US hotel profits reach highest levels in more than 2 years

Hotel rates are sky-high and travel demand is soaring heading into summer. That raucous party you can hear faintly in the distance just might be a celebration by the financial teams at Marriott, Hilton, Hyatt, or just about any other major hotel conglomerate.

But while it's time to party like it's 2019 again when it comes to U.S. hotel profitability, that doesn't mean everything's back to normal in this travel sector.

Gross operating profits per room for U.S. hotels in March hit their highest levels since November of 2019, hotel data firm STR, Inc. reported this month. Higher rates and reviving demand generators like group and business travel drove profit margins.

That shouldn't be a total shock: Marriott reported this month that luxury rates at the company were 27% higher than 2019 levels for the first three months of this year. Even the usually affordable brand mix at Choice Hotels saw a 9% rate increase over pre-pandemic levels in the first quarter.

There are other factors at play that are providing a less than a solid foundation to the industry's recovery, though. Higher profit margins have been partially driven by hotels temporarily suspending some services during the pandemic. And whether those return depends in part on a certain travel segment.

"Right now, [the profitability recovery] is still about a lot of leisure travel out there. That's really driving things, but we're starting to see the recovery of group travel," said Joseph Rael, senior director of financial performance at STR. "That's important for those big box hotels of the publicly traded big brands that report quarterly. It's really important for them because that group demand really drives the food and beverage departments."

Major hotel companies worked during the pandemic to lower financial break-even points at individual hotels by cutting costs. This meant lower staffing levels, limited hours (or outright closures) at restaurants and lounges, and a reduction in services like daily housekeeping.

At the same time, holding onto higher hotel rates during even low-demand times enabled individual properties to recover quicker than in prior economic down cycles.

Those service and amenity cutbacks have enabled individual hotel owners to eke out some profitability, but guest tolerance for such practices only goes so far.

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Travel demand is widely expected to exceed pre-pandemic levels this summer. The return of non-leisure demand generators like group and business travel should boost profits even further — though, despite that, the return of daily housekeeping as a widespread practice is still up in the air.

Revived group and convention travel ought to breathe new life into on-site dining and hotel bars — a major win for hotel companies looking to make money off more than just a guest room.

"[Food and beverage] has been slow to recover. [Hotel owners] reduced those operations, and then the group demand just hasn't been there," Rael explained. "As we kind of get that group demand back, you have all these guests that are spending a lot of their money on-site. It really drives that F&B revenue."

Beyond that, it's still a tale of two recoveries for the hotel industry. Hotels in beach destinations are the clear winners, as profits in Miami were at 141% of 2019 levels, according to STR. San Francisco, however, is only at about 56% of 2019 revenue levels, Rael shared.

A full financial recovery very much rests on the group and business travel sectors seeing a rebound to their pre-pandemic levels. That would have guests utilizing all the services of a full-service hotel, from the bars and restaurants to meeting spaces and catering.

"In the end, the group and business travel is really what drives a lot of the top brand performance," Rael said.

Some of that can be supplemented with leisure travel, especially in destinations like Miami. However, there's still an industry beyond Florida, and those hotels can't bank as easily on vacationers picking up the slack in profits.