The realities of hotel occupancy

Majorca doesn’t welcome tourists any more; the tourist tax is to blame. Etcetera, etcetera. In June last year, the average occupancy rate of hotels in Majorca and the Balearics was the highest in Spain - 81.8%. But this was down from 83% in June 2018, 84.7% in June 2017, and 84.6% in June 2016. It was 2018 when the market really started to correct itself in that tourists who had been “borrowed” from destinations which had experienced terrorism-related security issues were returning to those destinations. Market correction or not, the mere fact that there was a decrease in occupancy confirmed to those only too willing and ready to attack Majorca that here was evidence of, inter alia, greed and a shooting-in-the-foot.

Not, it has to be said, that one can really blame people for this sort of reaction. Especially not if it is a consequence of reports in which hoteliers themselves lament their declining occupancy and fortunes (both in terms of luck and money). The hotelier lament is one that we have heard many times. During the dark days of financial crisis, for instance, profits didn’t go up. They couldn’t go up. Occupancy wasn’t there, and there were pressures on prices. As the clouds of financial crisis cleared came the unanticipated bonus caused by insecurity in other lands. Occupancy was there, and so were the prices. Fortunes were renewed.

I recall some years ago a very senior figure in the Majorca hotel sector saying something along the lines that if 100% occupancy can’t be achieved in the highest months (July and August), something must be wrong. There was something wrong. That statement. There may be times when certain hotels can put up no vacancies signs, but 100% as an across-the-board situation is fanciful. It has never happened, and it never will happen. Look at hotel occupancy stats down the years, and you’ll realise this is the case. In essence, anything above a general level of 90% for the highest months is pretty good going, this general level applying to individual resorts or Majorca as a whole.

Occupancy, as there hasn’t been any for several weeks, will now start to consume media column inches, as will percentages for how many hotels are open or may open. No one can possibly expect occupancy at the levels normally experienced, but what does this really tell us as far as hotel financial performance is concerned?

The other day I was sent a link to an article about the dilemma facing hoteliers this summer. To open or not to open? That is the question. In this article, there were some figures which did make one sit up, but when I started to look elsewhere, I sat back. They were to do with occupancy and break-even. What do you reckon that break-even point is? Forty, fifty per cent? Not according to Meliá it isn’t. Depending on the category of hotel and its level of service, it’s between 28% and 35%. Really. That low.

Meliá being Meliá, i.e. a damn good company, there was certainly no reason to dispute the figures, and when one looks further, there is verification. Another recent article looked at occupancy and break-even. In Europe as a whole, operational break-even is 34.5%. This increases slightly depending on category and service, just as the Meliá situation does.
But break-even isn’t of course what hotels are about, or any business, come to that, which wants to generate profit and grow. Another source examined the relationship between occupancy and peak profitability. For what were described as “upper-scale” hotels, this was 84.6%. So-called “upper-midscale” hotels hit peak profitability at 71.4%. The difference was partly due to factors such as the costs of food and beverage supply: higher quality will mean higher cost.

Operational costs are cited as being the reason why, once a certain level of occupancy is surpassed, profit starts to go down, with this profit only redeemable if prices to customers are increased.

These figures are of course general, and one accepts that hotel business circumstances do vary significantly. Ownership of a hotel, for example, will strip out one very significant cost - the rent - while labour costs in Majorca are higher than elsewhere in Spain because of collective bargaining agreements that are more favourable to workers. The Covid crisis will also have added costs of health security measures. But these figures do, nevertheless, give a rather more complete picture of the realities of occupancy.