Conrad Hilton was over 50 and had been operating hotels for more than 20 years before he bought his first property outside Texas in 1939. The hotel group he founded from a string of converted former banks and rundown boarding houses is now the oldest and second-largest in the world.
That same patience is a necessity for current chief executive Chris Nassetta as he guides the company through the coronavirus crisis a century after Hilton was founded during the 1918 influenza pandemic.
The Delta coronavirus variant may have held up the recovery of Hilton’s hotels by a month or more but, Nassetta told the Financial Times, “in a business that is 102 years old . . . three to four weeks doesn’t really matter”.
At the start of summer, hotel groups were optimistic. As lockdowns eased, pent-up demand manifested itself in fully booked hotels and soaring room rates during July and August.
“As much of the world reopens, the pent-up demand for travel we’ve been anticipating is happening,” Nassetta told investors in July.
The second quarter of this year was the first time since the pandemic that Hilton did not report a loss. Total revenues in the three months to the end of June topped $1.3bn with net income of $128m, up from revenues of $564m and a $432m loss in the same period in 2020.
Over Labor Day weekend in September, total occupancy in Hilton’s US hotels reached 85.7 per cent, one of its best performances since the pandemic began.
During the second quarter, the group repaid $1.2bn of its outstanding debt. “We remain confident in our balance sheet and financial flexibility, as we move forward into the recovery,” chief financial officer Kevin Jacobs told investors.
But as companies come out of the summer lull, hopes of a rapid revival have receded and the travel industry — one of the worst hit by the pandemic — has been left wondering when business will be back to anything like it was pre-Covid-19.
The US, Hilton’s largest market, lags behind other G7 nations in vaccination 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 through the winter season, have been cancelled.
Before the pandemic, business trips and group meetings made up about 70 per cent of Hilton revenues.
The group has already been “pummeled” by the pandemic, Nassetta said. Its overall losses amounted to $720m last year, a stark contrast to the $886m profit reported in 2019.
To see out the crisis, Hilton announced in June last year that it would cut about 2,100 jobs. It drew down the entirety of a $1.75bn revolving credit facility and pre-sold $1bn worth of loyalty points. It had also issued $4.4bn in bonds between April 2020 and January this year.
Some of its rivals have invested more in their leisure hotels to buffer an expected longer-term drop in business travel. Industry data provider STR forecasts that leisure travel will recover to 2019 levels in 2023 but business will take until 2025 to make a full comeback.
InterContinental Hotels Group launched a luxury resort brand last month targeting growth of 10 hotels a year, while Hyatt Hotels bought the high-end resort operator Apple Leisure for $2.7bn.
Marriott, the world’s largest hotel chain and Hilton’s closest rival, is retraining staff in its city centre business-focused hotels to “better understand the wants and needs of the leisure traveller”, chief executive Tony Capuano told the FT this month, while a major Hilton franchisee said that across the industry, hotel groups were offering unusually preferential terms to have their brands on “iconic leisure properties”.
But Nassetta said he is not tempted to follow suit.
A source close to Hilton’s senior management said the company considered the Apple Leisure deal but did not think it was “strategically [or] economically meaningfully accretive”.
Nassetta said: “My whole life’s philosophy . . . is steady hand on the wheel.”
He added: “Everybody thinks leisure, leisure! I’ve been doing this too long: leisure is going to come down and [business travel] is going to come up.”
David Katz, an analyst at Jefferies, said there was a “significant question mark on what the trajectory of [Hilton’s] recovery would be”, adding that Nassetta is “by his own admission optimistic all the time”.
The group has already had several major events at its hotels cancelled or postponed as a result of the Delta variant.
But Nassetta points instead to the recovery in short-haul business trips to 80 per cent of 2019 levels during the second quarter. “You have to realise that you are reading the papers and filtering through a big company lens when the bulk of business travel is not that and these [small and medium] businesses have to travel or they die,” he said.
He also believes that corporate travel will rapidly return when white-collar executives realise they are losing contracts because a rival decided to visit the client in person.
Investors certainly seem to be on his side. Hilton’s shares are up 23 per cent so far this year compared with 17 per cent at Marriott, 6 per cent at Hyatt and a fall of 2 per cent at IHG.
With business travel in mind, Hilton is pushing the growth of its Signia branded hotels, which focus on group meetings. In July, it opened its first Signia in Orlando and has broken ground on another in Atlanta. The Fairmont hotel in San Jose is set to reopen as a Signia, according to press reports.
The group said it has seven of its own conferences booked for next year with several thousand delegates at each.
Richard Clarke, an analyst at Bernstein, said hotels could benefit in a world with a lot more remote working: “There is an idea that people might live further from cities and companies will decide not to have a physical presence but people will still need to get together and hotels will play a part in housing those people.”
But Amar Lalvani, chief executive of hotel group The Standard and a former executive at Marriott-owned Starwood, said it would be harder for big hotel companies to adapt to this change in demand: “Decision making in bigger companies is hard and they have quite rigid standards.”
Hilton has done more than many big groups to adapt to the changing needs of its business customers. It has launched a service that allows groups of delegates in different locations to connect, for example, and has sped up the check-in process with an app allowing guests to unlock their room via their phone without visiting the reception desk.
In an industry that is sometimes slow to adapt, technology is “the big sea change” of the pandemic, in Nassetta’s view.
He hopes it might help with the industry’s “single biggest issue in the world right now” of acute staff shortages, particularly in the US and Europe. Daily housekeeping has become an on-request service and Hilton is recruiting for nearly 3,000 roles across the UK and US.
The group is also taking a cautious stance on M&A, unlike Marriott, which has told the FT it is keen to do deals.
Nassetta said: “We are not really acquisitive at the moment. Never say never [but] running a big business a lot of it is just having discipline. What you don’t do to a degree is more important than what you do.”
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September 18, 2021 at 05:00AM
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Hilton bets on the return of business travel - Financial Times
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