Case Study: Terminus Hotel

Olivia Roberts, Alica Durcekova, Yasmin Pirzada and Hala Chatila

Summary

The Terminus Hotel has a maximum occupancy of 200 rooms, and relies on their maintaining high occupancy from
partner travel agencies like Pearson Travel (bidding 90€ for ten rooms per day) and Impressa Reisen (bidding 95€ for
five rooms per day). Looking at predicted occupancy, the assumption is that the previous years' occupancy rate
matched the longer-term average rate of 60% (Normal Capacity), meaning the total cost per room would be €82
which is less than the asking price from travel agencies and therefore would be accepted. However, in 2008 the
marketing department forecasted 40% occupancy level for 2009 due to the 2008 financial crisis. Therefore, the costs
incurred for 2009 per room per day are 85.6€ for fixed cost and 25€ for variable cost. Rejecting bids in 2009 from
long-term travel agencies reflects their focus on immediate financial goals, driven by bids falling short of the hotel's
total room cost. Analyzing three alternatives—accepting one offer, or reducing fixed costs by €250,000—aims to
determine the most profitable path forward. This strategic evaluation aligns with the hotel's commitment to
navigating economic challenges while maintaining financial sustainability. It underscores the importance of
adaptability and strict decision-making in ensuring the hotel's long-term success amidst challenging market
conditions.

Alternatives

As Terminus Hotel recieved two different offers and declined both, we looked into the break even of the individual
hotel rooms, to find the price they could charge that would be profitable. Assuming 40% occupancy, total cost per
room is 110.6€ which means accepting the offer from Pearson Travel would incur a loss of 20.6€ per day per room
(assuming all 80 rooms were charged exactly 90€). Following the same logic, accepting Impressa Reisen would incur
a loss of 15.6€. Therefore, the objective would be to take a course of action that would allow the hotel to charge at
least 111€ per room to be profitable.

Alternative 1: Accept Pearson Travel, Decline Impressa Reisen

Accept the Pearson Travel offer of 10 rooms for 90€ per room per day, and decline the Impressa Reisen offer
altogether. Operating income will be a negative result, meaning the Terminus Hotel will be making a loss as the total
costs are higher than the selling price. This offer would incur a loss of 206€ per day for the ten rooms.

Alternative 2: Decline Pearson Travel, Accept Impressa Reisen

Accept the Impressa Reisen offer of 5 rooms for 95€ per room per day, and decline the Pearson Travel offer
altogether.Operating income will again be a negative result, meaning the Terminus Hotel will be making a loss as the
total costs are higher that the selling price. This offer would incur a loss of 78€ per for the five rooms; therefore, the
loss will be lower with this alternative than alternative 1.

Pearson Travel Impressa Reisen

SPU 90€ 95€

UNITS (rooms) 10 5

Revenue 90€ x 10 = 900€/day 95€ x 5 = 475€/day

VCU 25€ x 10 = 250€/day 25€ x 5 = 125€/day

FCU 85.6€ x 10 = 856€/day 85.6€ x 5 = 428€/day

CMU 900€ - 250€ = 650€/day 475€ - 125€ = 350€/day

OI 650€ - 856€ = -206€/day 350€ - 428€ = -78€/day

Alternative 3: Implement a Lower Fixed Cost Structure
Assume implementations resulted in reduction of fixed costs by 250,000. Lowering the fixed cost would decrease the
total cost per room per day, therefore, the loss incurred when accepting either of the offer would be decreased.

New Fixed Costs (FC1) = €2,500,000 - €250,000 = €2,250,000

Pearson Travel Impressa Reisen

SPU 90€ 95€

UNITS (rooms) 10 5

Revenue 90€ x 10 = 900€/day 95€ x 5 = 475€/day

VCU 25€ x 10 = 250€/day 25€ x 5 = 125€/day

FCU 77€ x 10= 770€/day 77€ x 5 = 385€/ day

CMU 900€ - 250€ = 650€/day 475€- 125€ = 350€/ day

OI 650€ - 770€ = -120€/day 350€ - 385€ = -35€/day

Proposal

Base Numbers
The Terminus Hotel has 200 rooms available in total, and the forecasted occupancy level for 2009 is 40% or 80
rooms. The fixed cost for Terminus Hotel per year is 2,250,000€ (or 77€ per night per room), while the variable cost
per occupied room is 25€. The room rates offered by the hotel were lower than the costs, so filling more rooms could
help reduce some fixed costs and contribute towards covering some expenses. In proposing the alternative of
reducing fixed costs by €250,000, we aim to improve the hotel's bottom line and mitigate losses. This adjustment
prioritizes short term profitability, driven by the need to manage current financial constraints.

Qualitative Issues
Aside from numerical statistics, the Terminus Hotel should consider qualitative aspects when making decisions.
Maintaining long-term relationships with tour operators is critical for future business growth and reputation, as
accepting their offers would help maintain a higher occupancy rate, which is vital for profitability. Furthermore,
potential consumers' perceptions of the hotel's stability and service quality should be carefully considered.
Balancing competitive positioning with industry standards while maintaining the hotel's value proposition is critical.
Lastly, employee morale can have a substantial impact on service quality and overall client happiness. To address
these qualitative factors, the hotel might establish open communication techniques, foster a customer-centric culture,
and prioritize employee well-being through training and recognition programs.

Broader Strategic Considerations

The Terminus Hotel will incur a loss in 2009; however, due to the forecasted 60% occupancy in 2010 and 2011, the
hotel can aspire to compensate the loss with their new cost structure, which will generate profits in these following
years. Looking ahead, the Terminus Hotel might consider larger strategic options to strengthen its market position
and assure long-term success. To begin, expanding its revenue streams beyond hotel bookings, such as offering
unique experiences or packages tailored to the historic beauty of its site, could attract a broader spectrum of guests
while increasing profitability. Second, investing in sustainable practices and eco-friendly projects coincides with
changing consumer expectations and indicates corporate social responsibility, which promotes favorable brand
perception and attracts environmentally concerned visitors. In addition, using technology to simplify operations,
improve visitor experiences, and personalize services can boost operational efficiency and customer satisfaction.
Furthermore, forming alliances with local businesses, attractions, and event organizers might result in synergies that
improve the hotel's services. By adopting these strategic measures, Terminus Hotel can strengthen its competitive
position, adapt to changing market dynamics, and thrive in the dynamic hospitality industry.