When hotel executives have talked about their companies' performance this earnings season, they indirectly spotlighted a few trends affecting much more than just their sector. As Skift has long said, "Travel is a global crucible for everything."
Editor’s Note: Skift Senior Hospitality Editor Sean O’Neill brings readers exclusive reporting and insights into hotel deals and development, and how those trends are making an impact across the travel industry.
Hotel earnings season so far has made me reflect on a manifesto that Skift founder and CEO Rafat Ali wrote several years ago: “Travel is a global crucible for everything. It is where the largest consumer and tech trends first meet and are quickly tested. Everything converges in travel.”
When hotel executives have talked about their companies’ performance in the past couple of weeks, they have indirectly spotlighted bigger-picture trends.
Here’s a snapshot of a few:
1. Changes in consumer income patterns are boosting a popularity for “premium economy” offerings, which in industry jargon translates into “mid-market” hotels.
- The spread of disposable income in many countries is changing. Wealthy households are getting richer: Spending by households in the top 1% of incomes broadly outpaces spending by the top 10% of incomes. If you’re skilled at serving the highest-end traveler, you can print money thanks to demand exceeding supply.
- If you can capture budget travelers, you also win for the same reason.
- Yet there’s an under-appreciated segment of in-between income segments that can be profitably catered to. These include the growing band of travelers who buy “premium economy” seats on airlines and “mid-scale” or “mid-market” hotel rooms.
- In the confusing (but logical) world of STR classes, “mid-scale” hotels sit above the “budget” and “economy” classes and below the “upscale” and “luxury” classes.
- Hilton CEO Christopher Nassetta said in his second-quarter earnings call that the “mid-market” was what he coveted long-term.
- “We’re not ashamed of saying we have every intention to have the best brands in every market to serve the mid-market because we think that’s where the most money will be made over the next ten or 20 or 30 years,” Nassetta said.
- Mid-market hotels are popular with developers and operators because the cost of creating and running such properties can be relatively cost-effective long-term. While luxury hotels generate higher rates, they also generate higher costs — requiring more hands-on skills to handle. Mid-market hotels can be profitable with less involvement and risk.
- What does this say about the broader world? The consumer categories of a decade or two ago may no longer reflect today’s consumer realities as income re-distribution changes demand patterns — and how those changed demand patterns interact with supply constraints.
2. Luxury hotel demand is exceeding supply. But so is the demand for “affordable” lodging.
- Accor CEO Sébastien Bazin recently said that the customers coming to his luxury hotels and resorts aren’t asking about price — they’re asking instead about suites. The company doesn’t have enough luxury suites to meet today’s demand at the high end of luxury, he said.
- Marriott said that “luxury rates in U.S. and Canada have actually outpaced inflation when you compare to ’19.”
- Hyatt, since 2017, doubled its count of luxury rooms. That positioned it well for the second quarter of 2023 when a segment of financially comfortable travelers was willing to pay average daily rates 15% higher than in the second quarter of 2019. Its luxury properties had stellar performances (excluding troubled markets like San Francisco).
- Meanwhile, Choice Hotels, which has heavy exposure to hotels at the more affordable end of the chain scale, is also seeing a strong business. It provided financial guidance for full-year 2023, where it forecasts net income — a measure of profit — of between $255 and $265 million.
- The trend in hotels echoes what’s happening in short-term rentals. Airbnb said earlier this year that its most in-demand lodging was its most affordable lodging, and it didn’t have enough supply to meet that demand.
3. Five-star travelers aren’t swayed by price. But more price-conscious travelers will shop around.
- One example is Cancun. Hyatt reported that U.S. visitation to its resorts in Cancun in the second quarter were negative year-over-year.
- Price or convenience weren’t problems. Airlines added capacity by a double-digit percentage, and airfares dropped on average.
- “The one thing that remains true in the Cancun Riviera Maya market is that five-star hotels are outperforming four-star hotels by 10 points,” said Hyatt CEO Mark Hoplamazian.
- By implication, travelers shopped around. Hyatt saw a 16% increase in visitation to its resorts in the Dominican Republic and an 11% increase to its resorts in Jamaica.
- As the middle and lower end of the market feel more pressure, they may shop around more, and greater availability of information, along with the continued evolution in airline route networks, in many markets may cause a reshuffling in winners and losers in travel. There are parallels in other industries.
4. China’s economic impact on the world may be different than Westerners once envisioned.
- Many long-term growth plans for Western companies used to involve tapping the Chinese market.
- Yet the geopolitical tension with China is now a headwind. To quote a recent Wall Street Journal article, “[Chinese] investors who once bought New York City hotels are placing funds elsewhere.” One possible side effect: Some markets, such as Singapore, Dubai, or Saint Petersburg, may benefit from a surge in Chinese external investment displaced from Western nations.
- To be clear, major hotel groups may be the rare sector that can still count on China because neither the U.S. nor China seems to object to companies from one country building or running hotels in the other.
- Hilton’s Nassetta said: “China is eclipsing prior high watermarks and getting going on [hotel] development, as I already said, but also operationally, eclipsing 2019 numbers.”
- But the story of China’s rise may continue to take an unpredictable course, affecting businesses.
5. The era of “free money” is over.
- In a sign of how rising interest rates can create friction for hotel companies, Hyatt said it had to issue $600 million of senior notes at a 5.75% interest rate to help pay notes due by October 1 that it had issued at only 1.3%.
- If interest rates don’t return to super-low levels, the most heavily indebted companies will be at a competitive disadvantage. Hyatt isn’t heavily indebted and has plans to raise cash through asset sales. But other hotel and non-hotel businesses will be impacted by this shift.
These are only a few of the trends I saw reflected in hotel earnings. But you get the point. If you want to see broader trends worldwide, looking at travel company earnings can be eye-opening.
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