Hilton CEO’s 2023 outlook: Don’t expect any hotel bargains, even in a recession

If you think a recession might usher in a wave of hotel bargains, don't check out the Hilton reservations system over the next year or so.

Hilton early Wednesday morning reported a $346 million profit for the third quarter. However, there was a recurring theme on an investor call later in the day: Will this be as good as it gets in terms of profitability? There is debate on whether a recession is just around the corner, after all.

Investor call details

Hilton CEO Christopher Nassetta indicated there is still plenty of growth and recovery momentum at his company. International travel is still flickering back to life in parts of the world, like Asia, and there is a revival in corporate and group travel demand. That means hotel rates are likely to continue their ascent — great news for hotel owners but not exactly music to travelers' wallets.

"Despite near-term macro headwinds, we're not seeing any signs that fundamentals are weakening," Nassetta said on the investor call. "Rising demand, coupled with historically low industry supply growth, should continue to drive strong pricing power."

While the pandemic may have sparked higher-than-normal levels of domestic leisure travel demand, it also reduced the willingness of lenders to sign off on financing new hotel projects. That reduction in the supply of new hotel rooms hitting the market means less competition and a greater ability for hotel owners of existing properties to raise rates.

Even with extraordinary levels of travel demand over the summer, there isn't some major wave of new hotels being built. Blame part of that on supply chain woes that have slowed down the construction timelines, even on projects that did manage to pull together bank approval. Don't expect any of that to change next year.

"The laws of economics are alive and well," Nassetta said. "Supply is at historically low levels, and it's going to stay there for a while given everything that's going on from COVID and now into the macro concerns."

Welcome back, business travelers

It's more than just a slower rate of hotel openings keeping nightly rates high in the face of a recession.

Nassetta, as well as Hilton's chief financial officer Kevin Jacobs, noted a strong revival in business and group travel demand over the summer and into fall. It's unlikely that will dissipate heading into next year. More demand streams on top of leisure travelers should lead to even higher hotel rates.

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However, the company doesn't appear too concerned about the idea of going too high with nightly rates. Hilton still estimates consumers have $2.4 trillion in excess savings accrued during the pandemic. Theoretically, that's a major tailwind for a hotel company like Hilton.

"Demand is picking up," Nassetta said. "Why is it picking up? It's picking up because the segments remain strong…People still have the desire and a lot of disposable income and savings to spend [as well as] more flexibility and time. [With] business transient, you have a huge amount of pent-up demand that's accrued as well as in the meetings and events segment. You [also] have the international markets opening up."

The Hilton CEO sees additional growth opportunities in this area because consumer behavior shows more people are willing to pay extra for experiences rather than physical goods. That, coupled with recent-to-recover demand sources like corporate travel, should give the company and the broader hotel industry more durability amid economic uncertainty.

Nassetta isn't ignoring signs of the global economy slowing down, though. Governments around the world are raising interest rates in an effort to bring down inflation. Still, he sees reason to be optimistic about Hilton's position in 2023.

"We have these tailwinds like spending more on experiences, [revived] international travel, pent-up demand and then just incremental demand associated with people having to run their businesses [and] gather [for] meetings and events of all sorts — whether it's social or business," he said. "At the moment, those tailwinds are stronger than the headwinds, and I would say meaningfully stronger, which is why we would continue to recover. We continue to have pricing power."

How long can it last? Maybe longer than people expect in the face of a global recession.

"My own belief is we have enough wind in our sails to go for a while," Nassetta added.