By Deanna Ting, Skift – Feb 13, 2019 1:30 pm
Hilton reported strong fourth quarter and full-year earnings for 2018 on Wednesday morning — so much so that shares rose 6 percent to their highest level since last October.
Most tellingly, systemwide revenue per available room (RevPAR) grew 3 percent in 2018, with group business RevPAR up 4 percent and corporate transient RevPAR up 2.6 percent. Leisure transient RevPAR was also up 2.6 percent, but was lower than expected.
Hilton’s adjusted earnings per share for the fourth quarter of 79 cents also beat the 69 cents consensus.
In different investors notes, Jeffries equity analyst David Katz described Hilton’s earnings results as “healthy” and R.W. Baird senior research analyst Michael Bellisario wrote Hilton’s fourth quarter results “easily topped expectations and guidance.”
Nevertheless, the lines of questioning from analysts during Wednesday’s earnings call reflected an ever-present concern shared by analysts and shareholders alike about whether the record-breaking 10-year cycle of profits in hospitality is finally coming to an end.
Despite Hilton CEO Chris Nassetta’s confidence in Hilton’s business model — the strength of its net unit growth, expansion in China, a growing loyalty program membership, and strong RevPAR stats in 2018 — analysts peppered him with questions about pipeline decreases, concerns about China given the trade wars, the rise in conversions, and the modest leisure travel decline.
In other words, are we beginning to see some cracks in Hilton’s strategy or the overall health of the hotel business today?
Addressing concerns in the slight decline in pipeline growth at the end of 2018, Nassetta emphasized that the pipeline for the full year was up 6 percent, and that pipeline growth “may vary quarter to quarter.” He said that by the end of 2019, he expects “sequential improvement year-over-year through ’19.”
As for the modest decline in leisure travel that Hilton saw in the fourth quarter, Nassetta attributed it to a variety of factors, including shifts in holidays, weather concerns, and the U.S. federal government shutdown.
“Our expectation for the year is that leisure is going to be fine and that leisure is going to grow, but we think it will probably grow less than last year,” he noted.
And if it’s any indication of an overall industry prognosis for the year ahead, Hilton also lowered its 2019 RevPAR expectations to a range of 1 to 3 percent, versus the previous range of 2 to 4 percent.
Like a number of other travel brands seeking expansion in China, Hilton too is seeing some impact from the softening economic growth in China, as well as looming concerns over a potential trade war with the U.S.
Nassetta noted how the biggest declines in leisure transient travel came from China primarily because of “trade war issues” and the “slower economies.”
Thirty percent of Hilton’s pipeline is located in the Asia-Pacific region, and the company expects to open 20,000 rooms in the region by this year, achieving a net unit growth of 20 percent.
Nassetta said he believes the pipeline of new hotel projects for Hilton in China “is in good shape” and that he’s also seen interest shift from more luxury brands to “midmarket” brands such as Hampton by Hilton and Hilton Garden Inn thanks to the growth of the Chinese middle class.
“If the China economy slows down, continues to slow and stays growing at a slower pace, I do think at some point it will have to have a ripple effect,” Nassetta said. “But I want to be clear that we really haven’t seen it.”
CHANGING THE CONVERSATION ABOUT LOYALTY TO ENGAGEMENT
Nassetta said that when it comes to building loyalty, he’s more concerned about engagement levels than with the total number of members that Hilton has, which reached 85 million at the end of 2018.
“What’s most important is engagement,” Nassetta said. “How many of those members are actually actively engaged and staying with us?” He said that five or six years ago, engagement levels were likely only 15 to 20 percent, and today, that level is at 50 percent.
He also noted Hilton’s latest marketing campaign, “Expect Better. Expect Hilton,”featuring actress Anna Kendrick as part of an effort to drive more “direct relationships and different business” — and those efforts, he said, are paying off.
“Our Web direct channels remain the fastest growing channels that we have and are growing at a much faster rate than OTA channels,” he said. “If you look at the numbers for the year, our Web Direct channels of all types grew three times the rate of other channels.”
Previously, Nassetta spoke with Skift about his strategy for engagement with consumers and how it differs from his peers’ efforts to entirely “own a customer.” Emphasizing the benefits that Hilton can provide to travelers who join its loyalty program is one way Nassetta hopes to engender more engagement.
A CLOSER LOOK AT DEVELOPMENT
Conversions, which refer to instances when an existing hotel property converts to another brand, are an historically good indicator of when the industry is in trouble. For example, during the recession of 2008, Nassetta said he saw the number of Hilton’s conversions go up to the low 40 percent range.
In 2018, Hilton saw a slight bump in its number of conversions — going from 20 percent to 25 percent — and Nassetta noted that the increase was likely reflective of “little more challenging conditions” in terms of financing.
And to accommodate demand for more conversions, Hilton has been focused on adding new brands that allow for them to join the Hilton system, such as Curio Collection by Hilton, Tapestry Collection by Hilton, and Doubletree by Hilton.
EARNINGS BY THE NUMBERS
Hilton’s net income for the fourth quarter was $225 million, and for the full year it was $769 million. Adjusted earnings before interest, taxes, depreciation, and amortization was $544 million for the fourth quarter and $2,101 million for the full year, exceeding the high end of Hilton’s expectations.
The Bottom Line:
Hilton Hotels is one of the biggest chains in the industry. In light of its success, investigator’s looked at its earnings and development to understand the sector’s trends. Overall, the company reports very stable income, with only slight indicators of negative change. Despite the slight decline in the Chinese market, this past years earnings exceeded the projected expectations– good news for the travel industry!
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