IHG’s Strong Recovery Clouded by Finance Chief’s Departure

The resignation of InterContinental Hotels Group (IHG) finance chief Paul Edgecliffe-Johnson marred an otherwise broadly positive third-quarter earnings report on Friday from the UK-based company.

Edgecliffe-Johnson, chief financial officer and head of strategy, said he was departing in six months from the company that runs Holiday Inn, Hotel Indigo, and other brands to take a comparable role at Flutter Entertainment, a sports betting and gaming operator.

Many investors respected him, so his departure may somewhat shake confidence, Citi analysts and Jefferies analysts wrote in research notes.

IHG’s hotel revenue surged in the third quarter as it enjoyed a post-pandemic boom in travel. Its revenue per available room — a key industry metric — was up 2.7 percent compared with the pre-pandemic third quarter of 2019, at $87.37. The numbers count the 5,354 hotels the company owned in both periods, and it was the first quarter for IHG to see its revenue per available room exceed 2019 levels.

The company’s average daily rate for the third quarter increased 13 percent year-over-year and 6.7 percent compared with the pre-pandemic quarter.

Compared with 2019, occupancy remained down 4 percent in the Americas and down about 13 percent in Europe. Vacationers drove the surge in revenue, with leisure-related growth in room revenue up 12 percent system-wide versus the pre-pandemic quarter.

The results were broadly encouraging. But general economic uncertainty because of rising inflation worldwide and an energy crisis in Europe threatens a fall-off in demand in the upcoming quarter. IHG typically depends more on business travel than vacationers for growth in the final quarter of the year.

The company generally only has visibility of a few weeks out on booking trends but so far pricing power and a demand recovery across business travel and group bookings is continuing, executives said.

Watching the Pipeline

At the year’s start, IHG set an annualized target of 4 percent for system size growth. But in the third quarter, its adjusted net system growth was 2.6 percent. To achieve its target, it would have to speed up its openings through the rest of the year significantly. That would be difficult but Edgecliffe-Johnson said he was “very hopeful.”

The company signed 89 hotels with 13,200 rooms in the quarter. That pace was similar to last year’s, rather than faster as hoped. The company commented that across the industry companies have been seeing lower levels of new hotel openings.

“We do, though, still expect openings to step up in the fourth quarter, and we continue to explore a number of organic opportunities to help deliver on our ambitions for net system size growth,” Edgecliffe-Johnson said. “This is organic. We’re not going out and buying something…..”

About 40 percent of IHG’s pipeline is under construction.

As for 2023 growth, the company cautioned it can’t get ahead of market trends, but could only at best lead them.

“We’ve always said we want to have industry-leading levels of net system size growth,” Edgecliffe-Johnson said. “So if what ‘industry-leading’ looks like in 2023 is lower than 5 percent, then that’s what we will be targeting rather than sort of 5 percent, specifically and numerically.”

Inflation’s Impact

In the U.S., getting access to debt capital for deals has become harder for owners as central bankers have hiked interest rates in response to rising inflation and borrowing costs have quickly increased.

IHG argued that several of its brands have relatively strong track records for producing high institutional rates of return for investors. It claimed owners would have an easier time getting deals approved if they signed to have IHG brands. Owners must pay IHG a significant signing fee and don’t pay that lightly unless they know they will get financing approved. All of these steps can be headwinds on pipeline growth.

Inflation’s biggest impact on IHG will probably be labor, the company said, because about 70 percent of its costs are labor-related. The company didn’t give specific guidance for 2023, but Edgecliffe-Johnson said a number of companies are seeing wage inflation of about 4 to 5 percent a year.

Security Breach

Last month, hackers broke into some IHG systems, forcing the company to close some booking channels and leaving hotels briefly only able to take bookings by phone or walk-up. The company has since stated it found that the hackers didn’t access systems storing guest data.

Some hoteliers have complained they lost business, but IHG said the parent company didn’t suffer a “meaningful” loss.

“As I look at the data, it’s actually very difficult to tell because we don’t have all the competitors’ numbers to compare against,” Edgecliffe-Johnson said. “But I can’t see anything that tells me there’s been any meaningful revenue shift or any meaningful loss of revenue.”

The company said it was ahead of its peers in adopting new technologies.

“We’re in the cloud ahead of our competitors,” Edgecliffe-Johnson said. “There’s an awful lot of [enterprise tech] investment that’s gone in over the years, which, as you know, some of our largest competitors are now having to face the need for them to make that investment, but we’re ahead on that.”

China Watch

IHG is relatively more exposed to the China market than most of its peer companies, which could position it well if China returns to its pattern of strong growth. About 9 percent of the company is exposed to China, wrote J.P. Morgan analysts in a report.

Yet news this month that the country remains committed to strict coronavirus restrictions without using next-generation vaccines soured short-term prospects for the Chinese travel market.

IHG hotels saw occupancy at its properties in Greater China down 17 percent in the third quarter compared with 2019.

“Conditions for opening new hotels have continued to be challenging for the industry, particularly in China,” Edgecliffe-Johnson said. “For example, there are around 20 hotels or 3,500 rooms in China that we’d originally expected to open in 2022, but which have slipped into next year.”

Worldwide IHG has 4 percent of the supply of about 20 million hotel rooms. Only Marriott, with 7.2 percent, and Hilton, with 5.3 percent, have larger shares of the pie.

The company didn’t report total revenue or net income or profit for the third quarter in the Friday update. CEO and President Keith Barr didn’t take part in the earnings conference call with investors but did discuss IHG’s prospects and strategy at Skift Global Forum last month (see video).