Overblown recession fears? Hilton’s rosy outlook makes you wonder
Hilton provided the recovering hotel industry a roaring, profitable start to the second-quarter earnings season.
The hotel company posted a $367 million second-quarter profit Wednesday and also noted its global network performed only 2% off 2019 revenue per available room — the hotel industry’s key performance metric — levels for the same time period.
This is a major recovery from the second quarter of 2020 when performance during the first three full months of the pandemic was 81% off 2019 levels.
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The strong financial showing arrived as economists speculate a recession is just around the corner, but Hilton executives remain bullish about the second half of the year and even anticipate full-year profits could exceed $1.2 billion.
“We’ve been looking very carefully at our business, as you would guess, at all the segments for sort of any forward-looking trends that we can see,” Hilton CEO Christopher Nassetta said Wednesday during an investor call. “I would say what we're seeing still is very positive.”
Nassetta anticipates leisure travelers will continue to pay higher-than-normal hotel rates heading into the fall, albeit lower than the notoriously high rates seen this summer.
Additionally, business travel demand moved closer to normal levels over the second quarter, with business transient demand at 95% of 2019 levels for the quarter and weekday rates (typically how the hotel industry gauges business travel) higher than in previous peaks.
Business transient demand in the U.S. at Hilton exceeded prior highs for the month of June, Nassetta said. The overall business travel demand is led by travelers working for smaller and medium-sized businesses that typically don’t rely as much on remote work compared to larger companies.
These smaller companies accounted for 80% of Hilton’s overall business travel demand prior to the pandemic, and Nassetta previously indicated a desire to see that number grow to 90% as a result of its stronger recovery.
Even larger companies are inching back to normal, with travel demand from big corporations now at 80% of pre-pandemic booking levels.
“In the second half of the year, based on the trends we've been seeing, our expectation is business transient is going to be on a revenue basis equal to 2019 levels,” Nassetta added.
It’s a busy time at Hilton in terms of hotel openings and development. Nassetta pointed to recent additions to the company’s network which included the Waldorf Astoria Washington, D.C. (pictured above, and you can read about TPG’s first look at that property, formerly the Trump International Hotel). Also added, is the Hotel Marcel New Haven — part of Hilton’s Tapestry Collection and expected to be the first hotel in the U.S. to achieve net-zero carbon emissions.
A string of openings over the quarter, like new Conrad properties in Los Angeles and Nashville, as well as the Hilton Maldives Amingiri, helped the company surpass the 7,000-hotel mark in July.
The company’s overall development pipeline includes more than 413,000 guest rooms across nearly 2,780 hotels.
“We continue to drive a disproportionate share of global development, with nearly one in every five rooms under construction around the world slated to join our system,” Nassetta said.
“Additionally, our development market share is more than three times larger than our existing share, meaningfully higher than our peers, given our industry-leading [performance].”
The future looks a lot like the past
Industry analysts and critics often debated over the pandemic of how the hotel industry would need to change to better accommodate the future of work and travel. However, Nassetta has been one of the loudest cheerleaders about how things would recover largely from how things were before the health crisis.
Sure, things might shift a little here and there (a la the company’s growing embrace of business travelers from smaller companies), but leisure travelers, business travelers and group business would remain the three major food groups of a standard hotel.
Hilton’s current recovery trajectory appears to back that claim up. Leisure travel exceeds pre-pandemic levels, business transient demand is close to a full recovery and group business, while a little further behind, is within striking distance. Hilton’s group business performance is about 85% of 2019 levels.
“When we think about the group side, while we don't think in the second half of the year we'll get all the way back to where we were in 2019, we're going to get awfully close,” Nassetta said.
One aspect of the travel recovery that often gets discussed in industry circles is just how much of an impact vacation rental platforms like Airbnb have on the hotel industry. Millennials and members of Generation Z flock to this kind of lodging, and there is swelling sentiment hotel companies should do more to have offerings in this space.
Marriott and Accor both have smaller vacation home rental divisions. However, the experience divide between hotels and vacation rentals was felt on Wednesday’s earnings call.
“What [Airbnb does] is they serve a certain customer need, and we serve another customer need,” Nassetta explained. “There's plenty of room for us to coexist given what we're delivering is very different and it's generally for different types of stay occasions.”