Part III Being There
4.1 Rooms at the Inn
The airline business is a creation of the twentieth century: It wouldn’t exist were it not for the significant technological advances that have been implemented since 1900. By contrast, the lodging business has been around for thousands of years, pretty much since the beginning of mankind. Although the basics of the lodging industry are relatively simple, the operational and financial features have become increasingly complex and sophisticated.
The earliest versions of what we have come to know as hotels or inns go back to the earliest days of recorded history. Inns dotted the main Roman roads that led to ancient Britain, and later, in the Middle Ages, hospitality was dispensed by mon- asteries that provided travelers with separate dormitories. In thirteenth-century China, inns were relay houses established by the Mongols to accommodate trav- elers and to provide a postal service. Aryokanis simply a traditional Japanese inn.
By 1604, inns must have been pretty important to the communities of that time because an act was passed in England that said, “the ancient, true and proper use of Inns, Alehouses and Victualling Houses was for the Receipt, Relief and Lodging of Wayfaring People traveling from Place to Place and not meant for the entertainment
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H.L. Vogel,Travel Industry Economics, DOI 10.1007/978-3-319-27475-1_4
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and harbouring of Lewd and Idle People to spend and consume their Money and Time in Lewd and Drunken Manner.”1
Most early guests shared their accommodations with strangers and often set their own rate of payment. And because most guests arrived singly on foot or by horse or stagecoach, there was no need for a large number of rooms. Innkeepers, located primarily along well-traveled routes, were often just homeowners with some extra space and a willingness to provide food and lodging services. Indeed, for most of recorded history, hotels remained small, more like what nowadays would be called an inn or a bed and breakfast than a Hilton or Marriott.
Although the wordinnhas been used since the 1400s, the wordhotelwhich first appeared in London in the mid-1700s, is derived from the Old Frenchostel. The term came to characterize facilities in Europe and America that could shelter and feed travelers in what could at first be best described as a furnished mansion.
The industry’s modern roots, however, go back only to the early 1900s. In 1919, for example, legend has it that on the way to buy a bank, Conrad Hilton bought the Mobley Hotel of Cisco, Texas, because that was the only way he could get a place to sleep. The erstwhile Mobley then went on to become the first of a worldwide chain, with the Hilton name becoming practically synonymous with the word hotel.
In the 1930s and 1940s, the lodging industry gradually evolved into larger nationwide chains mainly through buyouts of older, established major city proper- ties. Not much new construction was completed in those decades, scarred as they were by the Great Depression and World War II. More rapid expansion had to await the end of the war, arrival of the middle class baby-boom generation, the sprawl of new suburban communities, technological improvements that opened up air travel to the general public, and construction of the federally funded Interstate Highway System that was born with passage of the Interstate Highway Act of 1956.
The new roads were built just in time to feed traffic to new roadside motor hotels, soon to be known as motels, that had begun to spring up all around the country. And the man most credited with popularizing a family-friendly version of these motels by including in the price of every room the now common but then revolutionary amenities such as swimming pools, free parking, television sets, and air-conditioning was Kemmons Wilson, a Memphis entrepreneur. Wilson built the first Holiday Inn (named after the 1942 Bing Crosby movie) in 1952 and was soon able to expand the concept nationwide via franchising. Shortly thereafter, chains such as Howard Johnson, Hyatt, Marriott, Radisson, and Ramada were similarly formed.
By the 1960s and 1970s, most of the large chains were well established in the United States, and attention turned to overseas markets, where conditions seemed ripe for expansion. The broadening of the airline customer base that developed in response to airline price deregulation and introduction of jet-propelled, wide- bodied aircraft such as the Boeing 747 (see Sect.2.1) made this possible. For the most part, the lodging industry withstood the great inflation and oil-shortage years of the 1970s reasonably well.
1From anEncyclopedia Britannicaarticle on hotels.
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During this time, however, there was also a steady improvement of hotel management systems, which enhanced productivity through introduction of auto- mated reservation systems and computers into virtually every phase of operations.
It was generally thought that all of this would lead readily to vertical integration of airlines and hotels. The idea of the same company capturing all of the traveler’s spending—from home to hotel and back again—sounded better in theory than it actually worked in practice.2
In the early to mid part of the 1980s, a favorable tax environment featuring accelerated depreciation schedules and easy bank lending policies (boosted by deregulation of the savings and loan industry) stimulated a hotel construction boom that added more rooms than the market could easily absorb. Accelerated depreciation, in particular, increased the attractiveness of hotels as investments that could provide tax shelter against other sources of income and allowed hotels to be operated at a paper loss. Its introduction also underscored the distinctions between the functions of hotel management as opposed to hotel ownership; in other words, the differences between the lodging versus the real estate sides of the business.3
Although changes in the Tax Reform Act of 1986 (the most extensive since 1954) helped end the room boom, it was at least another seven years before new demand caught up with older supply.4The late 1980s were also characterized by a rising number of hotel transactions, by aggressive bidding for so-called trophy properties that related to the Japanese economic bubble of that time, and by the overleveraging of assets to the point where the servicing of debts began to consume more than 10 % of industry revenues.5
Economic recession and the Persian Gulf War in the early 1990s stunted the lodging industry’s growth for a while. But as Fig.4.1illustrates, by the middle of the 1990s, profits again soared as sharply rising demand finally absorbed the room glut created in the second half of the 1980s and allowed room rates for higher-end
2United Airlines proved this through its purchase of the Westin chain in the early 1980s and its sale of Westin a few years later. Also, Pan American World Airways founded the Intercontinental Hotel chain in 1946 and the parents of TWA and United each owned Hilton International, the chain’s overseas arm. None of these airline-hotel arrangements lasted for long.
3In hotels, for example, once fixed costs are covered, a large part of every incremental dollar of revenue contributes to profits and the variance of earnings and cash flow (EBITDA) tracks fairly closely. However, in the real estate business, depreciation and interest expenses are prominent characteristics with much greater variance between earnings and EBITDA usually evident.
4The Tax Reform Act of 1986 ended the Investment Tax Credit, which since 1976 had allowed builders to deduct 6 5 % of the capital cost of a project against taxes, and it also changed partnership rules. In addition, depreciation schedules were increased to 31.5 years from 18 years and earned income could no longer be sheltered by passive investment losses. Moreover, use of so-called nonrecourse bullet-loan financing—popular in the 1980s and featuring 5–10 years of payments with a large payoff required at the end of the loan period—later led to a large number of hotel foreclosures when, in the midst of the weak-demand environment of the early 1990s, many payoffs came due.
5By comparison, as of the end of the 1990s, debt service consumed only around 4 % of industry revenues.
major properties to be significantly raised.6The Great Recession that began in late 2007 and lasted until mid-2009 later reversed some of these gains. As shown in Fig.4.2, the effect on leisure and hospitality employment in the United States was unusually severe but probably less so in other parts of the world, especially Asia.
The industry’s milestone events are shown in Fig.4.3.
Still, good-time prosperity has not relieved the pressures for even greater efficiency, which has everywhere been increased via consolidation of hotel chains and brands into just a few large companies. In all, as Fig.4.4illustrates, in 2015 there were more than 15.8 million chain-related hotel rooms and 169,000 properties
(2) - 2 4 6 8
80 90 00 10
-8 0 8 16 24 32 40
80 84 88 92 96 00 04 08 12
$ billions Profit/room ($000)
Fig. 4.1 Lodging aggregate industry profit, bars (left), and per room, line (right), 1982–2014.
Note: House profit is defined as profit before deductions for fixed charges and management fees, while net income includes those deductions.Source data: Smith Travel Research
Fig. 4.2 Comparative leisure and hospitality employment in recessions. Leisure and hospitality index of employment, seasonally adjusted.Source: USMonthly Labor Review, Davila (2011)
6An alternative industry profit definition is that of house profit, i.e., profit before deductions for fixed charges and management fees.
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in the world (and probably an equal number of small bed-and-breakfast, family- owned and operated rooms).7 The average number of rooms per property (not shown), however, has only risen gradually from 85 in 1995 to 94 in 2015.
1910 1930 1950 1970 1990
Lodging Industry Milestones 1890
United Airlines buys Hilton Asian hotels ($1.1 billion) Conrad Hilton buys first Hotel
Patriot American buys Interstate for $1.34 billion
Bass buys Inter-Continental for $2.9 billion Starwood buys Westin for $1.6 billion
Starwood buys ITT for $13.7 billion Bass Plc. buys Holiday Inns for $2.2 billion New World Development Ltd. buys Ramada for $530 million Hilton becomes first coast-to-coast chain,
buys The Roosevelt and The Plaza
First Hyatt opens Westin (originally Western) hotels begins
UAL buys Westin
UAL sells Westin to Aoki of Japan
Aoki sells Westin to Starwood and partners
Four Seasons founded
Four Seasons acquires Regent Intl. chain
Saudi Prince Al-Waleed buys 25% of Four Seasons
Carlson buys Regent Intl. brand from Four Seasons Sheraton begins
First automated reservation system (Sheraton)
ITT Corp. buys Sheraton
ITT Sheraton buys Europe's CIGA chain
First Marriott First Holiday Inn
Bass Plc. buys Holiday Inn
Interstate Highway Act
Carnival Cruise begins Inter-Continental chain founded by Pan Am
Pan Am sells Inter-Continental to Grand Met
Grand Met sells Inter-Continental to Japanese Saison Group Waldorf-Astoria, New York built
The Plaza, New York, opens Brown Palace, Denver opens
Claridge's, London, opens
Savoy, London
opens, 1889 St. Francis, San
Francisco, opens
Olympic, Seattle opens Ritz-Carlton, Boston opens
Ritz-Carlton name rights sold
Howard Johnson motels begin Disneyland opens
Disney World opens
Promus merges with Doubletree
Hilton buys Promus for $3 billion Ritz opens in Paris
Carlton opens in London
Marriott buys Renaissance for $947 million
2010 Fontainebleu opens in Miami Beach
Terrorists attack America
Hilton buys back foreign unit for $5.7 billion Four Seasons taken private for $3.7 billion
Hilton taken private for $26 billion Harrah's taken private for $27.8 billion
Macau and Singapore gaming soars Marriott bid for Starwood exceded
Fig. 4.3 Lodging industry milestones, 18902015
9 10 11 12 13 14 15 16 17 18
90 100 110 120 130 140 150 160 170 180
96 98 00 02 04 06 08 10 12 14
Rooms (left scale) Properties
Rooms (millions) Properties (000s)
Fig. 4.4 Number of worldwide chain-related hotel rooms and properties, 19952015.Source data: Smith Travel Research (STR)
7The UNWTO previously compiled the following data, which is no longer available but is of historical interest. In 1997, the number of bed-places in Europe were 11.375 million, in the Americas, 9.334 million, and in East Asia/Pacific, 6.708 million. These accounted for around 95 % of all places.