Spotlight...DUX

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The new normal

The big beasts of lodging, Marriott and Hilton, dusted off familiar songbooks, as their second quarter results reflected a new normal that looks increasingly similar to the old, pre-pandemic normal. For both, the lead recovery market of the US is now delivering a performance ahead of that experienced in pre-pandemic 2019. Other regions are posting a similar recovery graph, albeit behind by several months. Profits are back once more, and talk has returned of share buybacks and increasing dividends.

“It’s a compelling and exciting story about the resilience of travel and the resilience of Marriott’s business model,” said Marriott CEO Tony Capuano. “By the last month of the quarter, RevPAR in all regions outside of AsiaPacific had more than fully recovered to prepandemic levels, leading to June global RevPAR 1% above 2019.”

Worldwide occupancy for June rose to 71%, five points below pre-pandemic levels, with global ADR 8% above the same month in 2019.

Hilton reported Q2 systemwide RevPAR at 98% of 2019 levels, with the average dragged down by a weaker Asia Pacific region. EBITDA was 10% higher, while margins were also better than three years prior.

The return of business in Europe has been the big surprise. “Europe has experienced the swiftest RevPAR recovery of all of our regions this year,” up 57% from January to June, said Marriott CFO Leeny Oberg. “I would say Europe was the big surprise for me,” echoed Hilton CEO Chris Nassetta. “Europe is on fire - the big cities are raging this summer, and they are raging in Q3, and Europe is now trending above 2019. I think Europe will be ahead for the full year in terms of RevPAR.”

Both reported the return at scale of corporate business. “We see continued strength in leisure, we expect to see that continue into the fall and higher rates than you would have typically seen pre-Covid,” said Nassetta. “Business transient continues to recover, led by recovery in the big corporates, which are back to 80% of where they were. And the SME side of the business has been quite robust.

“Based on the trends we have been seeing, our expectation is transient business is going to be on a revenue basis equal to 2019 levels. On the group side, while we don’t think we will get all the way back to where we were in 2019, we are going to get close.”

At Marriott, Capuano added: “SMEs represent about 60-65% of our business transient demand, which is a bit higher than what we experienced pre-pandemic. The bigger corporate clients continue to steadily improve. And over time, we expect to get maybe not all the way back, but closer to where we were, in terms of the mix of SMEs versus large corporate clients.”

Hilton grew loyalty membership 17% in the quarter, to 139 million, and members now account for 62% of occupancy, a percentage on a par with 2019. Marriott now counts 169 million Bonvoy members, with distribution returning to previous norms. “We have seen steady reduction in the percentage of total room nights that came out of the OTAs,” said Capuano. “During the first two years of the pandemic, as you might expect, we saw OTA volume rise, but direct bookings rose more rapidly. And I think it’s reasonable to expect in the coming quarters that we would start to get back to the trend line we saw pre-pandemic of the total volume of OTA contribution moderating.”

And quizzed on Airbnb, Nassetta insisted he sees “zero discernible impact”, adding: “I think what they do is they serve a certain customer need and we serve another customer need. I have said it for a long time, there is plenty of room for us to co-exist given what we are delivering is very different. And it’s generally for different types of stay occasions.”

Financially, it really feels like business as usual, said Oberg. “Our capital allocation strategy remains the same. We will make investments that enhance our growth and increase shareholder value, while returning any excess capital to shareholders through a combination of a modest cash dividend and share repurchases.

“It really is back to where we were in terms of the way the model fundamentally works. We are at the low-end of the 3x to 3.5x adjusted debt to EBITDAR at the end of Q2 and we have given a model that keeps us squarely and comfortably in that range. And we obviously want to keep our flexibility both in terms of investment opportunities as well as taking advantage of excess available cash. So, you will continue to see us move forward with the exact same approach that we have taken for some time.”

HA PERSPECTIVE

By Chris Bown: Aaand relax - nothing to see here, life’s returning to normal, as far as the big group CEOs can see. By early next year, the return of more international travel volume, the hoped-for reopening of China, and the full return of corporate travel and events should offset any local weakness from economic hiccups, putting these big beasts firmly back on track.

Slimmed down after the pandemic, Marriott’s Oberg revealed that its US hotels are delivering a 3% higher profit margin already, compared with 2019, as stronger rates are more than offsetting labour and other inflationary costs.

And so to where next, for growth. Both companies talked excitedly about conversions, which generally rise in number after an economic upheaval, and expect 25-30% of new signings to come via that route. Net growth figures this year will also be muddied by losses due to withdrawing from Russia. And growth in China, the pre-pandemic hot topic, is currently being left where it is, until the country’s authorities get past their Covid-19 policies.

HA PERSPECTIVE

By Andrew Sangster: We have been saying for more than a year that this will be a rate-led recovery. At Marriott, global ADR was 8% higher in June 2022 compared to June 2019. Occupancy, however, was five percentage points lower. Optimists will point to the five percentage points of recovery still to come, anticipating further bumper quarters. Pessimists will point to the deteriorating economic outlook and expect the lagging indicators of the hotel RevPAR numbers to reflect this economic reality eventually.

The results from both Marriott and Hilton were impressive, with perhaps the only slight negative being the moderated net unit growth targets. Marriott shaved a little off its numbers to leave guidance at between 3% and 3.5% NUG, down from 3.5% to 4%. Taking out 6,500 rooms in Russia represented a hit of almost 0.5%.

Hilton, on the other hand, continues its rapid growth performance and is on track to deliver 5% NUG. It has not, however, fully quit Russia and this too will eventually weigh on its NUG when it gets round to doing the right thing.

Although Hyatt has latterly been winning the NUG crown, Hilton has been the long-term fastest growing, claiming 118% system growth since 2007, ahead of Marriott’s 87%, Hyatt’s 85%, Accor’s 60%, IHG’s 57% and Wyndham’s 50%. Choice is the laggard of the big Western players, achieving 30% growth since 2007 on Hilton’s numbers (in a presentation given this May).

But back to the issue of what’s ahead. Hilton CEO Chris Nassetta summed it up with the unintentionally arresting comment that “there’s certainly a lot of uncertainty in the world”. More insightfully, Nassetta later on the conference call pointed to the vast infrastructure spending (about USD1 trillion) committed to in the US as a harbinger of good things to come. Hotel demand is strongly correlated to nonresidential fixed investment, he said.

While the return of international travel will help Hilton, Nassetta said he does “not expect it to move the needle”. More important is the ongoing strength in leisure and group; while coming back strongly, the latter will still not have fully recovered to 2019 levels by the end of this year. Nassetta added that flight disruptions had a limited impact; although fly-to business was usually 60%, it was two-thirds driveto in the second quarter. How many people have swapped planes for cars or decided not to travel due to the restricted air capacity is not clear. But it would be surprising if there was no performance uplift as air capacity regains full strength.

Hilton and Marriott are the two bulls in accommodation. As we reported, the OTAs have seen growth decelerating in July (although they expect it to pick up later in Q3). The big worry is the economic outlook. Although Nassetta points out that there are other, better indicators of future demand, the economy still matters.

And this brings us to the ongoing cost-of-living debate. The first thing to say is that the data is far from pointing to the future disaster that some sections of the media would have you believe. Let’s discuss UK numbers, as these are closest to hand for me and much of Hotel Analyst’s readership. The most recent earnings report from the Office for National Statistics showed that total pay went negative for the first time in more than a year for the three months March to May. It was down 0.9%. A decline in total pay is a bad thing but remember; this is inflation adjusted – it allows for the impact of surging energy and food prices. Nominal total pay was up 6.2%. And within the last year (April to June 2021), total real pay (inflation adjusted) was up 7.1%.

We do have a cost of living decline, but on average most people have a decent cushion. And yes, this cushion will be needed over the next six to nine months, as things will get worse before they get better. As Jim Callaghan, the Labour Prime Minister in 1979, did not say: “Crisis? What crisis?” The data so far is not gloomy. If we look at the two-year period January 2020 to January 2022, it is clear that wages have been going up faster than prices.

ONS figures show total pay in January 2020 averaging, on a weekly basis, GBP545. By January 2022 this had increased to GBP600, a rise of 10.1%. CPIH, consumer price inflation including housing costs, the usually preferred measure, indexed at 100 for January 2015, shows 108.3 in January 2020, rising to 114.6 by January 2022, a rise of 5.8%.

So, for the two-year period, wages have gone up almost twice as much as inflation. The recent surge in inflation alters things dramatically, however. Comparing January 2020 with May 2022, shows CPIH up 10.5% but wage growth was 10.3%.

Wages are now, in real terms, going backwards, but hardly by as dramatic amount as is being claimed. The hyperbolic headlines reflect short-term shifts, not the longer-term two steps forward and one step back reality.

The question is where we go from now, and nobody has a perfect crystal ball. Current assumptions about a cost-of-living crisis do not factor in whether workers can push up their pay; or whether energy prices collapse rather than continue to balloon.

Double-digit pay rises will undoubtedly ease the problem, and people may, on average, be better off in a year. A super tight labour market increases the odds for this outcome, although it remains an outlier.

Another outlier is the forecasts by the Bank of England. The BoE thinks things will be bleak and has revised its projections much more negatively. Its August Monetary Policy Report expects inflation to hit just over 13% in Q4 “and to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead”.

The UK is forecast to enter recession from Q4, “and real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative”. UK households will, by the autumn, have energy bills that are three times higher than they were in the autumn of 2021.

The MPC’s outlook paints a more pessimistic view than even the gloomiest external forecaster: growth is worse, unemployment higher and inflation higher. Last month, the respected EY ITEM Club, which has an econometric model based on the same one used by the UK Treasury, forecasted that the UK should narrowly avoid a recession.

Given the MPC’s lamentable track record in forecasting, it is tempting to dismiss the current outlook. Markets largely seemed to do so (or they had already factored in something like it anyway). And there is plenty of evidence for continued optimism. Barclaycard, which represents about half of all UK consumer spending on debit and credit cards, saw a 7.7% hike in spending in July compared to July 2021 and 1.6% up on the month before. These are hardly signals of recession.

And even if there is a recession, analysts at