With the U.S. economy anemic at best, RevPAR continues to slide as hotels struggle through another downturn. Although the industry is well positioned and remains very profitable by historical standards, no one knows how long or severe this “least favorite” part of the cycle will last. Owners and managers need to develop and implement contingency plans and operating budgets for next year to protect a hotel's bottom line. Here are 16 critical initiatives every hotelier should review at this phase of the cycle:

MAXIMIZING MARKET SHARE

1) Practice proactive revenue management, as well as utilize all effective franchise, third-party or other revenue management tools at a hotel's disposal.

2) Analyze the tradeoffs between rate and occupancy. Closely track your competition's rates. Too often, in past down periods, owners and operators have reduced rates prematurely or unnecessarily. Rebuilding rate is a long process.

3) Closely monitor booking pace and review the history of major customer segments, with a focus on segments often denied or underutilized by a hotel during the 2003-2007 upturn. In particular, seek out bookings from SMERF (social, military, educational, religious, fraternal), contract or other segments, as well as from alternative distribution channels.

4) Assess and implement, if justified after cost-benefit analysis, revenue enhancements or incentives, such as use fees, hotel or attraction packages or amenity offerings designed to stimulate occupancy or generate revenue.

CONTROLLING OPERATING EXPENSES

5) Establish aggressive, but realistic goals for achieving additional expense savings tied to projected lost revenues.

6) Use zero-based budgeting, including identifying all discretionary expenditures.

7) Increase labor scheduling and productivity reports in accordance with accurate occupancy forecasting.

8) Competitively re-bid all major vendor and supplier contracts.

9) Pursue utility purchasing options through non-traditional means like energy cooperatives.

TACKLING FIXED EXPENSES

10) Undertake real estate tax appeals, especially in markets where real estate has declined for more than the local jurisdiction's tax year.

11) Quantify all capital improvement plans and brand upgrades needed (vs. “optional”), and undertake adjustments to those budgets. Be sure to leave sufficient time to allow for negotiations with the brand, lender and other third-parties.

Alternatively, if new or substantially renovated competitive hotels will open in your backyard within the next two years, consider additional improvements, even if the particular market is undergoing RevPAR declines. Again, planning for the improvement's funding, from hotel cash flow, reserves or from new financing sources, should be undertaken early. History has shown too many hotels in a down-cycle don't prepare for new competition, with the result being a loss of market share. Such hotels can also wind up missing much of the next upward cycle's growth in RevPAR.

PLANNING FOR SHORTFALLS

Fortunately, the percentage of hotels facing financial duress or debt service shortfalls has been reduced with each successive industry downturn. Nonetheless, if a hotel is in its initial ramp-up phase, or must refinance debt or is likely to encounter other challenging financial situations, the following actions may be essential:

12) Achieving an understanding of:

• the amounts, sources and duration of an expected working capital, debt, equity or other shortfall, and the affected stakeholders;

• the financial and business position of (and strength of) your relationships with the affected stakeholders;

• all debt covenants, including debt service coverage ratio requirements and/or owner financial condition representations and warranties;

• the rights of senior and mezzanine debt holders and of equity or preferred equity participants in the ownership group;

• the rights of the third-party manager and franchise brand;

• the terms of all guarantees provided by owner, manager and/or guarantor;

• the pricing and terms of capital from existing or new stakeholders, which might be available to address the shortfall.

13) Develop a shortfall fund and/or plan of action to take to the affected stakeholders as early as possible so there is time to negotiate.

ENHANCING LEADERSHIP AND FOCUS

As always, the most critical element of weathering a downturn involves the effectiveness of the hotel's owners, managers and employees, and if applicable, the hotel's corporate office and its third-party management and/or asset management personnel in working together in a focused manner. More specifically, these parties, under the owner's leadership, will be most successful if they:

14) Build a list of the critical variables, including the most important revenue, operational, market, brand, financial and owner actions to be implemented.

Simply put, these critical variables become the hotel's downturn action plan to be followed, monitored, evaluated and modified by all responsible parties on a regular basis.

15) Implement an early warning system to quickly respond to external or internal factors impacting the critical variables in the action plan

16) Stay focused on a hotel's most important assets: employees and guests.

With the increased professionalism, productivity and transparency of the industry, hotels already practice many of these steps. Nonetheless, a downturn heightens the importance of the above priorities, as their utilization can make a critical difference in minimizing the impact of a market or industry decline on a hotel and its financial results.

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Jerry Herman, is Of Counsel in DLA Piper US LLP's Washington, D.C. office, and has a broad based and real estate hospitality legal practice. He has 25 years of senior-level business and legal experience in the hospitality industry.