Hilton Sees Signs of Pandemic's Pent-Up Demand Moderating in 2023

Hilton Worldwide's earnings report on Thursday was a good news-bad news story.

In good news, the owner of 19 brands, such as Waldorf Astoria and DoubleTree, continued to see a strong hunger for travel through the end of 2022 thanks to a post-pandemic surge in trips. The stock price for the McLean, Virginia-based company surged to a nine-month high in reaction.

But in bad news, the hotel operator predicted that 2023 would bring respectable but more muted growth as the industry will return to a normalized trajectory. The company also reported unusually soft signings for its pipeline of new properties.

Strong Quarter, Rebound Year

Hilton's fourth quarter system-wide revenue per available room — a key industry metric — was $102, the company said. That was 7.5 percent above the level in the comparable period in 2019, making for the second consecutive quarter that the figure surpassed pre-pandemic levels.

"Small and medium-sized businesses remained an important and growing part of our business travel segment, accounting for roughly 85 percent of our segment mix," said Chris Nassetta, president and CEO, in a call with analysts on Thursday.

The company said it sold guest rooms, ballrooms, and all-inclusive resort bookings at higher rates because of booming travel demand.

In the fourth quarter, the hotel operator produced $333 million in net income on $2.44 billion in revenue. For the full year of 2022, the company produced $1.255 in net income off of $8.77 billion in revenue.

Softer Forecast

The company forecast that in 2023 it would produce a net income of between $1.38 billion and $1.45 billion, representing management's faith that the U.S. and Europe will either dodge recessions or not have recessions damper travel demand. It expects it will push revenue per available room up between 4 and 8 percent year-over-year on a comparable and currency-neutral basis.

This would be a nicely profitable course, but it would be modest comedown from a lofty 2022 performance.

In a perhaps telling sign the sector may return to normality by year-end, Hilton declined to give a 2019 comparison for its 2023 guidance for revenue per available room.

Some context: Americans will have have spent down about two-thirds of the additional savings they piled up during the pandemic by the end of 2023, according to a forecast by Goldman Sachs. That may take the air out of the full robustness of the pandemic rebound.

But Hilton is betting on shifts in consumer spending patterns.

"You continue to see consumers shifting how they're spending their money," Nassetta said. "So maybe they're spending a little bit less, but how they're spending it, it continues to be shifted more towards experiences, and we're sort of Exhibit A on the experience side. ... We don't see [leisure travel bookers] slowing down."

Hilton also believes there's probably not enough supply to meet normalized U.S. demand in the segments in which it competes most strongly.

"We're currently experiencing in the U.S. market, which is our biggest market, as an example, equal to the lowest levels of supply we've ever seen," Nassetta said. "Thankfully, we get more than our fair share. But overall in the market, very low levels of supply, and that continues to be met with very strong demand."

"We believe we'll retain our pricing power," Nassetta said. "We're not assuming in the second half of the year that that pricing power is increasing, I would say, we assume it's flattening or maybe even modestly lower [in the second half of 2023]. ... Not rates actually lower, but plateauing rate growth in the second half of 2023."

Executives claimed Hilton had grabbed market share from competitors last year "in rate and occupancy across the system."

They also said the group business was recovering, at last, to 2019 levels.

"Comprising roughly 20 percent of our normalized mix, group [travel bookings for meetings and events] is a segment with the greatest visibility," Nassetta said. "For 2023, group position is up 25 percent year-over-year and is nearly back to 2019 levels ... helped by rising demand for company meetings as organizations bring their teams back together."

Unusually Soft Unit Growth

Hilton has yet to return to pre-pandemic rates of expanding its hospitality empire.

Hilton added 17,700 rooms to its system in the quarter, or nearly a hotel a day, meaning its hotel openings modestly lagged expectations. The company blamed the ongoing pandemic crisis in China, a key market.

The hotel operator okayed 24,400 new rooms for development during the fourth quarter. That meant the company added a net 48,300 rooms to its portfolio for the full-year 2022, contributing to net unit growth of 4.7 percent.

"With a record pipeline of more than 416,000 rooms, half of which are under construction, we expect net unit growth of 5 percent to 5.5 percent for the year and remain confident in our ability to return to 6 percent to 7 percent net unit growth over the next couple of years," Nassetta said.

The management chalked the sluggishness up partly to rising interest rates causing friction for hotel dealmaking and partly to construction snafus in markets such as coronavirus-ravaged China. In the U.S., construction costs are coming down, but they're still higher than they were in 2019 by about 20 percent to 30 percent, Nassetta estimated.

The re-opening of China could help normalize hotel pipeline trends in that country while boosting hotel demand across Asia Pacific. Those trends could be a tailwind for hotel operators.

"Hilton is the most exposed to the U.S. out of its peers, excluding the smaller Choice," said Pranavi Agarwal, Senior Research Analyst at Skift Research. "The company's portfolio exposure is currently more skewed to places that likely offer the smallest recovery uplift in 2023, such as the U.S., which has essentially recovered, and to segments such as upscale and upper midscale, which have mostly recovered — unlike luxury that still has room to run."

Newest Brand, Spark by Hilton

Last month, the company launched a "premium economy" brand, Spark by Hilton. In an update on Thursday, it said the brand had "more than 200 hotels in various stages of negotiation" as of February 3.

"This will be the most disruptive thing we've done in terms of the brand space," Nassetta said. "It's not as sexy as lifestyle and luxury. But in terms of an opportunity to be a value contributor in the billions of dollars for this company, I'm as excited about this as anything else we've done. It should be, over time, the biggest brand we have in terms of the number of units."

The brand is designed fully for conversions, meaning hotel owners use it to convert properties from other brands. It may help Hilton steal share in some markets where inventory is outdated and the cost of renovating under another company's standards may be higher than in converting to Spark by Hilton. It expects the first properties to open by year-end after full renovations and retrofits.

Hilton pitches itself as a better demand driver for owners than other chain operators. For instance, it noted that its co-branded credit card program set a record for spending in the fourth quarter and the full year. Management said that spending, tied to a loyalty program, helps drive direct bookings.