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| Revenue Per Available Room (RevPAR) |
What it is:
Revenue per available room, or RevPAR for short, is a ratio commonly used to
measure financial performance in the hospitality industry. The metric, which is
a function of both room rates and occupancy, is one of the most important gauges
of health among hotel operators.
There are two ways to calculate RevPAR. The first formula is:
Total Room Revenue in a
Given Period, Net of Discounts, Sales Tax, and Meals
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# of Available Rooms in Same Period
Alternately, the same figure can be arrived by calculating the following:
Average Daily Room Rate x Occupancy Rate
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How it Works/Example:
Consider the following results from Company XYZ's latest quarter:
| Number of Rooms: | 1000 |
| Average Room Rate: | $90 |
| Average Occupancy Rate: | 75% |
| Total Room Revenue: ((1000 rooms x $90/room x 75% occupancy) x 90 nights in the quarter) |
$6,075,000 |
Using the first formula and the information above, we can calculate that Company XYZ's RevPAR was:
($6,075,000/90,000) = $67.50
Using the second formula, we can arrive at the same answer:
$90 per night x 0.75 = $67.50
Therefore, we can conclude that Company XYZ generated approximately $67.50 in revenue per day from each of its hotel rooms.
RevPAR is arguably the most important of all ratios used in the hotel industry.
Because the measure incorporates both room rates and occupancy, it provides a
convenient snapshot of a how well a company is filling its rooms, as well as how
much it is able to charge.
It should be noted that RevPAR, by definition, is calculated on a per-room basis. Therefore, one company can have a higher RevPAR than another, but still have lower total revenues if the second firm manages more rooms. For example:
Company XYZ
1,000 rooms
$90 per night
75% occupancy
RevPAR = $67.50
Total Revenues = $6,075,000
Company ABC
10,000 rooms
$90 per night
70% occupancy
RevPAR = $63.00
Total Revenues = $56,700,000
Note that Company ABC has a lower occupancy (which is not surprising, considering it manages ten times as many rooms), and thus a lower RevPAR. However, its total revenues are still far greater than those of Company XYZ.
Rising RevPAR is an indication that either occupancy is improving, or room rates are rising -- or some combination of both. Of the two, rising room rates have a much more dramatic impact on the bottom line than corresponding increases in occupancy. It is not uncommon to see both figures rise together, though, as higher occupancy is usually concurrent with a stronger pricing environment.
RevPAR evaluates the strength of only
one type of revenue-generating stream, and it is important to note that many
hotels derive a substantial portion of their total revenues from restaurants,
golf courses, spas, casinos, business conferences, and other amenities.
Therefore, one must also consider these other revenue streams in addition to
comparing RevPAR ratios among companies.
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