Hilton CEO Talks HNA, Cancellations, OTAs, and Airbnb

Hilton reported its earnings for the second quarter of 2017, and during a call with investment analysts, CEO Christopher Nassetta addressed a number of recent developments related to the company, including news regarding its relationship to its newest big investor, HNA Group.

In March, HNA closed its 25-percent acquisition of Hilton shares from Blackstone for approximately $6.5 billion. Recent crackdowns on corporate debt by the Chinese government are fueling concerns that HNA may be forced to pay down its debts, and possibly threaten its many foreign investments — Hilton included.

When asked by analysts if he was concerned about HNA's financial investment in Hilton, Nassetta said, "I don't have anything to add to what you're reading about with HNA." He said Hilton is "in dialogue" with the company and is "in the process of onboarding a couple of board members as planned." He added, "What happens with them, ultimately, I don't know, but it appears, to us, as business as usual. There's not much more to say about that."

Pressed for further comment, Nassetta emphasized the long-term "good strategic potential" of Hilton's relationship with HNA Group.

Additionally, Nassetta fielded a question about Hilton's ties to another Chinese conglomerate, Anbang, which is also facing scrutiny from the Chinese government over its debts. Its chairman, Wu Xiaoui, was even detained by the Chinese police last month for reasons that were not disclosed.

Anbang owns the flagship Waldorf-Astoria hotel in New York City and it also attempted, unsuccessfully, to buy Starwood Hotels & Resorts last year. The Waldorf-Astoria hotel in New York closed earlier this year to undergo an extensive, multi-year renovation.

"As far as we know, their intentions are to continue a rapid pace to enter into the major redevelopment of the Waldorf-Astoria," Nassetta said, noting Hilton has been in engaging in "lots of discussions" with the company. Nassetta also said he did not know where Anbang was generating the financing for the redevelopment of the Waldorf-Astoria: "Where they are getting that money, I do not know and will probably never know."

He added that when the hotel eventually does reopen, in approximately three years, that the management fees Hilton will collect from the property will be even higher than they were in 2016 when they totaled $7 million. He also hinted at the fact that Hilton is close to signing a hotel deal for yet another property in Midtown Manhattan which would open under its Conrad luxury brand.

Hilton's New Cancellation Policy

Nassetta addressed the upcoming implementation of Hilton's new cancellation policy in the U.S. and Canada which would require 48 hours' notice to cancel a reservation without penalty, with some hotels in certain markets requiring 72 hours' notice.

He said the reasons for the new policy are "obvious" and "not just borne of technology, but the fact that customers, many of them, ultimately have been trained to do multiple bookings and do things that have created a scene where cancellations, in some markets, have skyrocketed."

The increase in cancelled reservations, Nassetta noted, has made it increasingly difficult for Hilton to manage its inventory and the cost of that ultimately not only impacts hotel owners but hotel guests as well.

News of Hilton's new cancellation policy initially sparked major concerns from corporate travel buyers. Nassetta, however, said Hilton has had discussions with its corporate customers and that their "reception has been perfectly fine." He also noted that "a large majority of our customers do know, within those time frames, that they need to cancel or not, but they haven't done anything about it" because the incentives to cancel in a timely manner didn't exist before.

Expect Hilton to debut new rate structures that enable more flexible cancellation policies. "We have been testing some other things," Nassetta noted. "Hopefully sometime in the second half of the year we will layer incremental opportunities on top of that that will start to bifurcate … creating fully flexible and semi-flexible pricing structures that would require a cancellation within seven days."

Airbnb: A Hotel Ally?

Nassetta also shared an interesting perspective on Airbnb and the rise of home sharing and vacation rentals. He believes that the more competition there is from the likes of platforms such as HomeAway and Airbnb, that it could likely translate to lower distribution costs for online travel agencies (OTAs) like Booking.com or Expedia.

"Competition is a good thing," Nassetta said. He reiterated his believe that Airbnb and its peers "are not directly competitive" with hotels and that they cater to "different travel or trip occasions." He noted that as Airbnb transforms itself into becoming more like an OTA, "the more competition there is in any space, the better off we are. More competition, in theory, would have the effect of driving prices down and driving distribution costs down. As the competitive environment heats up, I think the net result is good."

Corporate Travel Health Depends on Tax Reform

At the beginning of this year, Nassetta had high hopes for corporate travel in 2017. But a lot has happened since, at least politically, and he offered a somewhat more tempered outlook on the rest of the year.

He described Hilton's corporate clients as "cautiously optimistic" and that they "see the economy as continuing to show decent resiliency" and that most believe their budgets next year will be up. He added that the "single biggest thing" that could boost corporate travel budgets in the U.S. would be tax reform.

Hilton's Relationship with AmEx

Nassetta also mentioned Hilton's new exclusive credit card partnership with American Express, which was announced last month.

R.W. Baird Senior Analyst Michael J. Bellisario said that the financial impact of Hilton's agreement with American Express could range anywhere from $50 to $60 million in 2018, and that it should benefit Hilton's hotel owners with lower transaction and processing fees, which are estimated to be around $179 million.

Second Quarter Earnings Beat Wall Street Expectations

Hilton had a solid second quarter, reporting earnings of $166 million, and a net income of 51 cents per share, beating analysts' expectations of 50 cents per share. Revenues for the quarter totaled $2.35 billion.

In a preliminary review of Hilton's second quarter earnings, Barclays analyst Felicia R. Hendrix noted that Hilton's results from the second quarter "reflect the underlying attractiveness of the company's unit growth-driven and capital-light management and franchise-fee model." The company completed spinoffs of its real estate and timeshare business units earlier this year.

Hendrix also noted that the company's international revenue per available room (RevPAR) "was strong" although U.S. RevPAR was "soft."