The Russia Journal: How was the summer season for your business?

Boris Averyanov: Unfortunately, the occupancy of Radisson SAS Lazurnaya hotels suffered badly from the false media reports on the natural disaster in Krasnodar Krai. It was difficult to counteract this influence and all our staff strove to keep our clientele with us. We had to persuade every guest by phone that the weather was fine and everything was okay in the city. We even placed a Krai map on our Website so that people could see how far Sochi was from the disaster-stricken regions.

RJ: There has been a strong slowdown in the tempo of commissioning of new hotels in Moscow over the last three years. How is the situation different in the vacationing resort areas?

BA: In vacation resort areas, the situation is just the opposite. After a more than 20-year period when not a single hotel was built, the last decade has seen the appearance of three 4-star hotels of the Radisson SAS Lazurnaya chain: The Peak hotel in the mountains; Lazurnaya, which is within a pleasant distance from the city's hustle and bustle, and Park, in the very heart of Sochi. Nearing completion is the construction of a second part of the Peak hotel complex at Krasnaya Polyana, 70 km from Sochi, which includes standard suites, deluxe suites, cottages, a restaurant, a wine bar and a barbecue terrace. In addition to hotels, we are building a modern-class congress hall to seat 500 people, and, in the long run, we plan to build a cable-car ride at Krasnaya Polyana.

RJ: What do the average suite price and occupancy have to be for a hotel of your class to operate with profit?

BA: We operate at high workloads for four months of the year, and during the remaining eight months we seek to attract so-called "conference travelers." In our Peak hotel, the high season is winter. A standard suite in Peak is $150 per night in winter and $110 per night in summer. In Lazurnaya, the busy season is summer and a standard room costs $170 per night in summer and $115 per night in winter. The year-long average rate at Radisson SAS Lazurnaya is $120 per night, which is sufficient for us to operate with profit.

RJ: What is the structure of your hotels' earnings?

BA: We run a huge chain of restaurants, bars and nightclubs, which is why catering constitutes a pretty high percentage in our earnings, 47.8 percent in 2002. We have restaurants for any pocket or taste, from Sea Breeze with Mediterranean cuisine and Fregat with Caucasian cuisine, to the fine-dining Peter the Great, which offers a wide selection of dishes prepared according to traditional Russian recipes.

The Russia Journal: How has your hotel's occupancy changed since January 2002?

Lisandro Platzer: Compared to the January level, the hotel's average occupancy has increased by approximately 30 percent, which allows us to say that the general situation in the business is stable. This past summer season was fairly successful for the hotel, despite a temporary decline in occupancy in July. The decline was a manifestation of the regular summer downturn in business activity in the city. After all, Orlyonok is a business hotel and 80 percent of its clients are representatives of Russian and Western business circles. The average occupancy for the period of May to August was 77-80 percent.

RJ : What does the average price and occupancy have to be for a hotel of your class to operate at a profit?

LP: Formally, Orlyonok is a 3-star hotel and the average price of accommodation is $85 per night. Even with an average occupancy of 50 percent, our hotel would operate at a profit. However, Orlyonok is an example of a hotel where formal "star" category does not exactly correspond with the actual level of service. In fact, Orlyonok occupies a special place in Moscow's hotel industry because all the rooms are refurbished, there are VIP-suites, and the quality of service is on an international level. A breakdown of our earnings goes as follows: 55 percent come from accommodation, 25 percent is from our rent payers, 15 percent is from food and drink services and 5 percent is from telecom services.

RJ: There has been a marked decline in the number of new hotels being built in the last three years. Why do you think that is?

LP: While the segment of 4- and 5-star hotels is saturated, there is a noticeable growth in demand for high quality and less expensive 3-star hotels, which gives reasons to expect growth of their proportion in the industry's total earnings in the near future. However, this segment of the market and its principal trends are still embryonic. Investor interest is obvious but that factor is probably holding them back.

RJ: How successful are the restaurants which operate in your hotel?

LP: Our hotel complex includes a lot of restaurants, cafes and bars operating on rental terms. Competition is pretty tough which positively affects the quality of service. In line with our strategy of permanent expansion of the spectrum of services, we opened a new cafe, Bonjour-Cafe, in August.

The Russia Journal: How would you evaluate the summer season?

John Wood: Le Meridien Moscow Country Club has been enjoying a record summer and occupancies have been running 14 percent higher than last year.

RJ: What would you say about the potential for investment in the Russian hotel market?

JW: After the crash in 1998, investors became very wary and it takes time to regain the confidence needed for a long term investment. The situation has now changed and two new hotels are opening this month. Others will surely follow.

RJ: Experts say a 5-star hotel becomes profit-making if at least half of its available suites are occupied at the average rate of $250 a day in the first year of operation. Do you agree?

JW: Theoretically these estimates are feasible but a lot depends on the way the project is financed and how it is designed as some operations are more labour intensive than others. Also the level of the standard of service plays a key role.

RJ: To what extent are restaurants in your hotel profitable?

JW: At Le Meridien Moscow Country Club our Restaurant operations are significant contributors to the overall profitablility of the entire operation. As a 5-star resort we aim to offer different types of dining experience as guests expect a variety of choice, especially in a 5-star hotel. For next year we are now working on developing some new concepts which are the result of customer demand as we want Le Meridien Moscow Country Club to be known as the place where exciting things happen.

The Russia Journal: How was this summer season for the National?

Marina Gandzhuntseva: The occupancy of our hotel has been increasing and reached 100 percent this June and July, which required all hotel services to work in "all-hands-on-deck" mode. We managed to get through the peak season without problems thanks to our exceptionally well-adjusted system, and we are looking forward to the upcoming fall and winter season with optimism.

RJ: Despite the potentially high investor interest in Moscow's hotel industry, there has been a strong slowdown in the tempo of commissioning of new hotels in the city over the last three years. What, in your opinion, are the main reasons for that?

MG: In Moscow, the niche for hotels of the deluxe or business class is filled, while the niche for medium-class hotels, which is being actively developed abroad, is empty here. The inflow of visitors has increased compared to last year, and the increase is mostly accounted for by middle-income people who are looking for 3- or 4-star accommodation. Visitors to Moscow are expecting European-class service here, but many hotels currently operating in the city were built back in the Soviet era and fail to live up to their expectations.

Given the discounted land rent rates for companies involved in the construction or reconstruction of hotel buildings (discounts have been specially granted by the Moscow government in order to stimulate investor activity) and the growth in the number of visitors, it appears strange that no investment boom is taking place in the segment of European-class 3- and 4-star hotels in the city. Apparently, those investors who are already here consider it to be more cost-effective to invest in home and office construction projects (which pay back very quickly), while those who have not entered the Russian market yet are still hesitating, fearing a new wave of economic instability.

RJ: According to experts, a 5-star hotel becomes profitable if at least half of its available suites are occupied at the average rate of $250 a day in the first year of operation. Do you agree with these estimates?

MG: I don't completely agree with them. Most of the currently operating 5-star hotels charge around $200 per day, and make a profit starting at 50 percent occupancy. A graphic example is the situation in 1997, when hotels continued to operate at a profit despite the prices being not higher than $200 per day. The same applies to 4-star hotels, except the prices are on average $25 lower.

RJ: What's the earnings structure of a hotel?

MG: Accommodation earnings constitute approximately 60 percent; up to 35 percent come from the catering and room services, and the remaining 5 percent is earned by other services.

RJ: To what extent are restaurants in your hotel profitable? How does a hotel's class determine the choice of its restaurant's style and menu?

MG: Our Moskovsky restaurant and Alexandrovsky bar are bringing stable profits. A restaurant in a 5-star hotel should combine class with not excessively showy luxury. Its interior should feature a solid, classic design without excessively artsy elements. Dishes on offer should feature at least two cuisines – Russian and European, in the case of the National.

We also have other national cuisines as a sign of respect for our foreign guests who constitute 90 percent of total occupancy.

The Russia Journal: How would you appraise the results of this past summer season?

Elena Romanova: Occupancy of the hotel was 13 percent higher compared to last summer. This summer was more business intensive despite the absence of major exhibitions and other events in the city.

TRJ: What, in your opinion, are the main causes of the serious decline in the tempo of new hotel commissioning over the last three years?

ER: In all likelihood, investors are cautious only because of the risk involved in any large project in Russia. Foreign investors often find it hard to understand Russian legislative acts and procedures. Besides, they are meticulous about signing contracts and after the decision is made it takes time to coordinate all the details.

TRJ: According to experts, a 5-star hotel becomes profitable if at least half of its available suites are occupied at the average rate of $250 a day in the first year of operation. Do you agree with this estimate?

ER: One figure is lacking here – the sum of initial investment. It is difficult to make any estimates if initial volume of investment is not known. Generally speaking, the estimate looks plausible for a hotel of our category.

TRJ: What is the structure of earnings of Sheraton Palace hotel?

ER: The main source of income is, of course, our guests – 60 percent. Sale of food and beverages makes up another 30 percent; here we don't draw any clear distinction between banquets, restaurants, conferences, etc. The remaining 10 percent is generated by our business-center, laundry, health-club, etc.

TRJ: To what extent are restaurants in your hotel profitable? How does the hotel's class determine the style and menu of its restaurants?

ER: Restaurants represent a very important part of our business because they host banquets, buffets, cocktails, conferences, wedding parties, etc. Besides, every month our chef produces "recommended menus" such as asparagus, caviar and oyster – depending on the season. And he has created a special Japanese breakfast for our Japanese regulars. Also, we have a system of club cards called "Sheraton Plus." These are issued to our most valued regulars and accepted in payment for accommodation and restaurants as well as for various services, including the health-club.