An Investigation of Asset Expenditure Management in Australian Hotels

Australian hotels compete with hotels in other countries in the international tourism market and must therefore be in good physical condition to meet international and domestic traveller expectations. This highlights the importance of hotels maintaining a continuing vigilance with respect to ensuring asset related expenditure decision making is appropriately conducted. Such decisions are, however, complex due to their high dollar value as well as their cyclical, ambiguous and frequently irreversible nature. The broad aim of this research is to further understanding of factors relating to asset expenditure management practices in Australian hotels, a topic that has drawn little prior research attention. The thesis has drawn extensively on theories of agency theory and organisational power. The study adopted a mixed methods approach utilising two empirical phases. The first phase involved a series of face-to-face interviews with six different stakeholder groups representing asset managers, hotel lawyers, hotel auditors, hotel owners, hotel general managers, and hotel financial controllers. A total of twenty interviews were conducted. The second phase involved the administration of a questionnaire survey to general managers of Australian and New Zealand hotels with twenty or more rooms and a star-rating of three or more. Major findings arising from the interview phase include the following: 1. Australian hotel owners currently hold the balance of power with respect to contracting with hotel operators. The power balance appears to be around 60:40 in favour of owners. 2. Factors affecting the locus of power between hotel owners and operators include: (1) size of hotel owner; (2) size of hotel operator; (3) location of hotel; (4) strength of operator’s brand; (5) composition of operator’s management team; (6) credibility and reputation of owner and operator; and (7) size and condition of the hotel. 3. Annual allocations to the furniture, fittings and equipment (FF&E) reserve in Australian hotels operating under a management contract tend to be underfunded by approximately two per cent of gross revenue. 4. Identification of seven causal factors of FF&E reserve under-funding. 5. Increased use of brand standard clauses in management contracts are resulting in increased owner FF&E reserve expenditure assigned to projects that uphold brand standards that are frequently inconsistent with owner’s preferred spending. 6. Regardless of the size of a capital budgeting project, a mixture of quantitative and qualitative capital budgeting appraisal techniques appear to both be applied in the decision-making process. 7. Hotel owners’ concern over the difficulty of formulating accurate cash flow estimates when applying quantitative investment appraisal techniques results in the application of qualitative investment appraisal techniques in the decision making process. 8. Operators are inclined to positively bias capital budgeting proposals toward projects that protect their brand, provide a consistent customer experience and raise management fees. Owners attach greater importance to the achievement of bottomline profitability, which may be undermined by operators’ positively biasing capital budgeting proposals.