• Luxury operators face fight for management contract growth

The return of the leisure traveller saw both Orient-Express Hotels and Mandarin Oriental report increases in revpar and increased confidence going into 2011.

Both companies are now looking to their expansion, with Orient-Express looking to do so while still cutting its debt levels and Mandarin Oriental facing a lack of global development finance.

At Orient-Express, fourth-quarter revpar was up by 10%, "driven primarily by occupancy, with rates holding up well", driven by the leisure market. For 2011, the group said that the outlook currently looked "encouraging", with January revenues up 12%.

Paul White, president and CEO, said: "I think we’re heading into a very strong second quarter which is going to be underpinned by performance in Europe, particularly Italy, and our trains and cruises. Quarter three is looking strong at the moment but the comps are going to be a little harder in Q3 as our third quarter last year was strong. The US seems fairly flat. Rest of the world, particularly Asia and Brazil, looks set for a strong year."

Goldman Sachs kept its rating on the company at neutral, but raised its price target on the group from $12 to $13 (it was trading at $12 at the time of writing). In a note to investors, the group said: "Orient Express has exposure to luxury and super luxury hotel segments and we have become increasingly constructive on these segments given the improving trends. However, we remain concerned on the high leverage of the company versus other lodging companies in our coverage. At the current stage of lodging up-cycle we prefer to own companies with more exposure to business travel than leisure travel."

The company has sought to address concerns over its debt levels and over the year has reduced net debt to Ebitda from 9.1 times to 6.7 times.

White said: "I remind you that in the peak earnings period of 2007, our net debt to Ebitda was five times. During the year we refinanced 10 facilities, replacing $374m of debt and pushing it out between three and five years at what we consider to be relatively good rates. The ratio of four times debt to Ebitda remains our target but it will now be driven by Ebitda improvement." He did confirm, however, that the group still had non-core assets to dispose of.

The group is also looking to expand its management business, hiring a chief development officer, Roy Paul, who had previously worked at Four Seasons, to pursue the strategy.

White said: "We have a vision which will see us hopefully get into some of what I would call the major gateway cities around the world on a management or combination of management and investing business. It’s not just all about the Ebitda that rolls off of a few management contracts; it’s about increasing the profile of the company at the same time."

Fellow luxury group Mandarin Oriental said that it saw the market stabilise in 2010, with 2011 beginning "well" as demand recovered in key markets.

The company said that increased demand led to higher occupancies in "almost every destination", which in turn allowed "most" hotels to raise their rates, "although not yet back to the levels achieved in 2008". 

Chairman Simon Keswick said: "While it is too early to anticipate the outcome for the year, over the medium term the group should benefit from the strength of its brand, the limited new supply of hotel rooms in many of its key markets and the phased completion in coming years of hotels under development."

The group said that leisure customers made up more than 40% of the group’s room nights, and that across the portfolio hotels have seen a return in demand from its "traditional" source markets for such guests.

Hotels had also seen growth from newer markets where the group had been increasing its investment in recent years, with mainland China now providing 11% of total visitor arrivals, up from 4% in 2009.

Over the course of the full year the group announced three new projects: two developments due to open in 2014, in Abu Dhabi and Doha, mark the group’s entry into the Middle East. A new hotel in Pudong, Shanghai, which is scheduled to open in 2013, represents the fourth hotel in mainland China that the group operates or has under development. 

However, one previously announced project in Atlanta will now not proceed amid reports that the site had been sold in a foreclosure auction.

The company said that it expected to achieve its mid-term goal of operating 10,000 rooms in key global locations "within the next few years". It said that, to achieve this, it was "well positioned to invest in hotels in strategic locations that offer attractive returns". However, as with Orient-Express, the group was also eyeing management contracts, with group CEO Edouard Ettedgui adding "at the same time Mandarin Oriental’s strong brand continues to be compelling to luxury hotel developers. In fact, all 16 of the group’s announced projects, except for the leasehold interest in Paris, are long-term management contracts without equity participation".


HA Perspective: Almost every hotel operating company on the planet seems to be pursuing growth by management contract these days. And for major luxury brands, it is pretty much the only way they plan to grow.

To succeed, these luxury players are going to have to offer something unique. Right now, it is not at all clear what that is going to be for most. In a market with lots of undifferentiated players, a squeeze on margins looks inevitable.

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