Pandemics and economic downturns are not fun. Also, water is wet. But even though the last few years have been tough on everyone, there have been some bright spots here and there if you look for them.
Traveling for vacation or work was greatly curtailed during the pandemic, as many people didn’t want to take the risk and Zoom (ZTNO) made face-to-face meetings less necessary. Even when the pandemic eased and vaccines became more available, hotel use still lagged behind for a variety of reasons. Some people still didn’t want to risk traveling, some people’s budgets were too crimped by inflation, and many people just prefer services like Airbnb (ABNB) now.
A 2022 survey from CPPLuxury found that international travel to America had greatly abated and the average stay had shortened to three days.
In response, many hotel chains reacted by lowering their prices or offering discounts, reasoning that it's better to get some business going rather than having lots of empty rooms.
But in a recent fourth quarter earnings report, Hilton (HLT) CEO Christopher Nassetta suggested those bargains might be a thing of the past, as inflation looks likely to cool off and the recent job numbers suggested the U.S. economy might be able to avoid a recession.
“We’ve assumed not a crash landing but sort of a soft-to-bumpy landing in the U.S. with a moderate recessionary environment in the second half of the year,” Nassetta said, adding that this is leading to a greater recovery for the hotel sector. “There is more recovery and more pent-up demand, particularly [with] business travel and the group segments.”
Hilton Doesn’t Plan To Offer Bargains Again Soon
Hilton reported $1.3 billion in profit last year, and $333 million profit in the fourth quarter 2022, which was the second quarter in a row, the company notes, where overall performance exceeded pre-pandemic levels.
The hotel chain ended 2019 with an occupancy rate of a little more than 76% at its U.S. hotels, reported The Points Guy, which also notes that “last year, Hilton’s U.S. hotels were just under 70% full. But rates averaged nearly $158 a night compared to $148.70 back in 2019, according to company filings with the U.S. Securities and Exchange Commission.”
While Hilton could theoretically lower its price to get back to pre-pandemic occupancy levels, Nassetta does not think that will be necessary, as much as people may love the bargain, as he expected demand to continue to rebound.
“We can get back [to 2019 occupancy levels] tomorrow if we wanted,” said Nassetta. “We could drop rates and occupy ourselves up, but we don’t want to do that. We are trying to manage, in this cycle particularly given the environment [of] inflation [and] everything else, really effectively to drive the best bottom line results for [our hotel] owners.”
Nassetta feels ultimately that hotels like Hilton have the upper hand, as the still present inflation and general economic insecurity will likely preclude a great deal more hotels opening up in the near future.
“We do continue to believe we will have good pricing power, at least through this year, simply because there's no capacity addition really coming into the market,” Nassetta said. “We do have these, both cyclical and secular, tailwinds that are giving us increases in demand that we think are going to allow us to continue to have pricing power.”
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Hilton Has An “Unsexy” New Offering
Nassetta doesn’t think prices will go down, nor does he think there’s going to be a major influx of new hotels anytime soon.
But that didn’t stop him from taking time on the call to talk about Spark, a budget hotel the company announced in January. Hilton is calling it a “premium economy offering,” and is currently converting existing hotels into the new brand, as there are deals in place for 100 Sparks hotels.
Rates at a Spark hotel are set to run between $85 and $105 a night, according to The Points Guy, and “likely be roadside hotels, or those off interstate highways found amid a cluster of restaurants and gas stations.”
This would roughly be Hilton’s equivalent to budget friendly stays like Motel 6, serviceable but not fancy, and not a sector big luxury companies like Hilton tend to focus on, as Nassetta well knows.
“I mean, it's not sexy, OK? It's not as sexy as lifestyle and luxury,” he said. “But in terms of an opportunity to be a value contributor in the billions of dollars for this company and its shareholders, I'm as excited about this as anything else.”
