Giving 110%: Analyzing hotels that exceed max occupancy

Giving 110%: Analyzing hotels that exceed max occupancy
09 OCTOBER 2017 7:25 AM

Hotels exceed the 100% occupancy threshold more often than you might think. But does “giving 110%” equate to a profitable operating strategy?

HENDERSONVILLE, Tennessee—Coaches urging their teams to give maximum effort in pursuit of victory often resort to the cliché, “Give 110%!” This notion of something more than the whole might make literalists cringe, but it is mathematically sound under the right parameters.

Take hotel occupancy, which STR defines as “Percentage of available rooms sold during a specified time period. Occupancy is calculated by dividing the number of rooms sold by rooms available.”

Occupancy = Rooms Sold / Rooms Available

While the number of physical hotel rooms typically is constant, hoteliers’ ability to sell them within a specific time period is not.

One such example: A road-weary traveler checks into at an interstate property at 2 a.m. seeking a few hours’ respite. The guest checks out six hours later at 8:00 am, leaving the operator enough time to turn the room around for another check-in that same day.

Other examples include hotel rooms used as dressing rooms or for employment interviews, movie auditions and wholesale distributors (e.g. clothing, toys and other merchandise).

In the above instances, utilization for the day exceeds 100% because the one room was sold twice.

Most hoteliers would only pull this operational lever if all other rooms were booked and turning around the same room was the only way to capture incremental demand. When that happens, voila! The entire property’s occupancy creeps above 100% for the night.

This is not as rare of an occurrence as you might think. During 2016, 37,888 U.S. hotels reported occupancy exceeding 100% at least once. Through August, the year-to-date 2017 number was 26,539.

Of properties surpassing the 100% threshold, approximately one-third (31%) did so only once year to date. Nearly 15% did so 10 or more times. All told, there have been 57,774 total nights through August in which hoteliers passed the maximum occupancy threshold.

An interesting note is one property recorded 223 such days out of a possible 242 calendar days through August. This outlier is likely a product of location; the hotel sits near one of New York City’s major airports, where day use is likely the result of layovers or cancelled flights.

The behavior is almost exclusively practiced in the lower and middle tiers (Figure 1). The upper-midscale, midscale and economy chain scales captured 90.1% of all roomnights exceeding 100%. The upper-midscale chain led with 19,531 nights year to date; at the other end of the spectrum was the luxury chain with only 82 such instances.

Interstate hotels accounted for a disproportionate share of roomnights above 100% with 15.4%. (The location type accounts for only 10.6% of rooms in the sample.) On an absolute basis, the phenomenon is also most common in suburban markets, where hotels reported 40.3% of all roomnights of 100%-plus occupancy (Figure 2). Surprisingly, airport hotels—where the nature of stays are most likely to be truncated due to layovers and flight schedules—surpassed only resort properties in terms of nights exceeding 100% occupancy.

What is less surprising is the correlation between average daily rate and peak occupancy nights. Across every chain scale, hoteliers yielded a higher rate when occupancy surpassed 100% than on an average night when demand was not as strong (Figure 3). Rate premiums ranged from 41.2% for independent properties to 13% for luxury hotels.

Profitability is likely another story. While we were not able to dissect profit-and-loss statements for hotels within the above data set, past research from STR’s Consulting & Analytics team found that gross operating profit peaked when occupancy hovered in the high 70% to low 80% range.

When it comes to occupancy, it appears giving 110% may not equate to a winning strategy after all.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.