Hotels are ordinarily a leading signal for recessions, with vacancies piling up ahead of national economies sagging. But the world’s largest hotel company sees no problems so far, despite signs of weakening elsewhere.
Marriott International acknowledged that bank lending challenges in the U.S. might impact the pace of its hotel development in North America. But so far, the banking crisis hasn’t affected its hotel pipeline. The company forecasted that it would sidestep any major problem.
“We do expect the tightening in hotel financing to be short-term,” said CEO and President Anthony Capuano.
The Bethesda, Maryland-based company — which operates 31 hospitality brands ranging from The Ritz-Carlton to its latest select-service brand, City Express by Marriott — was responding to the aftershocks of recent U.S. bank collapses. Since March, bank uncertainty around regulations regarding capital requirements has slowed down the willingness of some bankers to push some hotel project financings over the finish line.
So far, Marriott executives said they hadn’t seen a kink in its development pipeline. The number of deals leaving its development flow was 1.5 percent — below the historical average of just above 2 percent — and that rate hadn’t increased recently. Marriott said the biggest effect could be on new hotel construction, particularly for the development of its U.S.-based limited-service franchised properties.
“One thing to remember in that is that our pipeline is over 50 percent international, which does tend to be less dependent on senior loan financing,” said Kathleen Oberg, chief financial officer. “For the remainder, in the U.S., it is overwhelmingly limited service franchised properties. … I don’t think that there is a fundamental change in how we see those projects materializing.”
Any Recession May Have Muted Impact
Analysts quizzed Marriott executives about how they’re anticipating the effect of possible recessions in major markets worldwide over the next year or two.
Executives said macroeconomic uncertainty hadn’t yet dented its short-term demand trends across all customer segments. They admitted they have limited visibility into the second half of the year. They forecasted that in a worst-case scenario of a “meaningful softening of the global economy in the second half of the year” — which they believed was much more likely than a “super-sharp deep V-shaped drop” — its average revenue per available room might be roughly flat compared to 2022. On balance, not too harsh of an impact.
On the one hand, lodging demand ordinarily does have a high correlation with economic growth. But the pacing of the recovery from the pandemic in different geographic markets makes Marriott executives cautiously optimistic.
“We’re clearly seeing that now all restrictions are lifted in Asia Pacific and that both pent-up demand and return of demand is coming quite nicely, which will mean that should we see an economic slowdown, they will be impacted a bit less [in Asia Pacific] than, for example, in the U.S., where obviously in the U.S., if we see it, it’s starting from a different point,” Oberg said.
Blended Travel Staying Strong
Marriott executives said they hadn’t yet seen any reduction in hybrid business and leisure trips, even as people return to corporate offices. The era of blended travel appeared to be ongoing.
“We continue to see strong recovery on Sundays and Thursdays, which is probably the most compelling empirical data we have that suggests that blended trip purpose continues to be strong,” Capuano said.
“I would supplement that data with what we hear anecdotally when we’re talking both with special corporate customers and with group customers who are talking to us as we re-platform our technology and encouraging us to make it easier for their business travelers or their group meeting attendees to book a single reservation that has both business and leisure purposes,” Capuano said. “So we sense that trend shows no sign of showing down.”
Online Travel Agency Share Is Flat
Signals on whether online travel agencies are growing or shrinking their share of distribution for major hotel groups remained murky.
Marriott executives added a couple of data points to their company’s direct booking story on Tuesday. An analyst asked if overall occupancy contributed by the online travel agencies had changed meaningfully.
“No, that has stayed at about 11 percent, and that is quite similar to what it was pre-Covid,” Oberg said. “The interesting part is that you look at either [our direct] digital channels, which have grown 600 basis points since pre-Covid, or if you look at all of Marriott’s direct channels together, we’ve actually grown share about 100 basis points since pre-Covid, but the OTAs [online travel agencies] have remained roughly flat.”
It was a bit unclear how the online travel agency contribution could have stayed flat at about 11 percent over a few years while all direct channels had grown by about 100 basis points. Presumably, that means direct channels took share from travel management companies and bookings made through agencies via global distribution systems.
We asked for clarification and will update when we receive it.
Robust First Quarter for Marriott
In the U.S. and Canada, it reported an average daily rate of $181 —12 percent above the comparable pre-pandemic period. That price wasn’t keeping pace with inflation, which was more than 14 percent over the period.
“On average daily rates, Marriott executives noted that its inflation-adjusted pricing for non-luxury is below 2019 levels, giving it some comfort on sustainability of currently strong industry pricing levels,” wrote Joseph Greff and the analyst team at JP Morgan’s Research team in a pre-earnings call note that echoed what was the company reported Tuesday.
Average daily rate in the U.S. and Canada, the operator’s largest region, saw its pricing power especially aided by higher special corporate negotiated rates and 15 percent growth in group average daily rates.
Occupancy in the U.S. and Canada averaged 66 percent, a gain of 12 percent.
The strength in rate and occupancy boosted the company’s key metric of revenue per available room by 31 percent year-over-year to $169.53 on average in the U.S. and Canada and by 61 percent year-over-year to $115.77 elsewhere in the world.
In the first quarter, Marriott generated $757 million in net income — a measure of profit — on $1.1 billion in net fee revenue. Like with most asset-light hotel companies, Marriott reports a much higher total revenue figure — $5.6 billion in the first quarter — but most of that total revenue doesn’t flow to its bottom line but instead reflects costs born by partners which it has to reimburse.
The profits flowed to the bottom line. Adjusted net income totaled $648 in the first quarter, up 57 percent over the first quarter a year ago.