It has long been believed that the efficiency of hotels to convert revenue to profits is enhanced when ADR growth comprises more than half of the RevPAR gain. However, in recent years, we have seen a departure from this long-held belief.
To project changes in profits, we obviously need to look at the expected relative changes in revenues and expenses. Profit growth can only be realized when the dollar value of the change in revenue exceeds the dollar value of the change in expenses.
Within the lodging industry, there are other metrics that have historically been reliable indicators to measure the potential for hotel profit growth. One is the change in rooms revenue, or RevPAR. Using data from our annual Trends in the Hotel Industry, we find an 86 percent correlation between annual changes in RevPAR and gross operating profit (GOP) from 1960 to 2016. This implies that changes in RevPAR do provide a very strong indication of changes in GOP.
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