The theme for our industry lately seems to be modest profit growth tempered by increasing expenses.
While there are many options to consider for both decreasing costs and increasing revenue, destination fees continue to be a prevalent method of driving profitability, even at properties not considered traditional resorts. For example, the growing “urban resort” category shows no signs of slowing anytime soon. Each major brand seems to be making its mark in this emerging sub-category with marquee luxury projects such as IHG’s Six Senses resort and spa in West Chelsea, Manhattan, New York City.
We’ve advised owners and investors on destination fees—also known as resort fees or amenity fees—in both operations and acquisition underwriting. So, what does implementing these “mandatory” fees entail, and what should owners and potential owners know about them?
The basics
Destination fees increased 400% between 2017 and 2018, to $2.93 billion, and are expected to break that record in 2019, according to the U.S. Lodging Fees and Surcharges Forecast by Bjorn Hanson, a clinical professor at the Tisch Center for Hospitality and Tourism at the New York University School of Professional Studies. Destination fees originated in traditional, full-service, branded resorts in part to make charges more transparent to travelers by grouping the expenses a guest is paying for various amenities into a single line item. For example, a traveler might pay a fee of $40 per night to cover the costs of a range of amenities such as shuttle service, Wi-Fi access, newspaper delivery, pool use, fitness center access and towel service.
Over time, destination fees have been introduced at more upper-upscale and upscale properties, especially in transient-oriented, Top-25, urban markets such as New York, San Francisco and Washington, D.C. Many anticipate that these surcharges will increasingly be charged over the next few years across more secondary and tertiary cities as well, and potentially even at select-service hotels.
The bottom-line boost
Occupancy is at an all-time high in almost every major market, with average daily rate growing modestly, more or less in line with inflation. While hotel owners and operators contend with increasing fixed costs such as labor, insurance and property taxes, many are looking to increase revenues to offset those expenses to sustain profitability. Destination fees have been the go-to solution.
Such fees typically range from $25 to $40 per night. Because virtually no additional capital is required for many of the existing amenities being offered as a package, almost all of this revenue flows straight to the bottom line.
Further, this improvement to a property’s GOP can make a significant difference for an investor when underwriting a potential acquisition on an internal rate of return basis. In fact, we’ve observed cases in which the introduction of a destination fee has been a significant contributor to a transaction’s feasibility for the purchaser. After all, additional income in the range of $25 to $40 per room, per night can make a remarkable difference in bottom-line profitability through the duration of the investor’s hold period.
The brand’s input
A franchised hotel owner or management company is typically required to formally propose a destination fee for a property to a committee of the hotel’s parent brand. The brand will then either approve the fee going forward or request changes in the proposal. For example, Marriott International requires that a destination fee offer at least four times the value to the paying traveler, as a package, than what is being charged. In other words, a $25 fee must offer $100 in value, whether in the form of on-property food and beverage credits, early check-in availability, or any of the other amenities mentioned earlier. Keep in mind that in many cases an existing property isn’t adding any new amenities; it’s simply assigning values to existing ones and charging for the aggregated bundle.
Some travelers complain that the brands haven’t implemented consistent standards for destination fees across their properties, citing that the bundle of services offered in the surcharge can vary substantially between two otherwise comparable hotels. As these fees become more commonplace, industry experts seem to agree the traveling public will continue to urge the brands to offer similar packages of amenities across their portfolios.
The potential risk
Some in the industry contend that regulators will clamp down on destination fees before they become substantially more prevalent, for a few reasons. Pricing transparency is the root of these potential risks, especially if the traveler is booking through an online travel agency or other third-party where only the daily room rate is listed without the additional fees that are typically disclosed when booking directly.
If a regulator such as the Federal Trade Commission determines that destination fees are illegal in some or all circumstances, this trend will immediately grind to a halt. However, the FTC has already examined the transparency of destination fees and has previously provided guidance to the industry on the topic. In 2012, it articulated that so long as fees are clearly disclosed to the purchaser up front, there are no indications of deceptive practices.
Beyond regulatory concerns, others are taking into consideration guest loyalty. Some suggest that if a traveler isn’t asking for these services to be bundled, doing so may stir distrust, particularly among leisure travelers who aren’t accustomed to paying such fees at properties they may not consider to be full-service resorts.
As reported by HVS during a presentation at the NYU Lodging Investment Conference in June, RevPAR growth over the past five years has been driven primarily by leisure travel. These leisure travelers tend to be the most price-sensitive and most likely to review their folios line by line, questioning fees for bundled services they feel they didn’t utilize or even ask for.
While a traveler revolt or a resulting regulatory crack-down on these partitioned fees isn’t expected anytime soon, owners and investors should stay apprised of changes to industry-wide federal regulations related to pricing transparency so they may react accordingly.
The long and short of it
Even if you haven’t traditionally thought of any of the assets in your portfolio as resorts, adding a destination fee to select properties may be worth considering as one method of improving profitability in the intermediate term. Just be sure to deliver a level of amenities commensurate with the fee being charged. We recommend using prudence and fairness in the implementation of destination fees.
Tony Haddad serves as asset manager to clients of The Plasencia Group, overseeing portfolios of hotels and resorts on behalf of their owners. He has over three decades of hotel operations and management experience and has worked on properties across the Western Hemisphere. His responsibilities include property analysis and reporting, preparation of capital expenditures and operating budgets for owners and lenders, completion of performance and financial audits, and the structuring of accounting and finance operations.
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