As hospitality industry professionals, we know better than to make a long distance call from a hotel room, but does the average Jane and Joe Traveler? The answer is yes, and they’ve learned to use a cell phone or PDA, rather than even a calling card. Recent history has illustrated the effects of an educated traveler on the hotel industry.
As if the ubiquitous ads for cell phone plans weren’t bad enough, long distance plans advertising 3 cents, 5 cents and 10 cents a minute alert the cognizant public of how much they have been taken advantage of when they use a hotel room telephone for a long distance call.
So how badly has the hotel industry been impacted by improvements in mobile communications? According to Smith Travel Research, over the last five years, telephone revenue on a per occupied room basis has decreased an average of 3.3% (compounded annually) for full-service properties and increased by 2.5% annually (less than inflation) for limited-service hotels. As a percentage of total hotel revenue, full-service telephone revenues have dropped from 2.6% in 1997 to 2.0% in 2001. Limited-service hotels realized a similar decline from 2.0% to 1.7% between 1997 and 2001. Because of the high fixed costs associated with the telephone department, expenses have risen as a percentage of departmental revenue. The bulk of the telephone expense consists of the cost of local and long-distance calls billed by the telephone companies that provide these services. For full-service hotels, as a percentage of telephone revenue, telephone expense increased from 43.1% to 50.6% between 1997 and 2001. Limited-service properties have always realized higher costs, and between 1997 and 2001, telephone expenses increased from 57.9% to 65.3% of departmental revenues.
Although telephone revenue makes up only a small percentage of a hotel’s total revenue, it historically was a fairly lucrative department relative to other hotel `departments, many of which realize minimal profit, if not losses. If hotels fail to keep pace with the evolution of telecommunications, we believe the telephone department will become a loss leader. For hotels that lease their equipment, it already is. Through the course of our appraisal work, HVS has already seen signs of this happening. Primarily in mid-price and economy-oriented properties, telephone expenses have ranged anywhere from 100% to 250% of telephone revenues. Hotels located along a highway also have traditionally realized lower telephone revenues (as a percentage) and higher departmental costs on a per occupied room basis. Some of this may be blamed for inadequate call accounting systems and others might attribute it to high communication costs in certain locations. The majority will attribute it solely to technology advancements and cell phone adoption rate without recognizing their own responsibility to keep pace with important changes in telecom practices, products, and services. In addition, the competitive nature amongst hotels to offer free local calls has had an impact on telephone revenues and profit levels.
One hotel company we spoke with stated that they are budgeting at least a 5% decline in telephone revenues annually (on a POR basis) and even internet and 800 access charges can’t make up for the lost revenue due to wireless technology. Many managers are writing off profit in the telephone department altogether. Trends for mid-year 2002 confirm that the drastic decline continues. White Lodging Services, which owns and operates over 75 hotels in the U.S., stated that phone revenues for their 10,000+ rooms have dropped nearly 70 cents (on a per occupied room basis) through August 2002, compared to the same period in 2001. Worse yet, telephone profitability ratios have declined by more than 50% (per occupied room) during the same period as well.
What can hotels and hospitality companies do to mitigate the decline in telephone department profitability? Careful review of telephone bills is an important first step to reducing expense. Despite the fact that telephone service is a regulated utility, it warrants constant monitoring and attention. Billing service errors are rampant as commercial billing has become more complex. Multiple bills for various lines and services only compound the challenge. Hotels seldom have the in-house resources to scrutinize monthly bills to ensure accuracy and request adjustments, so erroneous phone bills are often paid without question.
Review facility configuration. Additional lines are often ordered to accommodate meeting groups or ensure adequate coverage for periods of high call volume. Historically, this was a reaction to a rising number of complaints from guests unable to get an outside line. This may have occurred during the height of guestroom telephone usage. Even though usage has declined, few properties have revaluated the number of physical lines running to the hotel. Based on a careful review of current call volume, properties may be able to actually reduce the number of lines or replace expensive copper lines with T-1 or shared T-1 services. Keep in mind that in recent years, guests have been placing additional demands on the telephone switch by using dial-up Internet connections. If a property has recently installed a high-speed Internet access solution, the number of lines needed to handle the voice traffic volume may have declined.
Shop around! It is a buyer’s market, and there is no reason hotels can’t take advantage of extremely competitive pricing and brand purchasing power of a plentiful commodity. Most consumers are hotly pursued by telemarketers who promise lower long distance rates and bundled services all designed to reduce total monthly telephone costs. While most consider this a nuisance, regular notification and evaluation of one’s telephone service does save money. In contrast, many hotel properties are operating with services negotiated years ago. There’s a good reason the phone companies don’t call commercial customers to advise them of money saving strategies but rest assured that they can be uncovered. In one instance, an independent hotel was able to reduce their annual costs nearly 60% by negotiating local service through their long distance provider instead of relying on a local service reseller.
Don’t leave the negotiation of telecom services to amateurs or operations people. Professional telecom audits are relatively inexpensive services that can pay for themselves quickly through accumulated savings resulting from improved cost control. Automation can reduce departmental costs by decreasing the number of operators required to handle inbound and in-house calls. Auto attendant and call routing functionality can take PBX demands off of front office personnel and reduce the need for dedicated PBX staff. Maintaining an outdated telephone switch may be more expensive than replacing it with more modern equipment.
Getting guests to resume use of hotel phones is a greater challenge, but opportunities to stabilize or improve telephone revenue do exist for companies willing to revise the traditional telephone department operating model. In an effort to maintain current customers and potentially attract new ones, hotel companies have begun to implement incentives and encourage guests to reach for the guestroom handsets. The first major hotel company to do so, Wyndham, is offering free local and long distance calls, as well as Internet access, to all WyndhamByRequest members as of June 2002. More recently, a group of Marriott hotels in the D.C. area began offering unlimited local, long-distance, and high-speed internet access for a daily fee of $9.95. Other hotel companies are experimenting with IP Telephony. Although still in its infancy, Voice over Internet Protocol (VoIP) is expected to dramatically reduce telecommunication costs by circumventing traditional long distance carrier networks and routing voice traffic over the Internet.
By eliminating or reducing the consumer costs for long distance and Internet access, hotel companies achieve a competitive advantage. As a result, to compensate for the lost profit, hotel managers are slowly increasing room rates or focusing additional attention on ancillary departments (business center, spa, meeting space, restaurants, etc.). With additional attention paid to the current services offered to the property by a provider, incorporating additional automation, and/or through the use of a technology consultant, savings may be realized.
tpierson@hvsinternational.comTanya Pierson
elauer@hvsinternational.comElizabeth Lauer Ivey
2229 Broadway
Boulder, CO 80302
303-443-3933
303-443-4186 FAX
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