Against the odds, lodging industry profits to rise.

U.S. Lodging industry profits will rise by up to 14 percent in 1999, according to Lodging Research.com, the comprehensive, Internet-based resource for hotel industry data from PricewaterouseCoopers.

While that rise is lower than the 23 percent increase the industry enjoyed in 1998, and the 36 percent increase in 1997, it is still a greater rise in profits than most other U.S. industries will manage this year, according to PricewaterhouseCoopers. Ironically, the record profits come despite declining hotel occupancy, slowing growth in revenue per available room (RevPAR) and hotel room supply that is growing faster than demand.

"A number of factors combine to send the U.S. lodging industry to a sixth year of record profits in 1999," said Bjorn Hanson, Ph.D., New York-based global partner in the PricewaterhouseCoppers hospitality and leisure group, a unit of the firm's financial advisory services (FAS) practice. "Primary among these are average daily hotel room rates that will rise 3.9 percent in 1999, more than twice the U.S. inflation rate."

Fueling the rise in average daily room rates is steady growth in demand for rooms, Lodging Research.com reports. At 3.3 percent, demand growth in 1999 will be less than the industry's 3.6 percent average supply growth this year, but greater than 1998's 3.2 percent growth in demand.

Although 1999 is the fourth consecutive year that growth in hotel supply will outstrip hotel room demand, fears of overbuilding in the U.S. hotel industry will remain overblown, according to Lodgingresearch.com.

The total number of U.S. hotel rooms available at year-end 1999 will be 3.3 percent higher than at year-end 1998, according to Lodgingresearch.com That is less than the 4.1 percent growth of total number of rooms available at year-end 1988 over 1997, Lodgingresearch.com reports.

"While obviously some hotel segments will see supply growth," Dr. Hanson said. "Lodging industry players that are diversified across a range of segments are clearly best positioned to take advantage of the overall slowdown in U.S. hotel room supply growth."

The Occupancy Paradox 

The industry will coast to another year of record profits despite an overall U.S. hotel occupancy rate that will decline from 63.9 percent in 1998 to 63.5 percent in 1999, according to Lodging Research.com.

Behind this anomaly is America's lower hotel occupancy "break-even rate," which stood at a record low 53.6 percent in 1998, according to PricewaterhouseCoopers. Break-even occupancy is the minimum occupancy level required for hotel revenues to match expenses.

Also helping hotels' bottom lines in a reduced-occupancy environment are lower-than-ever staff levels per property. Hotels' personnel levels have been sent to new lows by technology, expanded job roles and other factors.

Further, hotels have devised new means of generating revenue in a reduced occupancy environment. These new revenue sources include higher parking charges, master folio charges, special bar service charges, and others.

The PricewaterhouseCoopers' hospitality and leisure unit uses a proprietary econometric model to forecast U.S. lodging industry trends. The accuracy of the model's output is well established. In the first quarter of 1991, the PricewaterhouseCoopers' model forecast that 1993 would be the year in which the U.S. lodging industry would experience increases in average daily room rates greater than inflation, returning the industry to profitability. In the first quarter of 1997, the PricewaterhouseCoopers' model forecast that 1997 would be the peak year for construction of U.S. hotel rooms in the current cycle. Both predictions proved accurate.