Economic feasibility

Based on projected costs and environmental impact an initial assessment of economic feasibility can be made. Analysis is predicated upon the anticipated investment and maintenance costs for both private and public sectors compared to estimates of revenues gained and jobs created.

If an initial assessment indicates that development should occur, two processes will result: a detailed development plan, and a supporting administrative and legal plan to ensure the success of the development. Both will be discussed in the sections that follow.

Development plan

Clare Gunn has identified several principles of tourism planning to guide the development of any tourism project. 1 

Clustering. As mentioned above, the clustering of facilities and attractions makes it more convenient for the traveler by avoiding the need to make many brief stops along the way. Clustering has also been shown to be more efficient in the provision of infrastructure. The per-unit cost of such things as water, waste and power is less with clustered facilities.

Attraction-services linkage. While minimal facilities (snack bars and rest rooms, for example) need to be provided at attraction sites, major clusters of services are better located at the nearest community. The exception would be at major attractions such as Disney World where full services are expected.

Natural and cultural resource dependency. The basis for much of the success of a tourist attraction lies in the natural and cultural resources of the area. Each area is unique and, to maximize the development opportunity, the attraction should build upon, without destroying, the uniqueness of the resource.

Access. Access to and from attractions must be planned for as an integral part of the development. This is particularly important for linkage from the highway and air network to destination areas.

Population. For most tourist areas a relationship exists between visitation and distance. Tourist development is most successful when the attraction is within reasonable distance of major population areas. While there are exceptions such as activities highly oriented to place (for example, winter skiing), this rule tends to hold true.

Capacity. Attempts have been made to develop carrying capacity theories. The rationale is that a physical resource can handle a certain maximum number of people before the resource quality is diminished. Concerns over capacity are threefold: physical (not enough room), biological (overuse of fragile sites), and managerial (lack of staff or budget to cope with the number of tourists). It appears that the principle of capacity is elastic. That is, a site can handle an increase in visitors without a corresponding loss of quality experience if proper design and management practices are put into effect.

Cities. Cities are important to the development of tourism for several reasons. Cities are the prime location for services and facilities; they provide the destination for transportation modes; they are attractions themselves; and they contain "friends and relatives", a major motivation for tourist visits.

Social-developmental climate. As pointed out earlier, the attitude of the local population toward the development of tourism can mean the difference between success and failure.

Flexibility. The dynamics of tourism are constantly changing. New destinations become the "in place"; a shortage of fuel limits travel plans; changes in the value of the dollar make it less attractive to vacation abroad. This does not violate the idea of planning, which attempts to predict and develop alternatives for the future. It does mean that planning must be a continuous activity, constantly being updated to meet new conditions.

Types of tourism. For developmental purposes, tourism can be defined in terms of touring and destination tourism. Touring involves visiting several locations during the vacation period. There is a heavy reliance on the linkage between attractions, transportation, services, and facilities, and the traveler's need for information and directions. Attractions are closely associated with the highway and are usually visited only once by the tourist. Activities tend to be more passive, and time constraints are of major concern. The vacation is a circuit rather than a point.

Destination tourism is more tightly self-contained geographically. Activities are often repeated and tend to be more physically demanding.

People. Destination areas must be designed and developed with the tourist in mind. As noted above, there must be a blend between "protection" of the area and the provision of creature comforts suitable to the type of tourist being attracted.

Heterogeneity. Tourism is place-oriented and all places are different. Destination areas cannot be treated the same. What may work for one will not necessarily work for another. Each region must be looked at individually in light of its opportunities and problems.

Facility operating and revenue projections

Within the overall development plan, feasibility studies will be performed for individual properties.

A typical objective is to provide enough rooms to accommodate 130 per cent of visitors while generating 70 per cent occupancy rate on an annual basis. The occupancy rate for a hotel is the number of rooms sold divided by the number of rooms available. For a 160-room property, an occupancy of 70 per cent means that 112 rooms (160 x 70 per cent) are occupied. Ideally, hotel room rates should be structured so that the property will break-even at 50 per cent occupancy. At the break-even point the property is not making a profit or a loss, it is holding its own. The break-even point is the point at which revenue generated is exactly equal to costs incurred. With fewer guests the property makes a loss; with more guests it makes a profit.

Typically, an accommodation facility has a relatively high percentage of fixed costs. Fixed costs do not vary as volume of business varies. The rent or mortgage must be paid irrespective of the number of guests who stay in the hotel; so must the manager's salary. These are examples of fixed costs. Certain costs, on the other hand, are variable (they vary as the volume of business varies). There are, for example, certain variable costs associated with the rooms department. Variable costs are those incurred in getting a room ready for occupancy by another guest. These would include:

The relationship among fixed costs, variable costs and sales volume can be seen in Figure 8.4. A business with a high proportion of fixed costs tends to have a relatively high break-even point. However, once the break-even point is reached the only costs incurred are variable costs. The difference between revenue and costs is great. Hotels and other accommodation facilities place a great emphasis on getting in as much business as possible beyond the break- even point. If a property can achieve the breakeven point, it may be willing to discount rooms in the off-season because the revenue generated will still contribute to profit as long as the variable costs are being met.

Another way to think of the break-even point is as follows: Suppose a 160-room hotel incurs USD 1 million in fixed costs for the year; a room typically sells for USD 40 and the variable cost of that room is USD 5 (for cleaning, soap, laundry, etc.). What happens when the first room is sold? The guest pays USD 40. USD 5 goes toward getting the room ready for the next guest. The remaining USD 35 is call the contribution margin. It goes toward (or contributes to) paying off the fixed costs for the year. After the first room is sold the fixed costs remaining are USD 1 million minus USD 35 or USD 999,965. Every time a room is sold for USD 40, USD 5 gets the room ready for the next guest and USD 35 goes toward paying off the fixed costs. The fixed costs remaining after succeeding rooms have been sold are USD 999,930; USD 999,895; USD 999,860, and so on. Eventually, if the property gets enough guests the fixed costs will have been paid for the year. This would occur after 28,572 rooms have been sold (USD 1 million/35). At this point the hotel is breaking even. When the next guest comes in he or she pays USD 40. From that, USD 5 goes to get the room ready for the next guest. The remaining USD 35 is profit! Each additional sale adds USD 35 in profit to the operation. However, as long as the variable costs are being covered, we are adding profit. In fact, we could sell the room for USD 5.01 and still make a profit, albeit only 1 cent.

This, however, is the rationale for selling rooms in the off-season or to groups at less than the regular rate. As long as the break-even point has been reached, rooms can be discounted and additions to profit will still occur. This should be done only if it is impossible to get the regular rate for the room.

What, then, is the break-even percentage for this hotel? The break-even percentage is the number of rooms needed to reach the break-even point divided by the number of rooms available. The number of rooms to break even is 28,572. The number of rooms available is 160 rooms times 365 days, or 58,400. The break-even point is 28,572 divided by 58,400 or 49 per cent.