1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSIS706050403020100Hotel Management OperationsFour Seasons is principally a hotel management company with hotel management earnings representing 81% of total earningsbefore other operating items in 1997. Under its management agreements, Four Seasons generally oversees all aspects of hoteloperations on behalf of the hotel owners, including hotel sales and marketing, hotel reservations, hotel accounting, purchasing,budgeting and the hiring, training and supervising of staff. For providing these services, Four Seasons receives a variety of feesincluding a base fee calculated as a percentage of gross operating revenues of the hotel. In addition, Four Seasons may receiveincentive fees based on the operating performance of the hotel.Through economies of scale, coordinated international marketing efforts, sophisticated labour management controlsand food and beverage purchasing systems, Four Seasons generally has enhanced the profitability of hotels under itsmanagement and increased its participation in the hotels’ operating profits through its incentive fees.In addition to overseeing day-to-day operations of its hotels, Four Seasons provides management services includingdeveloping and implementing sales and marketing strategies, operating a central reservations system, assisting withsourcing the financing of and managing the development of new hotels, providing advicewith respect to the design and construction of new or renovated hotels, assisting with theHotel Management Operations EBITDA($ millions)refurbishment of hotels, and providing a centralized purchasing system for hotel goods.General and administrative expenses for hotel management operations are incurredto provide the management services outlined in the previous paragraph together with and93 94 95 96 97including those items normally associated with the Corporation’s corporate overhead, suchas operations, finance, computer services, accounting, control, planning, legal, developmentand other costs of maintaining the corporate office.The Corporation’s general and administrative expenses are relatively stable. As a result,the Corporation derives substantial operating leverage, whether from the increases inmanagement fees from existing contracts or the addition of new management agreements.From 1993 to 1997, hotel management fee revenues and hotel management earnings beforeother operating items have grown at compounded annual growth rates of 15.2% and 22.9%,respectively. Hotel management earnings before other operating items as a percentage of feerevenues (hotel management profit margin) increased from 46.3% to 60.1% from 1993 to1997. Hotel management fees and profitability are expected to increase in 1998 and beyondas a result of the combination of (i) anticipated REVPAR improvements in hotels undermanagement, (ii) a full year of management fee revenues from the properties acquired oropened in 1997, including the first vacation ownership project, (iii) the addition of feerevenue from hotels added to the portfolio in 1998, and (iv) incremental fees from enhancedmanagement contracts.30Four Seasons Hotels Inc.