Hilton expects ‘very bad’ Q2, recovery starting in Q3
Hilton President and CEO Chris Nassetta said he believes the company and overall industry will see the recovery start as soon as the third quarter, though Q2 is likely to be as challenging as or worse than Q1.
MCLEAN, Virginia—In response to the coronavirus pandemic, Hilton focused on protecting its employees and core business while preparing for the eventual recovery, which Hilton President and CEO Chris Nassetta said could begin as early as the third quarter.
The second quarter is going to be “very bad,” but as the U.S. and other countries reopen and begin moving again, the industry will start to see a recovery heading into the third and fourth quarters, Nassetta said during a call with analysts to discuss the company’s first-quarter earnings.
“I feel spectacularly good about the long term for the industry. I feel spectacularly good about our model and the long-term opportunities for Hilton,” he said. “We just sort of have to go through a period of time to rebuild and get back on our feet as an industry and a company to get back to where we were.”
Hilton’s hotels in the Asia/Pacific region offered a relatively early glimpse of the impact the pandemic would worldwide, and Hilton acted quickly to ensure it had sufficient liquidity for operations, Nassetta said.
Hilton currently has suspended operations at about 950 of its hotels, representing 16% of its global operations, Nassetta said. That includes 10% of its hotels in the Americas; 60% of its properties in Europe, the Middle East and Africa; and 15% of its hotels in the APAC region, he said.
At the property level, Hilton helped owners through suspending hotel operations, temporarily suspending brand and operating standards, deferring capital expenditure requirements, eliminating quality assurance audits and tapping into furniture, fixtures and equipment reserves for operating expenses, he said.
“Going forward, we are working closely with our ownership community to define the hotel operating model of the future, with the goal of developing operating standards that will keep our customers safe and drive enhanced efficiency and profitability while continuing to deliver products and service that customers will pay a premium for,” he said.
At the corporate level, Hilton reduced executive salaries, furloughed almost two-thirds of its corporate workforce, eliminated other non-essential expenses, such as capital expenditures, and suspended share buybacks and dividends, Nassetta said.
As a precautionary measure to preserve financial flexibility, the company drew down on the remaining amount under its credit facility, presold Hilton Honors points to American Express and executed a bond offering, resulting in a pro forma cash position of $3.8 billion at the end of the quarter, he said.
Hilton is seeing some glimmers of travel resuming as economies reopen in China, Nassetta said. The company closed 150 hotels in the country due to the pandemic, but has since reopened nearly all of them, with occupancies reaching more than 50% during the May Day holiday, he said. Most of its previously halted construction projects in China have restarted as well, he said.
In both Europe and the U.S., the number of temporary hotel suspensions has plateaued, and the company is now receiving reopening requests, he said. Sales teams are working with customers and businesses for the back half of the year and into 2021 and beyond, he said.
“In the last week alone, we booked tens of billions of dollars in group business in the Americas,” he said. “In addition, we are starting to see double-digit increases in digital traffic and booking activity across all segments.”
Global occupancy levels have increased from a low point of 13% to 23%, he said. Assuming the industry sees mobility and there isn’t a significant recurrence, demand should slowly rebuild in the third quarter, he said.
“These green shoots allow us to keep our eye on what the future of hospitality may look like as we carefully consider what travelers’ needs will be in a post-COVID-19 world,” he said.
Everything that has been delayed in 2020 will push into 2021, Nassetta said.
On a run-rate basis, once the industry gets back to normal, the company is comfortable with mid-single-digit growth, he said. The company is working on some conversions now, and while transaction activity is relatively limited, the crisis will probably create more opportunities than it hurts, he said.
Progress will depend on what happens as the U.S. reopens, and development of vaccines and therapeutics, he said.
As people and businesses get more comfortable, companies will start to think about hiring and investing, he said. A full recovery might take two to three years, he said.
Revenue per available room dropped 23% during the quarter, but performance through February was largely in line with prior expectations excluding the Asia-Pacific region, Nassetta said. RevPAR dropped 57% in March as the pandemic spread across Europe and the U.S., he said.
“Overall, we do not think our first-quarter results provide clear insight into the current environment, he said. “Given the timing of the pandemic, we expect a much more dramatic impact on our second-quarter results.”
With travel at a virtual standstill, the company expects systemwide RevPAR declined roughly 90% in April, he said.
During the first quarter, Hilton opened 67 new hotels representing 8,800 rooms, achieving a net unit growth of more than 6,100 rooms, according to the earnings report. The company signed the largest multi-brand deal in its history with Resorts World Las Vegas for a 3,500-room resort that unites Hilton Hotels & Resorts, LXR Hotels and Resorts, and Conrad Hotels and Resorts.
By the end of the quarter, the company’s development pipeline amounted to nearly 2,670 hotels representing more than 405,000 rooms in 120 countries and territories, 35 of which are where Hilton does not have a presence. Of the rooms in the pipeline, 223,000 rooms are outside of the U.S., and 213,000 are under construction.
As of press time, Hilton’s stock was trading at $71.88, a decrease of 36.4% year to date. The Baird/STR Hotel Stock Index was down 44.7% for the same time period.