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While Europe’s largest hotel operator is struggling amid the global decline in travel, Accor also has $2.7 billion cash on hand. But it won’t use that money to bail out operators struggling through the coronavirus downturn.
Operations at 62 percent of Accor’s global hotel portfolio are suspended due to coronavirus. The French hotel company saw a 17 percent decline in revenue and 25 percent drop in revenue per room, or RevPAR, in the first quarter. March was the weakest month of the quarter, but April and May are expected to be the worst months of the year due to uncertainty in when the global economy will reopen, according to Accor’s first quarter earnings report out on Wednesday.
Accor CEO Sebastian Bazin acknowledged the company has a grim outlook for the year, but the company does not plan to divert from its asset-light shift in recent years to assist struggling operators of any Accor-flagged property.
“While we’re not there yet, we have to foresee some tiny level of owners may not have the means or will to reopen,” Bazin said Wednesday on Accor’s earnings call. “Under absolutely no circumstances would we inject equity in those different owners, permitting them to reopen. We are asset-light and have no plan to go back to asset-heavy.”
The hotel company isn’t looking to get back into widespread property ownership, but Bazin said it has worked with struggling owners in areas like franchise fees in the past. Accor’s financial strength — the company can go “much further than nine months” with its current cash levels, Bazin said — is due in part to shedding real estate and completing an asset-light transformation at the end of 2019.
“We have far sufficient time to cope with what could be nine to 12 months. We’ll have better clarity after summer where we are on the shape and strength of a recovery,” Bazin said. “I can tell you we are not depending on any other sources than from cash we have on the balance sheet.”
A Very Dark Horizon
Accor still has to account for a weak quarter and uncertain year ahead for global travel. First quarter revenue was down 17 percent to $831 million, and Accor expects a $184 million shortfall in earnings before interest, taxes, depreciation, and amortization — or EBITDA.
“Since we don’t know the shape, the time, the nature of the recovery, everything we plan for is the worst. Every assumption we have made in Accor over the next 12 months is on a very gloomy, pessimistic scenario when it comes to EBITDA and working capital,” Bazin said. “Hopefully it’s going to be better than expected, but no management team should be preparing for blue sky when you simply don’t know how to spell it. I know it’s coming, but we’re preparing for the worst.”
Both Bazin and Accor Deputy CEO and Chief Financial Officer Jean-Jacques Morin said they expected Accor’s financial outlook to improve once the results of cost-savings measures enacted at the end of March materialized in coming months. The EBITDA shortfall estimate does not incorporate the cost savings moves. The company has furloughed staff, shuttered properties, suspended dividends and stock buybacks, reduced executive compensation, and deferred projects.
Morin estimated the company burned through as much as $217 million in cash over the first quarter, with $162 million of the loss coming in March alone.
“One thing we’ve learned is the next week is not the week you had planned for the week before,” Morin said. “It’s a very dynamic way with which we work with operations.”
Growth Still Possible
Accor still added 8,000 hotel rooms to its global portfolio in the first quarter and has a 208,000-room pipeline. Properties in China have begun to reopen, and occupancy at Accor’s upscale Chinese properties has improved into the 20 percent range. The company still expects 3 percent global net supply growth for all of 2020, Bazin said.
A leading source of growth will likely stem from “instant noodles,” a term Bazin said applies to growth from smaller or independent hotels looking to become flag-affiliated. While there is debate on if the downturn in travel will lead to a hotel brand shakeout, analysts and Bazin see it as an opportunity for growth when smaller operators look to tap into a global brand’s increased exposure to whatever level of travel occurs in the recovery.
“There are independent hotels talking to Accor on having Accor put brands on quickly to weather the storm and have access to third-party financing they wouldn’t normally have if Accor wasn’t there,” Bazin said.