Hilton bets on the return of business travel

Conrad Hilton was over 50 years old and had operated hotels for over 20 years before purchasing his first property outside of Texas in 1939. The hotel group he founded from a series of converted old banks and dilapidated boarding house is now the oldest and second largest in the world.

This same patience is a necessity for the current CEO Chris Nassetta as he guides the company through the coronavirus crisis a century after the creation of Hilton during the 1918 flu pandemic.

The Delta coronavirus variant may have delayed the takeover of Hilton hotels by a month or more, but, Nassetta told the Financial Times, “in a business that’s 102 years old. . . three to four weeks doesn’t really matter ”.

At the start of the summer, hotel groups were optimistic. As closures eased, pent-up demand manifested itself in full hotels and rising room rates in July and August.

“As much of the world reopens, the pent-up travel demand we anticipated is occurring,” Nassetta told investors in July.

The second quarter of this year was the first time since the pandemic that Hilton has not reported a loss. Total revenue in the three months to the end of June exceeded $ 1.3 billion with net income of $ 128 million, up from revenue of $ 564 million and a loss of $ 432 million in the during the same period in 2020.

Over the Labor Day weekend in September, the total occupancy rate of Hilton hotels in the United States reached 85.7%, one of its best performances since the start of the pandemic.

During the second quarter, the group repaid $ 1.2 billion of its outstanding debt. “We remain confident in our balance sheet and financial flexibility as we move forward in the recovery,” CFO Kevin Jacobs told investors.

But as businesses emerge from the summer lull, hopes of a quick recovery have faded, and the travel industry – one of the worst hit by the pandemic – has wondered when business will turn around for nothing. as before Covid-19.

The United States, Hilton’s largest market, lags behind other G7 countries in immunization rates, and many companies have now delayed large-scale returns to the office for their staff. Business trips and conferences, which hotels traditionally rely on during the winter season, have been canceled.

Before the pandemic, business travel and group meetings made up about 70% of Hilton’s revenue.

The group has already been “hammered” by the pandemic, Nassetta said. Its overall losses were $ 720 million last year, a stark contrast to the $ 886 million profit recorded in 2019.

The Old Mobley Hotel in Cisco, Texas

The Old Mobley Hotel in Cisco, Texas

To get out of the crisis, Hilton announced in June last year that it would cut around 2,100 jobs. He drew a full $ 1.75 billion revolving credit facility and pre-sold $ 1 billion in loyalty points. It also issued $ 4.4 billion in bonds between April 2020 and January of this year.

Some of its competitors have invested more in their leisure hotels to cushion an expected longer-term decline in business travel. Industry data provider STR predicts that leisure travel will return to 2019 levels in 2023, but business will take until 2025 to make a full comeback.

InterContinental Hotels Group has launched a luxury resort brand last month targeting growth of 10 hotels per year, while Hyatt Hotels bought up the premium resort operator Apple Leisure for $ 2.7 billion.

Marriott, the world’s largest hotel chain and Hilton’s closest rival, is recycling staff at its downtown business hotels to “better understand the wants and needs of leisure travelers,” said director General Tony Capuano at the FT this month, while a large The Hilton franchisee said that across the industry, hotel groups are offering exceptionally preferential terms to have their marks on “iconic leisure properties.”

But Nassetta said he was not tempted to follow suit.

A source close to senior management at Hilton said the company had considered the Apple Leisure deal but did not believe it was “strategically [or] economically significantly accretive ”.

Nassetta said: “The philosophy of my whole life. . . is a firm hand on the wheel.

He adds: “Everyone thinks of leisure, leisure! I’ve been doing this for too long: hobbies are going to come down and [business travel] will happen.

David Katz, analyst at Jefferies, said there was “a significant question mark over what the trajectory of [Hilton’s] the recovery would be ”, adding that Nassetta is“ by his own admission optimistic all the time ”.

The group has already seen several major events at its hotels canceled or postponed due to the Delta variant.

But Nassetta instead points to the recovery of short-haul business travel to 80% of 2019 levels in the second quarter. “You have to realize that you read the papers and filter through the lens of a big corporation when the bulk of business travel is not that and these [small and medium] companies have to travel or they die, ”he said.

He also believes business travel will return quickly when white-collar workers realize they are losing contracts because a rival decided to visit the client in person.

Investors certainly seem to be on his side. Hilton shares have risen 23% so far this year, compared to 17% at Marriott, 6% at Hyatt and a 2% drop at IHG.

Chart showing Hilton stock price rising relative to its competitors

With business travel in mind, Hilton is accelerating the growth of its Signia-branded hotels, which focus on group meetings. In July, it opened its first Signia in Orlando and inaugurated another in Atlanta. The Fairmont Hotel in San Jose is set to reopen as Signia, according to news reports.

The group said it has booked seven of its own conferences for next year with several thousand delegates at each.

A Signia hotel in Orlando, Florida

Hilton opened its first Signia hotel in Orlando, Florida

Richard Clarke, analyst at Bernstein, said hotels could benefit in a world with much more remote work: “There is an idea that people could live further away from cities and businesses will decide not to have a presence. physical, but people will still have to. get together and hotels will play a role in accommodating these people.

But Amar Lalvani, general manager of The Standard hotel group and a former executive at Marriott-owned Starwood, said it would be more difficult for large hotel companies to adjust to this shift in demand: “Decision-making in big business is tough and they have pretty rigid standards.

Hilton has done more than many large groups to adapt to the changing needs of its business clientele. For example, he launched a service that allows groups of delegates in different locations to log in, and speeded up the check-in process with an app that allows guests to unlock their rooms via their phones without going to the front desk.

In an industry that is sometimes slow to adapt, technology is the “big drastic change” of the pandemic, according to Nassetta.

He hopes this could help solve the industry’s “biggest problem in the world right now”: acute staff shortages, especially in the United States and Europe. Daily housekeeping has become an on-demand service and Hilton is hiring for nearly 3,000 positions in the UK and US.

The group is also taking a cautious stance on mergers and acquisitions, unlike Marriott, which told the FT it wanted to close deals.

Nassetta said: “We are not really buyers at the moment. Never say never [but] a big part of running a big business is having discipline. What you don’t do to some extent is more important than what you do.

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