After three consecutive years of declining profitability, the European hotel industry has started to recover lost ground.

According to the Annual Profitability HotelBenchmark Survey by Deloitte, hotels across Continental Europe reported 7% growth in profit per available room in 2004. On average hotels generated an additional €1,000 profit per available room in 2004 to reach €15,000 per available room. This compares to €14,000 in 2003.

Some of the strongest performing markets were in Germany, where the biennial trade fair cycle helped boost performance. Profits in Düsseldorf rose a staggering 76% mainly as a result of a €7,000 increase in total revenue. With costs kept under control all this incremental revenue fell to the bottom line resulting in profit per available room increasing from €8,000 in 2003 to €14,000 in 2004. Stuttgart was another star performer with profits up 17% compared to the prior year.

During 2004 Eastern European markets were the region's star performers with many cities reporting double-digit revenue per available room growth. This translated into strong profit growth with hotels in Prague and Budapest experiencing profit increases of 20% and 19% respectively.

Moscow took the top spot when it came to converting revenue to profit. Of the 23 cities tracked by the European Profitability Survey, Moscow's conversion rate was 53% compared to just 22% in Brussels. Moscow also achieved the highest profitability level at just under €39,000, representing a 31% increase over the prior year.

Whilst Moscow is dominated by luxury and upscale hotels leading to higher absolute profits per available room, operating costs remain relatively low. Furthermore, the potential arbitrage that exists between receiving revenues in US Dollars and paying local expenses in Russian Roubles also offers an opportunity to bolster operating profits.

The only Eastern European market where performance faltered was Warsaw. Profits for the year were down 6% as the city continued to suffer from over-supply in the first-class and luxury segments. Supply growth has resulted in occupancy failing to break the 60% level, while intense competition has placed pressure on average room rates.

Over-supply has also dented operating profits in Madrid, where a 12% decline was reported. However, Milan took the top spot as the worst performing market across Continental Europe in 2004 with profits down 13%.

Julia Felton, Executive Director of HotelBenchmark at Deloitte said: "The profitability figures for Continental Europe are very encouraging and highlight the diversity that exists within the European hotel market. From an operator perspective, top-line revenue growth bodes well for base management fees, whilst the conversion of revenues to profit should also be positive for incentive management fees."

"As a result, we anticipate continued interest in Europe from an investment and management perspective. Mature, stable markets continue to offer reduced risk whilst areas such as Eastern Europe offer potentially greater rewards".