Hotel earnings season has ended, so Skift reviewed what executives at hotel companies belonging to the Skift Travel 200 (ST200) said. We looked at companies beyond the half-dozen largest hotel groups.
Here are seven themes that stood out.
1. Hotels Adjust to “Normalized” Labor Patterns
Perhaps the most used term on earnings calls was “normalization.” Much media coverage has focused on the revenue side, as leisure travelers pull back from their post-pandemic surge while business travelers return to booking Tuesday and Wednesday nights at past levels.
Less discussed has been how the cost side of the hotel business is also normalizing. Executives are pleased to see inflation moderate, and supply chain issues ease.
Exhibit A: Apple Hospitality, the largest real estate investment trust that owns hotels, said its labor costs are easing. A more competitive job market is leading to higher worker retention at its 224 hotels on average. Contract workers now comprise 8.6% of staff, down from 10.6% a year ago.
“With lower turnover and less reliance on contract labor, we are better positioned to drive incremental property level productivity,” Knight said.
CEO Justin Knight sees an upside in the return of business travelers. Their midweek stays are less costly to service than leisure guests’ because they are typically in and out. If leisure travelers become more price-conscious, rising numbers of business travelers could offset some pressure.
2. The Inflation Impact Is Moderating But Still a Factor
Chatham Lodging Trust, which owns nearly 40 U.S. hotels, said it was pleased to see a taming of operational cost inflation beyond wage hikes. However, Dennis Craven, chief operating officer, said some costs were still spiking.
During the second quarter, the cost of serving complimentary breakfast was up 21% year-over-year, hitting margins by approximately 30 basis points. Property insurance premiums were up almost 20%, hitting margins by about 20 basis points.
When asked by Skift for more color, Craven said the spiking cost of free breakfast reflected “a combination of inflation as well as brands requiring more items in the face of inflationary pressures impacting owners.”
He added that, in addition to property insurance, healthcare insurance for employees has also “gone up double digits for probably the last decade, which is egregious.”
3. Hotels Keep Chasing Higher Rates, Not Higher Occupancy
When times were tough, hotels used to run sales to put heads in beds and chase occupancy. But more recently, hoteliers have tolerated vacancies to try to sustain their pricing power with consumers who remain willing to spend.
In London, PPHE Hotel Group (formerly Park Plaza Hotels) talked about its approach to managing its roughly $2 billion portfolio.
“We try to find a balance between rate and occupancy,” said Robert Henke, executive vice president of commercial affairs.
“Rate gives us better profitability because every extra euro or pound on the rate is nearly 100% flow through to the bottom line,” Henke said. “Whereas for occupancy, we have all the costs incurred to clean the room, staffing, utilities, water usage, amenities, and so on.”
This trend shows up in a key metric called revenue per available room, which blends the prices guests pay with how full hotels are.
For Hyatt, group bookings for next year are showing a 7% increase in revenue per available room. About 40% of that increase reflects room rates rising further above pre-pandemic levels, while about 60% of that gain is coming from occupancy growth, with occupancy still below pre-pandemic times.
4. Corporate Travel Starts to Return in Full
Corporate travel shows signs of a rebound to 2019 levels, where it’s currently off by roughly 18%.
Xenia Hotels & Resorts, a real estate investment trust owning 39 hotels, is seeing upticks in business bookings, especially from large Fortune 100 companies and professional services firms in major markets like San Francisco and Houston. This is helping drive midweek demand on Tuesdays and Wednesdays.
The gains are primarily in volume rather than rates. Last year’s corporate rate negotiations yielded meager increases at Xenia and across the industry. But Xenia saw a side benefit from so-called rate compression. As more corporate travelers fill rooms, its hotels can charge higher rates to other guests who are less penny-pinching than large corporate customers.
5. Tech Giants Begin to Drive Hotel Bookings Again
Cities where technology companies have major bases have generally lagged in hotel demand recovery. These markets have been hit hardest by lingering work-from-home policies. But an uptick in tech interest, partly driven by the boom in AI, is helping to revive these markets.
Chatham Lodging Trust is a hotel real estate investment trust exposed to these markets. In the most recent quarter, its hotels in Sunnyvale, California, saw an 8% growth in revenue per available room (RevPAR).
“However, the RevPAR of $144 is still 28% below 2019 levels,” said CEO Jeffrey Fisher.
Bellevue, Washington, emerged as the standout market, with RevPAR (revenue available per room) surging 14% year-over-year to within 6% of 2019 levels. Special corporate production there spiked 27%, driven by tech giants like Amazon, Microsoft, and TikTok.
6. Not Everyone’s Rushing to Adopt Major Brands
One of the big themes of the past year has been hotel companies cutting licensing deals with the major hotel groups to include independent hotels in the groups’ loyalty programs.
Hotel loyalty licensing tie-ups have included Marriott with MGM Resorts, Hilton with Small Luxury Hotels of the World, and IHG with Iberostar.
Investor analysts have been asking owners of independent properties whether they might want to affiliate with big groups. Not everyone does.
DiamondRock Hospitality, which has 13 independent hotels (and dozens of branded ones), wants to keep the independent ones as they are.
While joining one of the big systems could boost their top-line revenue thanks to the added marketing reach of those big groups, the fees they’d have to pay, and any costs related to meeting group criteria could eat into the gains.
“Our job as owner is really to drive profit, not top-line revenue,” said CEO Jeffrey Donnelly.
Some hotel groups are trying to woo companies like DiamondRock with incentives called “key money” to help fund renovations that will make hotels fit their brand standards.
“There is an opportunity there to collect the check,” Donnelly said. “But typically, for their key money checks, the brands tend to expect mid-teen IRRs [internal rates of return] on that money, which means it’s not cheap.”
The big brands expect a steady income stream from properties. Their fees essentially eat into money that would otherwise be split among property owners. Executives said whether branding makes sense depends on the property and the market.
7. Live Music Is Driving Travel Demand. Just Look at Nashville.
Taylor Swift’s concert tours alone have driven so much travel spending that they have illuminated the importance of music, sports, and other live events to hotel demand.
Colin Reed, CEO of Ryman Hospitality Properties, believes music tourism is particularly worth watching. During an earnings call last month, Reed used Nashville, where his company owns several hotels, as an example of the trend.
Nashville’s meteoric rise as a tourism powerhouse stems from its unique position as a live music epicenter. Annual visitors could exceed 20 million within 5-10 years, generating close to $15 billion in spending. Reed cited some key factors:
- Technology amplifier: Streaming and social media have exponentially expanded country artists’ reach, effectively marketing Nashville to tens of millions of fans globally.
- Infrastructure investment: Massive capital deployment into hotels, entertainment venues, and airport expansion supports rising visitor numbers.
- New venues: A planned NFL stadium could attract major events like Super Bowls and Final Fours. Large-scale developments like East Bank and Nashville Yards will further boost capacity.
- Celebrity factor: High-profile restaurant and music venue openings branded by stars like Eric Church and Garth Brooks continue to raise Nashville’s profile.
Hotel executives everywhere may look to other sources of demand drivers that may be relevant to their markets, such as rising interest in Formula 1 racing, e-sports, and underwater diving.
Accommodations Sector Stock Index Performance Year-to-Date
What am I looking at? The performance of hotels and short-term rental sector stocks within the ST200. The index includes companies publicly traded across global markets, including international and regional hotel brands, hotel REITs, hotel management companies, alternative accommodations, and timeshares.
The Skift Travel 200 (ST200) combines the financial performance of nearly 200 travel companies worth more than a trillion dollars into a single number. See more hotels and short-term rental financial sector performance.
Read the full methodology behind the Skift Travel 200.