Discounted hotel rates in the U.S. might be a thing of the past — if you can believe the CEO of one of the world’s largest hotel companies.
On Thursday, Hilton reported a $333 million fourth quarter 2022 profit and a nearly $1.3 billion profit for the entire year. It was the company’s second quarter in a row where overall performance exceeded pre-pandemic levels. But the data shows Hilton is achieving this strength not entirely by filling up hotel rooms.
The company ended 2019 with an occupancy rate of a little more than 76% at its U.S. hotels. Last year, Hilton’s U.S. hotels were just under 70% full. But rates averaged nearly $158 a night compared to $148.70 back in 2019, according to company filings with the U.S. Securities and Exchange Commission.
Don’t bank on discounted rates to close that occupancy gap just for the sake of filling up hotel rooms.
“We can get back [to 2019 occupancy levels] tomorrow if we wanted,” Hilton CEO Christopher Nassetta said during a company earnings call Thursday. “We could drop rates and occupy ourselves up, but we don’t want to do that. We are trying to manage, in this cycle particularly given the environment [of] inflation [and] everything else, really effectively to drive the best bottom line results for [our hotel] owners.”
If there was a travel-related silver lining to economic downturns in the past, it was that you could usually find a steal on hotel rooms as owners tried to get as much business as possible.
That was great for travelers but not as much for hotel owners, as it’d take years to get profits back to where they were before the economy started softening. The pandemic changed the playbook, and the industry is unlikely to revert to the old strategy anytime soon.
Discounting in the past would generate more demand and get people to start thinking about reserving a hotel stay.
However, no level of discounting was going to get people out and about during the first months of the pandemic when so much was unknown about the coronavirus. Hotel companies encouraged owners to keep rates generally at pre-pandemic levels so there wouldn’t be another yearslong financial recovery.
Given Hilton’s nearly $1.3 billion profit last year, even amid the omicron surge during the first part of 2022, it appears that strategy paid off. While Hilton’s average U.S. hotel rates only increased by 0.3% from 2018 to 2019, there was a whopping 19.3% increase from 2021 to 2022.
Inflation might be tapering off, and, despite a better-than-expected January jobs report last week (led by hiring in the leisure and hospitality sector), there are signs of an economic slowdown on the horizon.
“We’ve assumed not a crash landing but sort of a soft-to-bumpy landing in the U.S. with a moderate recessionary environment in the second half of the year,” Nassetta said.
The company anticipates prices to stabilize later this year rather than continue their momentous surge. But don’t bank on that leading to any bargains at your favorite Hilton hotel.
“There is more recovery and more pent-up demand, particularly [with] business travel and the group segments,” Nassetta said.
But rates are also likely to remain high. This is because there likely won’t be a massive addition of new hotel rooms to the U.S. market anytime soon due to the economic environment.
“We do continue to believe we will have good pricing power, at least through this year, simply because there’s no capacity addition really coming into the market,” Nassetta added. “We do have these, both cyclical and secular, tailwinds that are giving us increases in demand that we think are going to allow us to continue to have pricing power.”
Hilton’s subtle dig at Marriott and Hyatt
Blink, and you may have missed a little bit of a hotel executive jabbing on Hilton’s earnings call.
Hilton added nearly 17,000 new hotel rooms to its more than 1.1 million-room network in the last three months of 2022, and the company’s overall development pipeline stands at 416,400 rooms. By comparison, Marriott’s development pipeline usually hovers around the 500,000-room mark.
But Nassetta isn’t upset at being in second place.
Instead, he noted Hilton has more than doubled in size in the last 15 years. The company’s U.S. presence nearly doubled in that timeline, while the company’s international presence more than tripled.
Unlike competitors Marriott, Hyatt and Accor, Hilton focuses on building its own brands instead of acquiring others. It’s a lot more affordable to build it yourself than buy another company, the thinking goes.
“We achieve all of this without any acquisitions, and more than 90% of the deals in our current pipeline did not have any key money or other financial support,” Nassetta boasted.
Spark isn’t ‘sexy’ but could be a cash cow
Hilton’s latest brand-building endeavor is Spark, a premium economy hotel chain the company announced last month.
Spark is slated to grow by converting existing hotels into the new brand. However, it also generated a bit of industry cynicism and scoffing for moving into a segment of the industry major companies like Hilton and Marriott typically don’t play in.
Nassetta addressed the critics head-on.
“I mean, it’s not sexy, OK? It’s not as sexy as lifestyle and luxury,” he said with a laugh. “But in terms of an opportunity to be a value contributor in the billions of dollars for this company and its shareholders, I’m as excited about this as anything else.”
Spark is expected to eventually be Hilton’s largest brand, with thousands of hotels across the U.S. and Europe.
There are 70 million travelers who frequent premium economy hotels in the U.S. each year, Nassetta said. Hilton hasn’t had a brand in this space until Spark was first announced. The first hotels will open later this year.
“If you look at that customer base, I think arguably more than half of that customer base are customers that are early in their travel lives that are going to grow up and do other things,” Nassetta said. “The sooner you get them into the system and [start] building loyalty with them, the better off you are.”
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