The group said it plans to reopen its Golden Lion hotel in Leeds as The Cosmopolitan after a £1m revamp, creating a boutique-style premises.

Peel Hotels, which also owns Bradford's Midland hotel, is making the investment despite a "disappointing" half-year which saw pre-tax profits slump 42 per cent to £438,000.

The chain of eight hotels blamed soaring energy costs and losses at its Nottingham and Dunfermline sites for the slide in profits, but said it would plough in extra capital to differentiate its hotels in a tough market.

Occupancy rates were down 4.3 per cent, but the average room rate was up by 4.1 per cent. This meant revpar – a key industry measure of revenue per available room – decreased marginally.

"The way you fight recession is to invest and improve your product because other people might not be able to afford it," said chairman Robert Peel.

"If we can maintain our revpar at the end of the year we will have done very well.

"We are aware that there's going to be a contraction in the market place. But when something contracts the cream rises to the top. The Golden Lion has the wrong connotations and is a bit dated. It will be a niche market boutique hotel."

Peel Hotels said energy costs increased by more than 52 per cent during the 28 weeks to August 24 to £300,000, from £197,000 last year.

Mr Peel said in August alone energy costs were up 300 per cent on last year. Food and alcohol margins were also "under pressure", the group said, resulting in an overall cost increase of 2.8 per cent.

However, the group said it was not possible to pass on cost increases to customers in the current climate.

Mr Peel did not break down the specific performance of the group's hotels, except to say Bradford was on target for the half year, and Leeds performed slightly below its target.

"We have got a lot of hotels in Leeds," said Mr Peel. "It's getting to the stage where Leeds is over-hotelled in the current market."

During the period the company spent £700,000 on improving its premises, and is working on upgrading 26 bedrooms at its Bradford hotel.

Last year the group sold its Avon Gorge Hotel and a staff house in Bristol for £15.5m. It also sold the freehold of its Salem Street site in Bradford with planning permission for 99 apartments, office space and car parking for £2m.

Net debt stood at £2.6m, a relatively low gearing which Mr Peel said made acquisitions and the capital investment plans possible. The group plans to take advantage of opportunities to buy "distressed assets" in London, where it currently does not have a presence.

Mr Peel said while the next year will be challenging, he believes the group can weather the economic storm. "Undoubtedly our domestic market is currently being challenged and one would expect this to continue for the next year or so," he said. "We believe we are well able to overcome the difficulties."

It will pay an interim dividend of 2p per share.


A brand new look

Work will start on transforming the Golden Lion in January.

The £1m investment will take about 24 weeks and most of the work will concentrate on the public areas.

The ground floor of the 89-bedroom hotel will be gutted and a new bar, toilets and restaurant will be fitted.

Work will also focus on the reception and conference rooms. The outside of the hotel will also be renovated However, there are minimal plans to alter the bedrooms which are relatively modern.

Once complete the hotel will be renamed The Cosmopolitan, with a boutique-style theme.

The 18th Century Golden Lion in Lower Briggate is Leeds' oldest hotel and the group aims to win four star status as a result of the renovation.