A flow-through analysis of the US lodging industry during the great recession
International Journal of Contemporary Hospitality Management
ISSN: 0959-6119
Article publication date: 4 February 2014
Abstract
Purpose
The objective of this exploratory study is to investigate the “flow-through” or relationship between top-line measures of hotel operating performance (occupancy, average daily rate and revenue per available room) and bottom-line measures of profitability (gross operating profit and net operating income), before and during the recent great recession.
Design/methodology/approach
This study uses data provided by PKF Hospitality Research for the period from 2007-2009. A total of 714 hotels were analyzed and various top-line and bottom-line profitability changes were computed using both absolute levels and percentages. Multiple regression analysis was used to examine the relationship between top and bottom line measures, and to derive flow-through ratios.
Findings
The results show that average daily rate (ADR) and occupancy are significantly and positively related to gross operating profit per available room (GOPPAR) and net operating income per available room (NOIPAR). The evidence indicates that ADR, rather than occupancy, appears to be the stronger predictor and better measure of RevPAR growth and bottom-line profitability. The correlations and explained variances are also higher than those reported in prior research. Flow-through ratios range between 1.83 and 1.91 for NOIPAR, and between 1.55 and 1.65 for GOPPAR, across all chain-scales.
Research limitations/implications
Limitations of this study include the limited number of years in the study period, limited number of hotels in a competitive set, and self-selection of hotels by the researchers.
Practical implications
While ADR and occupancy work in combination to drive profitability, the authors' study shows that ADR is the stronger predictor of profitability. Hotel managers can use flow-through ratios to make financial forecasts, or use them as inputs in valuation models, to forecast future profitability.
Originality/value
This paper extends prior research on the relationship between top-line measures and bottom-line profitability and serves to inform lodging owners, operators and asset managers about flow-through ratios, and how these ratios impact hotel profitability.
Keywords
Acknowledgements
The authors gratefully acknowledge the assistance of PKF Hospitality Research, LLC in providing the data used in this study.
Citation
Singh, A., S. Dev, C. and Mandelbaum, R. (2014), "A flow-through analysis of the US lodging industry during the great recession", International Journal of Contemporary Hospitality Management, Vol. 26 No. 2, pp. 205-224. https://doi.org/10.1108/IJCHM-12-2012-0260
Publisher
:Emerald Group Publishing Limited
Copyright © 2014, Emerald Group Publishing Limited