May 12, 2020 / 2:31 PM / 17 days ago

Breakingviews - Hotels can ride out a cleaner, more vacant future

The Hilton logo is seen at a hotel in Vienna, Austria, April 9, 2018.

LONDON (Reuters Breakingviews) - There’s room at the inn. Lots of it. U.S. hotels say they bled $1.4 billion a week during the Great Lockdown. A wind-down of travel restrictions and social distancing will ease some pain. But hoteliers globally need to prepare for a year or more of radically reduced occupancy – and losses. This will benefit well-known brands with big balance sheets like Accor and Hilton Worldwide. Pity the little guy.

New York’s Four Seasons hotel gives a glimpse into the $600 billion industry’s woes. The iconic hotel owned by Bill Gates and Saudi Arabia’s Prince Alwaleed bin Talal opened its doors to medical personnel but luxuries like minibars are gone, its restaurant replaced by a lobby fridge with box meals. Even when business customers return, some new habits will continue, such as enhanced hygiene protocols that require a 24-hour delay between guests to deep-clean rooms. Hotels will be lucky to run at half occupancy.

That will wipe out profits. Take InterContinental Hotels, owner of the Holiday Inn and Crowne Plaza brands. Like many big chains, it derives most of its revenue from royalties paid by an army of hoteliers using its brands. If these asset owners see a 50% fall in their typical occupancy, they may struggle to pay. In such a scenario, even if the $8 billion group manages to trim costs, its $386 million 2019 profit could sink to a loss. Accor would take a similar hit. If the French owner of the Savoy in London and the Novotel chain’s 4 billion euro revenue halves, the bottom line would likely slip into the red.

These depressed results should be temporary. Unlike the increased security measures introduced in airports after the Sept. 11, 2001 attacks, only some of the higher standards of hygiene may remain once a vaccine is found. InterContinental saw a slight recovery in China with occupancy levels running in the mid-20% range in April, compared to 5% in mid-February.

All of this benefits the bigger, well-capitalised chains. Hilton, for example, hatched a deal with Reckitt Benckiser, the maker of Lysol, and the Mayo Clinic to create new room-cleaning protocols. Accor has 2.5 billion euros of cash thanks to some well-timed asset sales. But as the American Hotel and Lodging Association reckons, hotels could close if occupancy lingers at 35%. That leaves the industry’s minnows particularly exposed.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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