Europe's biggest hotel group believes it will be able to overcome inflation through strong pricing power as guests are still showing they are willing travel at any cost. So far, so plausible, at least in the short term.
The summer in Europe and the U.S. has been especially good for tourism, and in turn for Accor. The Paris-based operator of about 5,357 hotels globally regained its pre-pandemic performance on key financial measures. This enhanced pricing power could help insulate the lodging company from rising inflation, by offsetting those costs with revenue gains on higher room rates.
In the third quarter, the group reported record revenues thanks to higher rates and strong demand in many markets. Revenue per available room, a key industry metric, was up 14 percent from the comparable pre-pandemic period.
Accor, which runs chains such as 25hours, Pullman, and Novotel, generated third-quarter revenue of about $1.16 billion (€1.15 billion), up 9 percent on 2019.
While it didn’t reveal third-quarter net income, the group said it was confident it would reach the upper end of its guidance on full-year core earnings, getting closer to $645 million than $614 million — thanks to activity at its properties surpassing 2019 levels in all regions except Asia.
Most of the gains have come thanks to pricing power.
“When you look at our performance in the third quarter, Accor’s third-quarter average pricing was 23 percent above 2019 levels,” said Jean-Jacques Morin, chief financial officer.
The U.S. was the only market where occupancy had surpassed 2019 levels. Others remain beneath the prepandemic benchmarks.
So there is room for demand to continue to stay strong or grow further. The return of business customers and the potential for recovery in Asia seem to augur well for 2023, according to the group.
“If I just look at the results of October because we already are very much advanced in the month of October,” Morin said. “I have also a very good view on November because it’s tomorrow. We see the same kind of trends, i.e., a very strong pricing power in our hands.”
Enriching the Pipeline
Over the past year, Accor has been expanding its property count at a 2.4 percent year-over-year pace.
In the quarter it debuted 93 hotels, representing 15,300 rooms. As of the end of September, the group had a pipeline of 212,000 rooms across 1,218 hotels, roughly half of which will be in Asia Pacific.
Given that momentum, the company believes it will hit its target of 3.5 percent year-over-year growth in its pipeline for the full year. Before the crisis, Asia Pacific had been largest driver of net unit growth and pipeline in the company’s history. Until China reopens, it will be underperforming.
Yet over time there will be a proportional mix shift toward properties that generate more fees.
“What we call lifestyle and premium [properties] is probably today 70 percent of the pipeline,” Morin said. “It’s 40 percent in volume but it’s 70 percent in fees. If I do all my openings in China, it’s not going to necessarily do the same thing to my bottom line as if I do all my openings in a nice SLS [premium brand] in Dubai.”
Shrugging Off Inflation
The increase in energy prices in Europe should have a limited impact due to fixed-price contracts and an energy-saving plan already in place. Plus, about half of Europe’s hotel deals in Europe are franchises with locked-in commissions, rather than ownership or management contracts. The franchise model insulates the parent company somewhat from the vicissitudes of hotel bottom lines.
If Accor is able to increase average room rates by about 5 percent, it should be able to cover inflation’s negative effects the corporate level, such as for labor costs in the head office, after accounting for inflation’s beneficial effects in raising the fees it generates from hotel owners and franchisors, said Jean-Jacques Morin, chief financial officer. To be sure, annualized inflation may turn out to be 7 percent or higher, but so far Accor’s pricing power versus 2019 has been much higher than that.
Accor reaffirmed that talks are ongoing with Valesco Group to sell its Paris head office for about $452 million (€465 million). The asset disposal would be subject to a 12-year sale and leaseback agreement, and the company’s executives think they will close the deal by year-end.
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Photo credit: View from the rooftop restaurant at the SO/ Paris hotel, a brand belonging to Accor-backed Ennismore. Source: Ennismore.