fixed costs, and the variable costs and selling price for each item can be determined, the breakeven point of profitability can be calculated. The above supplied formulas can also be used to determine how a change in expenses or selling price will increase or decrease the number of units that must be sold in order to achieve profitability.
If a hotel manager is neither aware of the expenses associated with their products or services or is ignorant as to their breakeven point, such a manager will struggle to ascertain when and if their lodging operation is a financial success or a drain on ownership’s resources.
]]>From 2006 to 2011, members of an organized gang in San Diego ran a child sex trafficking ring of at least 16 girls out of various area hotels. At one hotel, staff members neglected to take any action to protect the long parade of children who were being ushered in to be raped. Furthermore, two members of the hotel staff permitted the gang members to use the hotel computer to post online ads advertising sex with the minors. Staff members also knowingly rented rooms for use in prostitution, charged higher room rates for rooms to be used for child sex trafficking and pocketed the difference, and warned the pimps if police were nearby.
Last month in Oakland, California, government officials sought to shut down two local limited-service hotels that have allegedly been hubs of prostitution and drug activity for several years. Officials said there have been numerous incidents of rape, kidnapping and violence – many involving victims as young as 14 who were forced to work as prostitutes.
In Orlando, a Florida man was arrested on charges of sex-trafficking last month at a full-service branded hotel. He was accused of selling sex with a 16-year-old girl and coercing a second young girl into prostitution who was “extremely scared” of disobeying him after he had physically abused her.
In December 2008, the ringleader of a sex-trafficking ring that spanned at least three states, was sentenced in federal court in Bridgeport, Connecticut, on federal civil rights charges for organizing and leading a sex-trafficking operation that exploited as many as 20 females, including minors. He admitted that he recruited minors to engage in prostitution; that he was the organizer of a sex-trafficking venture; and that he used force, fraud, and coercion to compel the victims to commit commercial sex acts from which he obtained the proceeds. According to the indictment, the defendant lured victims to his operation with promises of modeling contracts and a glamorous lifestyle and then forced them into a grueling schedule of dancing and performing at strip clubs and then forced the victims to walk the streets until 4 or 5 a.m. propositioning customers. The indictment also alleged that he beat many of the victims to force them to work for him and that he also used physical abuse as punishment for disobeying the stringent rules he imposed to isolate and control them.
What is sex trafficking?
Sex trafficking is a modern-day form of slavery in which a commercial sex act is induced by force, fraud, or coercion, or in which the person induced to perform such an act is under the age of 18 years. Enactment of the Trafficking Victims Protection Act of 2000 (TVPA) made sex trafficking a serious violation of United States law. Sexual traffickers use psychological as well as physical coercion and bondage to force their slaves to remain compliant.
Not only is human sex trafficking slavery but it is big business. It is the fastest-growing business of organized crime and the third-largest criminal enterprise in the world. The majority of sex trafficking is international, with victims taken from such places as South and Southeast Asia, the former Soviet Union, Central and South America, and other less developed areas and moved to more developed ones, including Asia, the Middle East, Western Europe, and North America. And it is this movement of victims from underdeveloped countries to more developed ones where hotels become initially exposed to sex trafficking.
Although anti-trafficking organizations can’t be sure how many people are forced into commercial sex work, the United Nations Global Initiative to Fight Human Trafficking estimates that human trafficking is a $32 billion business worldwide, with $15.5 billion coming from industrialized countries.
Victims of trafficking are forced into various forms of commercial sexual exploitation including prostitution, pornography, stripping, live-sex shows, mail-order brides, military prostitution and sex tourism. Victims trafficked into prostitution and pornography are usually involved in the most exploitive forms of commercial sex operations. Sex trafficking operations can be found not only in highly-visible systems such as street prostitution, but also in more underground venues such as closed brothels that operate out of residential homes. Sex trafficking also takes place in a variety of public and private locations such as massage parlors, spas, strip clubs and other fronts for prostitution, including some hotels and motels. Unfortunately, it is these handful of lodging establishments who either permit and support sexual trafficking or tacitly “look the other way” that has created a negative image of hotels as an inviting environment for human sex trafficking to occur.
Domestic trafficking
Unfortunately, sex trafficking also occurs domestically. The United States not only faces an influx of international victims but also has its own homegrown problem of interstate sex trafficking of minors. Although comprehensive research to document the number of children engaged in prostitution in the United States is lacking, an estimated 293,000 American youths currently are at risk of becoming victims of commercial sexual exploitation. The majority of these victims are runaways or “thrown-away” youths who live on the streets and become victims of prostitution. These children generally come from homes where they have been abused or from families who have abandoned them. Often, they become involved in prostitution to support themselves financially or to get the things they feel they need or want (e.g., drugs). Other young people are recruited into prostitution through forced abduction, pressure from parents, or through deceptive agreements between parents and traffickers. Once these children become involved in prostitution, they often are forced to travel far from their homes and, as a result, are isolated from their friends and family. Few children in this situation can develop new relationships with peers or adults other than the person victimizing them. The lifestyle of such youths revolves around violence, forced drug use, and constant threats. The average age at which girls first become victims of prostitution is 12 to 14. It is not only girls; boys and transgender youth enter into prostitution between the ages of 11 and 13 on average.
International victims and what they face
Victims of sex trafficking can be women or men, girls or boys, but the majority are women and girls. There are a number of common patterns for luring victims into situations of sex trafficking, including:
Sex traffickers frequently subject their victims to debt-bondage, an illegal practice in which the traffickers tell their victims that they owe money (often relating to the victims’ living expenses and transport into the country) and that they must pledge their personal services to repay the debt. Traffickers often take their victims’ money and identity documents, including birth certificates, passports, and drivers’ licenses to prevent them from being able to flee, secure long-distance transportation, or provide for themselves. If a victim has no ability to support themselves or escape, they become dependent on the trafficker to survive.
Sex traffickers use a variety of methods to “condition” their victims including starvation, confinement, beatings, physical abuse, rape, gang rape, threats of violence to the victims and the victims’ families, forced drug use, and the threat of shaming their victims by revealing their activities to their family and their families’ friends.
Victims face numerous health risks. Physical risks include drug and alcohol addiction; physical injuries; traumatic brain injury resulting in memory loss, dizziness, headaches, numbness; sexually transmitted diseases; sterility, miscarriages, menstrual problems; other diseases; and forced or coerced abortions. Psychological harms include mind/body separation/disassociated ego states, shame, grief, fear, distrust, hatred of men, self-hatred, suicide, and suicidal thoughts. Victims are at risk for Posttraumatic Stress Disorder (PTSD) – acute anxiety, depression, insomnia, physical hyper alertness, self-loathing that is long-lasting and resistant to change (complex-PTSD). Victims may also suffer from traumatic bonding – a form of coercive control in which the perpetrator instills in the victim fear as well as gratitude for being allowed to live.
How hotels can respond
Hotels can take a number of steps to prevent and respond to sex trafficking. If you think you have come in contact with a victim of human trafficking, call the National Human Trafficking Resource Center at 1-888-373-7888. This hotline will help you determine if you have encountered victims of human trafficking, will identify local resources available in your community to help victims, and will help you coordinate with local social service organizations to help protect and serve victims so they can begin the process of restoring their lives. For more information on human trafficking visit: www.acf.hhs.gov/trafficking.
The Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism, also known as ‘The Code’ is a set of voluntary guidelines developed by ECPAT (End Child Prostitution, Sex Trafficking, Tourism and Pornography), in cooperation with the travel and tourism industry. Hotels can adopt The Code as part of a strategy to help prevent what is arguably the worst form of sex trafficking – child sex trafficking. The Code has been signed by over 1000 travel and tourism companies including major hotel groups Accor, Carlson, Hilton, Wyndham and Millennium. These groups vary in the extent to which they implement it across their operations. Hotels can extend their implementation of The Code to other forms of sex trafficking.
Training of hotel staff is key. Hotel managers may never spot the signs of sex trafficking, but housekeeping and room service employees often know when something isn’t right. They are the employees that are in the guestrooms where much of the evidence of slavery or sex trafficking will be present. Train employees not just what to look for and to report indicators of exploitation to management in a timely manner, but educate all employees about the social and human costs of this horrendous exploitation. And remind them that the hotel’s reputation and perhaps its financial stability (and hence their individual job security), can be adversely impacted by the ongoing existence of such illegal activity.
Hotels can really be part of the solution to ending this systemic pattern of exploitation against at risk individuals. Remember, these are crimes being committed and these are people being mistreated. No respectable hotel should want to be associated with it.
]]>When performing the call around, sometimes the caller pretends to be a potential guest inquiring about the prevailing rate and availability at the other hotel, though more than likely, the caller may choose to identify what hotel they represent and even offer to share their hotel’s selling rate and projected occupancy for the evening in exchange for the same information from the other hotel. Such a tactic often takes the mantra of, “If you tell me yours, I will tell you ours.”
A faulty tactic
My professional experience over the years leads me to believe that this approach to keeping tabs on your competitive set (“compset”) is unreliable and rife with misleading intelligence. I cannot recall a time when my hotel ever supplied correct rate and occupancy information to another hotel directly. We always fudged the numbers one way or another depending on the projected demand for the evening.
If we were close to selling out and didn’t want to accept any overflow, we would always supply artificially high numbers so we could drive up average room rate perception among our competitors for the evening and justify quoting a higher rate to the few walk-ins that we would accept. If we had a glut of rooms that we needed to sell, we would quote artificially low rates and occupancy hoping to either pick up some overflow or walk-ins or to drive down the average rate being quoted to potential guests by our competitors. Either way, we never gave them the straight story.
In reality, I am pretty sure that they never gave us correct information either. Instead, it seems that all competing hotels were engaged in a huge waste of time and manpower to obtain unreliable data. We then based our short-term selling strategies off of this unreliable data, as did our competitors.
An illegal tactic?
What most hoteliers may not realize is that the practice of calling around to other hotels to obtain this data can be considered an illegal business practice and in violation of federal antitrust regulations designed to promote fair and open trade amongst competitors. The reason for promoting open competition is the belief that it motivates both producers to manufacture better products and sellers to sell these products or services at lower prices, thus benefiting consumers. Within the United States, both the Sherman Antitrust Act (1890) and the Clayton Act (1914) form the basis for such antitrust regulation. Penalties for violation of antitrust laws can be significant and may include court ordered dissolution or divestiture of a business, criminal penalties (jail and/or fines for owners or operators), and treble damages paid to injured plaintiffs.
What hoteliers should realize is that by calling around to inquire of rates and occupancy could be considered as collusion, a per se antitrust violation intended to restrain free competition. Per se violations are violations that are always illegal, regardless of intent. Similarly, anytime managers or owners gather together in a common environment (such as at hotel association events), they must also refrain from discussing or sharing prevailing rates, occupancies, ADR, RevPAR, GoPAR, Yield, or other operational statistics amongst themselves. Such actions could be construed as potential price-fixing agreements (or invitations to engage in such) intended to drive up room rates and potential profits at the expense of consumers.
Large fines for violations
In recent years, many governments throughout the world have been pursuing antitrust violations by hotels. In August 2011, the owner of three hotels and a management company in Connecticut agreed to pay, as part of a settlement, $50,000 in fines and to stop calling other hotels to learn their occupancy and room rates. The Connecticut Attorney General described the call around practice as “price fixing”. Just 16 months prior, the same Attorney General’s office settled with another hotel for similar violations. In November 2005, six luxury hotels in Paris were fined a total of 709,000 Euros for colluding on their business and marketing plans on a weekly and monthly basis in order to shift prices to higher levels. The managers spent considerable time on email and in meetings exchanging information in an attempt to fix prices.
Information that is not illegal
So, if sharing rate, occupancy, and other performance data directly with other hotels might be considered “collusion” or “price fixing” and hence illegal, where can hotel managers legally obtain critical information for benchmarking purposes? The answer is two places, the Internet and through industry research organizations and associations such as Smith Travel Research, Convention and Visitor Bureaus, Chambers of Commerce, your state’s lodging and tourism office or association, and even the American Hotel & Lodging Association.
The most reliable source of current rate information for future dates can be found online at each hotel’s website and through third party intermediaries such as online travel agencies. Want to know how much the hotel across the street is selling its guestrooms for tonight? Visit their website as any potential guest would to ascertain what the hotel is asking. Sometimes online travel agencies and other intermediaries may offer a lower price (especially for reservations booked through opaque travel websites), but they earn their profit through booking fees paid by the guests and commissions retained by the agency from the payments collected.
Computerized technology allows hotels and central reservation offices to raise or lower room rates on their website on extremely short notice based on actual demand demonstrated by bookings. Such dynamic pricing can be programmed into computerized models allowing the rates to fluctuate in sync with the demonstrated demand.
But many hoteliers forget that your competitors’ information is there online, all you have to do is look. Hotels will not post false rate information on their website because they would be required to honor bookings at the posted rate or lose out on potential revenue and profit if they set a rate artificially higher than the market would bear. The Internet is there for everyone to see, both potential guests and competitors alike.
The other logical source of competitor information for benchmarking would be derived from reports that are available either freely or on a subscription basis. Many hotels subscribe to Smith Travel Researches’ local compset and trends reports. While these reports can be expensive to receive, they render the most reliable “after the fact” market statistical data available. This is because hotels are required, as a condition of their subscription, to furnish their performance statistics in a timely and accurate, but confidential, manner. Smith Travel Research (STR) then takes this individual data and presents it back to its subscribers in aggregate form without revealing individual hotel performance data. STR Reports are great for benchmarking your hotel’s performance against your identified compset or within the general market, but will not allow you to benchmark against any single property.
Many CVBs, COCs, and other trade associations collect performance data directly from their membership, while others often partner with industry research companies such as Smith Travel Research, PKF Hospitality Research, Richard K. Miller & Associates, and Y Partnership to obtain and analyze performance data for their geographic locations. The advantage to these reports is that they are often free to members of the association, though it may take longer to reach individual hotels as they must be forwarded by the association after they are through completing their review or analysis.
Conclusion
Based on recent antitrust efforts relating to hotels, what is very clear is that hoteliers should no longer engage in “call arounds” to their competitors. Nor should they ever disclose performance statistics directly to a competitor, whether it is over the phone, via email, or even in a casual conversation or a business meeting. More reliable data that are not illegal to obtain or disclose is available through third parties sources. This is where hotel managers should invest their efforts.
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