• Bonuses hit IHG as trading improves

InterContinental Hotels Group saw its operating profit fall by 7% in the third quarter to $115m, with an increase in central costs of around 20% to $35m, including an unexpected $25m in staff incentive payments as performance improved ahead of expectations.

Trading fundamentals continued to show growth, with revpar up 8.1%, driven by increases at the revamped Holiday Inn-branded hotels. The company said, once the relaunch was complete, the next focus for attention in its stable would be the Crowne Plaza brand, with the group's global focus remaining on expansion in China.

Solomons told a conference call: "Crowne Plaza is our next big opportunity which we're working on now, we're piloting some ideas. That's definitely what we're looking at."

"It won't be the scale of changes that we saw with Holiday Inn. In the US, where it's a little bit older, it will need some work. We put capital behind individual hotels and we may build a flagship for Crowne Plaza. We'll roll through the changes over a few years." He added: "We've looked at the opportunity to add brands and grow over time and that's something we'll look into."

The group's Holiday Inn relaunch, due to be completed next year, has so far seen 82% of the hotels revamped, a total of 2,815 hotels, with revpar up 8% on the year for sites in the US, six percentage points above those that have not been renovated. Solomons said that the company had seen an uplift in signings for the brand.

By the end of the programme, around 750 new Holiday Inn brand family hotels will have opened, 635 underperforming hotels will have been removed and over 3,000 hotels will be operating to the new standards.

The group signed 88 hotels signed in the quarter. Solomons said: "Financing for new hotels remains constrained with only modest growth expected this year and next. However, signs of life in the hotel transactions market have seen an increase in enquiries about conversions.

"The encouraging thing is we've seen some attrition in the pipeline, but we have 75,000 rooms in construction. Rebrandings and conversions are currently a much bigger part of our business but you tend to see them signed and opened quite quickly, which should help compensate."

While the company removes underperforming hotels from its system – a total of around 35,000 rooms estimated for the 2010 – it is looking to China to help make up numbers and bolster its pipeline. IHG currently earns more than two-thirds of its profit from the US, but is focused on rapid expansion in China which will make it second in importance to the group after the US.

The group said earlier this year that revenue from Greater China would exceed $1bn for the first time this year. IHG, which is the largest international hotel operator in China, with 15% of branded supply, had 132 hotels in Greater China at the end of June, with another 148 in the pipeline as the portfolio is set to double by 2015.

Morgan Stanley's Jamie Rollo has estimated that, with China currently generating 14% of the group's Ebit, this should rise to 25% based on the pipeline.

China saw revpar increase by 24.4%, against a group revpar increase of 8.1%, driven by occupancy growth of 4.0 percentage points and rate growth of 1.8%, a return to rate growth for the first time since early 2009. Rates in all three regions, were up due, Solomons said, to "resilient summer travel and increased corporate demand. It does seem as though the business traveller is back". The group said that previous strength in its upscale hotels was filtering down to the mid-scale. Occupancy, at 68%, was nearing its 2007 peak of 72%.

Europe, Middle East and Africa recorded its fastest pace of growth in two years, CEO Andy Cosslett said, with the 3% fall in Ebit in the division largely attributed to currency conversions.

Post-Q3, October revpar was up 8.1%; consisting of 8.0% Americas, 6.1% EMEA and 12.3% Asia Pacific.

The Holiday Inn revamp cost was picked up in the main by IHG's owners, although the company had also committed $60m. The group is not planning such an investment with the smaller Crowne Plaza relaunch, although it has cash available. IHG cut its net debt to $801m at the end of September, down $358m on the year and Solomons said: "Going forward, we'll be looking at investing in the business and, where cash is genuinely surplus, returning that to shareholders."

Solomons did not anticipate a similar impact from bonus payments in the coming period, but said: "Because of the quantum of people we have, you can see some big movements. We're a bit like a bank in that respect."

IHG has no immediate plans to sell its remaining owned hotels, despite signs of a recovery in the transactions market. Solomons said: "A small but increasing number of hotels seem to be coming to market and selling at attractive multiples". He said this the current portfolio of owned hotels had a book value of $1.2bn, which it expected to see a "significant premium" to when it came to sell, although there was "no particular timing" to any sale plans.

 

HA Perspective: The $1bn relaunch of Holiday Inn began just as the global economy was in crisis and it is some achievement that IHG saw it through. At the time, the consensus view of outsiders seemed to be "they've started, so they'll finish" but also that had the programme not have commenced then it would have been mothballed.

Taking on Crowne Plaza, when many, if not most, owners are still reeling from the recession, is a brave move indeed. And shows clearly that IHG is determined to demonstrate just how resilient its new business model is.

Share →