• IHG lauds sharpest ever recovery

It is the sharpest recovery in the hotel industry's history, according to InterContinental Hotels Group.

Speaking at the company's final quarter results presentation, CEO Andy Cosslett said that the forecasts for a 3% decline in US revpar in 2010 have in reality turned into a growth of more than 8%.

In addition to revpar growth, another of the three drivers of profits, rooms, also saw progress with more rooms signed in Europe and Asia in 2010 than in 2009 (the final driver is royalty rates).

There has been a phenomenal recovery in the US with a 7.7% increase in total room nights sold, the largest ever according to Cosslett.

The trading outlook is also good with revpar forecast to grow by between 6.1% and 9.0% in the US. As well as economic recovery, the situation is helped by slowing supply growth and a strengthening of the mid market.

Cosslett said that the differential between mid scale and more upscale properties was "steadily being restored" and that this "favours the midscale in particular".

Total pipeline is expected to grow only modestly this year due to continuing system exits following the Holiday Inn upgrade but it is expected that future years will see growth in the 3% to 5% range as there will be fewer exits.

Operating profit before exceptional items grew 22%, perhaps a fairly modest result given the exceptional operating performance improvement. But profitability typically results from rate increases and only Asia Pacific has been enjoying better rates during 2010.

In fact, Asia Pac saw revpar growth back in December 2009 and significant rate improvement from the middle of 2010. Revpar in the region is now close to peak levels. Globally, revpar is $9 or 14% behind the peak for the group as a whole.

Also holding back profitability growth has been the volume of exits in the system due to the Holiday Inn upgrade programme. This will close by the end of this year with 46,000 rooms still to exit or relaunch (so far 370,000 rooms have been relaunched). Even so, franchise fees grew 6% in 2010.

On the management side, 70% of the growth came in Asia. Fees were up from $333m to $263m year-on-year although still below 2008's level of $339m.

For the owned and leased hotels, which number 15 worth $1.5bn (although four properties account for 80%), margins improved three percentage points although this is still four percentage points below 2008.

The sharp improvement in trading increased costs as the company paid out for performance related bonuses to its staff. People are about half of the group's regional and central costs.

IHG struck a different tone to that in past presentations by saying that now it had successfully paid down debt priorities had changed and now it would invest for growth.

A key target was China where it is looking to acquire brands. It is seeking something in the luxury or upper upscale space just below the InterContinental brand which it said was "sold out" in territories such as Shanghai.

Also on the agenda were "halo hotels", properties such as the San Diego Indigo that would have a wider impact on a market. It was unlikely that this would be in China but rather countries such as India where IHG had less distribution.

The total number of such investments would remain small, perhaps two or three InterContinentals and between four and six Crowne Plaza properties. "A few iconic properties can make a big difference," said CFO Richard Solomons.

Also on the growth agenda were new segments. Resorts were mentioned with a key driver being the need to offer somewhere for customers to redeem their loyalty points.

"We're not about to buy and build a $500m resort. We will risk weight where we invest," said Solomons. Other key areas for investment include in brands and in technology and systems infrastructure.

Since 2007 IHG has put in $200m of investment, typically sliver equity. This compares to more than $400m in capital released.

"There will be occasions where the use of cash will accelerate development but this will represent a small proportion of the total number of hotels signed," said Solomons. And the preference will always be to have a selling horizon and for the investment to deliver a return above the cost of capital.

The closing of the Holiday Inn upgrade programme had enabled IHG to move on to its Crowne Plaza offer. This was described as the fourth largest upscale brand with 388 hotels and a value placed on it of $3.5bn. It is also the third largest brand in the global industry pipeline (the top two are Holiday Inn and Express).

About 40 Crowne Plazas are expected to be removed from the system over the next two to three years as the programme progresses.

The IHG pipeline stands at 204,000 rooms, roughly 18% of the global branded pipeline according to IHG's estimates from STR figures. It put Hilton's share at 13%, Marriott's at 10% and Starwood's at 3%.


HA Perspective: It seems strange that IHG is seeking another luxury brand in Asia while creating another midscale brand in the US. Logic would suggest that the opportunity for midscale was strongest in Asia given the demographic in that country.

It is perhaps similarly surprising that it is Holiday Inn core brand rather than Express that has made the running in Asia. Express has just 30 sites in the region against 1,700 in the US.

If Asian development follows the pattern of the US then there is gobsmacking potential for Express. IHG has a new partner in ICBC for its China joint venture for Express and has signed a 20 hotel deal with Duet in India.

But the course of Asian development is unlikely to be as smooth as might be hoped. Even if it does prove bumpy, IHG and other hoteliers still have plenty of cause for optimism.

As Cosslett said during the conference call, a key feature of the hotel industry is the headroom there is for organic growth given the tiny market shares of existing players.

His challenge will be in deciding how much he is willing to pay to speed-up that organic growth through acquisition.

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