Leisure travel continues to be the best performer for Hilton, but a rebound in business travel – especially by small businesses – has pushed up the company’s profits in recent months.
Hilton on Wednesday reported a profit of $ 240 million for the third quarter, the company’s second consecutive quarter of profitability during the pandemic. Leisure travel dominated the recovery, with bookings in line with 2019 levels and fares for this industry even exceeding pre-pandemic levels.
But business travel is picking up, giving the company a much needed boost after several devastating quarters during the health crisis.
“Transitional businesses will continue to grow,” Hilton CEO Christopher Nassetta said on a call to investors. âYou will continue to see great strength in small and medium-sized businesses, which have not completely returned to pre-Covid levels but are quite close. “
Not all business travel comes back to life. Demand from large corporate clients is about 40% lower than 2019 levels, but Nassetta doesn’t appear to be losing much sleep on the suppressed line of business.
Hilton increasingly tried to gain more business from small and medium-sized businesses before the pandemic, which resulted in a faster recovery during the pandemic. Many of these companies don’t have the luxury of being able to work entirely remotely and have had to stay on the road and work in person. Nassetta claimed that 70 percent of American businesses are now back on the road.
Small business demand is only 5-10% from 2019 levels, he added. Because the company has been so focused on this line of business rather than major corporate contracts, overall transient business demand for Hilton is at 90% of pre-pandemic levels.
About 80% of Hilton’s pre-pandemic business transitional demand came from these types of small businesses, while large corporations accounted for the remaining 20%. Nassetta felt it would likely end up being a 90-10 split in the future.
âWe have continued our pre-Covid work to focus more on this segment of demand,â he added. “This demand is higher rated and more resilient, which has helped us recover more quickly in transitional business and is expected to result in price compression in the future as larger business trips increase.”
A story of growth
The other notable gains for the company come from the growth of its portfolio. Hilton signed new offers for 23,600 rooms in the third quarter and added 14,700 rooms. The company’s net room growth compared to the same period last year was 6.6% – significantly higher than negligible growth competitor IHG Hotels & Resorts reported last week.
Analysts from companies like Truist Securities noted that Hilton’s strength this quarter came from its “class” line of affordable, limited-service hotels like Homewood Suites, Home2 Suites, Hampton and Tru. These hotels don’t have the amenities of a full-service hotel like spas or restaurants, but they also don’t require the same level of staff, often resulting in higher margins.
Homewood and Home2 Suites saw their average occupancy rate exceed 80% in the third quarter, while Hampton and Tru exceeded 70%.
Hilton’s occupancy rate in Asia-Pacific averaged just under 50% in the third quarter, while the US was nearly 68% and Europe was just over 59%.
Revenue per available room, the industry’s key performance metric, also reflected the zero tolerance approach to new cases in China. Overall Hilton room revenue was 19% from 2019 levels, with the US down 14%, China down 25% and Asia-Pacific down 41% .
Hilton executives are by no means abandoning China: Most of the company’s development pipeline is outside the United States, and the company launched a large-scale franchise initiative for Hilton Garden Inn in China in addition to its continued development effort for Hampton and Home2 Suites in the market.
âThere have been spikes in RevPAR in China as the lockdown has gone on, but the development trajectory there continues to be strong and improving,â said Kevin Jacobs, CFO of Hilton.
Not much time has been spent on the Delta variant appeal and its impact on the Hilton takeover. Nassetta largely attributed some declines in occupancy in the third quarter to normal seasonality rather than the more contagious strain of coronavirus which has set a new wave of mitigation in place around the world.
The Hilton management team has primarily seen Delta’s impact on group bookings, but remains confident that this industry will recover next year.
Hilton executives have been among the most optimistic about the travel industry’s recovery from the pandemic. Nassetta last month at the Skift Global Forum predicted that business travel demand would exceed 2019 levels three years from now, and that optimism resonated on Wednesday regarding the recovery of the entire hospitality industry.
Compared to previous cycles, the pandemic recovery is expected to be swift due to concerted industry efforts to maintain rates throughout the crisis rather than offering deep discounts to entice potential customers.
âThings are going to come back faster than previous recoveries here,â said Nassetta. âTypically, it’s a chore to rebuild occupancy rates and rates are lagging far behind. Rate is leading the charge here.
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