• InterContinental confounds expectations

In a set of numbers that confounds all expectations about the current downturn, InterContinental Hotels has posted strong sales and a healthy level of signings for the first half of this year.

The trading numbers emulate Accor's equally robust first half performance and matching the same level of signings in the US year-on-year seems an astonishing accolade as to the robustness of the InterContinental business model.

IHG's CEO Andy Cosslett said the results were strong on "pretty much all measures". He talked about favourable long-term tailwinds "that will continue to blow". The main drivers, he argued, were the growing wealth across the world and the spread of internet technology that makes travelling cheaper and easier.

The downturn, rather than heralding a bleak time for the company, presages a period of strong relative outperformance. "The branded hotel sector in particular will have an even brighter future a guests look for consistency and investors seek out the more certain returns that strong brands provide," said Cosslett.

The outlook for the trading environment was uncertain, he admitted, but stressed that revpar was only one of the drivers for IHG with room additions expected to pick-up any slack.

"Our deal pace remains very strong, we have maintained the step-change in growth achieved since the switch to the asset light model," he said.

The US, which remains by far IHG's most important market, is the key example. The country faces what Cosslett called "short-term headwinds" but the new rooms growth was gathering pace.

The first half saw almost 24,000 rooms added and a net system growth of 13,000 rooms as unsuitable hotels were deflagged. And in terms of acceleration, net room growth was just 0.6% at the end of June 2006, growing to 4.2% by the end of June 2007 and coming in at 6.1% in June 2008 (all on a 12 month basis).

Gross revenue grew by 11% in the year to June 2008 of which five percentage points came from new hotels. Back in 2006, the 10% growth was entirely from existing properties.

The target IHG set itself for the three and half years from June 2005 to the end of this year was to add a net 60,000 rooms. It has already blasted through that threshold having opened 60,490. It has also opened 18 InterContinentals, meeting its target of 15 to 25 properties.

The only slightly below par performance was in China where the aim of having 78 hotels opened will probably be missed, having hit 40 so far. IHG said that the main cause of this was the Chinese government's tightening of funding and planning.

Cosslett was confident about delivering on IHG's pipeline of 1,800 hotels. He said that 70% of the pipeline was financed, "to the best of our knowledge". Franchisees were typically financed by local banks with whom the hotel owners had long term relationships "banks can opt out but they haven't in previous downturns".

Attrition rates in the pipeline were keeping steady at historic trend rates with about 10% of deals dropping, and only a handful of these due to financing, said Cosslett.

Giving even more confidence about the pipeline, about 40% of the pipeline was already in construction. Cosslett admitted that at the higher end of the market, financing was more difficult and taking longer but he remained bullish about the future stating that "deal pace remain incredible".

The head winds ahead in terms of trading are already starting to become visible. The year to the end of June saw negative occupancy growth in all IHG brands in the US except InterContinental, Staybridge and Indigo. Continental Europe was negative and the UK showed a rise below 1%. The only bright spot was the Middle East with a rise of 5.4%.

Rate growth continued but trended down as this year progressed, month-by-month, in most regions particularly the US and the UK.

The half year to June 30 saw revpar on a constant currency basis rise 4.0% globally. Total gross revenue across the IHG system was up 8% to $9.6bn. Continuing revenue was up 14% to $952m and continuing operating profit was up 29% to $284m.

The financial numbers were presented by Paul Edgecliffe-Johnson, svp global corporate finance, as CFO Richard Solomons was attending the funeral of Steve Porter, who until earlier this summer was head of the Americas for IHG.

Porter's sudden death came after a short battle with cancer. Solomons is currently running the division for IHG while a replacement is sought.

 

HA Perspective: IHG's pipeline for the Holiday Inn brand alone is longer than the entire pipeline for its nearest competitor. And it is currently opening almost two hotels a day.

This will give it some insulation against the trading downturn that must surely kick in soon. The mystery is why it has not already.

Partly, it is the resilience of the US economy which has so far staved off recession thanks to rate cuts and tax rebates. With negative growth now in the Euro zone it looks likely that the hotel sector will start taking a turn for the worse.

Historically, the pattern has been for hotels to lag the general economy by about six months. Perhaps the lag effect has extended, but it would be foolish to expect hotels to escape.

IHG seems well positioned to weather the storm, however. Firstly, IHG's pipeline will continue to deliver net revenue growth to its business even with declining revpar (provided the fall is not too great).

Secondly, IHG believes its mid market dominance means it will benefit from travellers trading down. Cosslett argued that people were continuing to travel rather than stopping but are having to take cheaper flights and stay in less luxurious hotels.

Thirdly, IHG, as a global player with a spread of brands is set to benefit as the squeeze is put both on independent operators and smaller chains. Independents are more likely to embrace a brand in difficult times, said Cosslett, although with a pipeline of 90% new builds this is not a major factor for IHG at present.

And smaller chains face being squeezed, particularly by larger corporate accounts that typically react to downturns by reducing their number of suppliers. Global hotel chains that offer a range of price points are more likely to make the cut than national chains or chains that are focused on upscale.

Overall then, the stage is set for companies such as InterContinental, Marriott, Accor and Hilton to emerge from any downturn with increased market share.

As Cosslett argued, the advantage of a strong system is greater as market conditions toughen.

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