Hotels are on the brink of a profitability renaissance as increased occupancy coupled with rising room rates and multiplying ancillary fees plump U.S. hoteliers pockets.
Each element of the pricing model plays a significant role in the U.S. hotel industry’s overall health today, starting with how many rooms hotels manage to sell each night.
Hotel occupancy in the U.S. in 2015 is forecast to reach 64.8 percent, the highest in 20 years, according to data from Macroeconomic Advisors and Smith Travel Research compiled by PwC. Hotels are also projected to charge more, a 5.7 percent increase in average daily rates, in 2015.
An occupied room; however, comes with the added costs of hotel staff, cleaning costs, and other overhead. The business model with the highest payoff comes in the form of fees and surcharges.
Fees and surcharges became a common industry practice starting in 1997, but recent traveler demand has led to another wave of fee growth.
Total fees and surcharges collected by U.S. hotels reached a record $2.1 billion in 2013 and are on track to reach another record of $2.25 billion in 2014, according to a report on U.S. lodging fees and surcharges from Bjorn Hanson, a clinical professor with the NYU Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management.
Hotels are in most cases charging guests for products or services that are already in the hotel and do not incur cleaning or labor costs. Common examples of other fees include early departure fees, reservation cancellation fees, charges for in-room safes, and baggage- holding fees. Hotels have profit margins of 80 percent to 90 percent off these fees, the report states.
One of the most complained about fee is for Wi-Fi; however, hotels have started to recently introduce free or tiered payment models to appease guests.
Hotels, depending on where they fall between budget and luxury options, are likely to continue coming up with even more fees.
For example, Hilton Worldwide recently enabled guests to book specific rooms — representing yet another opportunity for hotels to introduce a fee. This is a charge that Hanson says could become more common although it’s not likely to become an industry-wide practice.
The chart below outlines the increase in collected hospitality fees and surcharges, driven by increased occupancy and more numerous fees, at U.S. hotels.