Europeans look past lockdown

Europe-based hotel groups Accor, IHG, NH and Melia all declared substantial losses for 2020, with attempts to reduce overheads running behind dramatically reduced revenues.  

IHG and Accor saw a greater geographical variability, with a greater impact from parts of their portfolios in Asia and the USA. For the Spanish-based groups, it has been about minimising cash burn, and waiting out the storm. Both NH and Melia have substantially European portfolios, which have been hit hard by European government actions including lockdowns and travel bans.  

Aside from the depressing negative numbers, CEOs gave their views on where hotel markets, and their companies, are heading next as they look to return to profit in 2021.  

Accor’s Sebastien Bazin said he has a five point plan for the coming year: “Number one, don’t be late for the rebound. Whenever it comes, take it, grasp it. Number two, whatever we promise, deliver on it. Number three, spend the maximum time on your loyalty programme. Number four, it’s all a matter of proving to the owners that you can open, you can manage, you can increase traffic, you can deliver results, and you have to increase your pipeline. Number five, it’s all about human capital – preserve, retain, seduce your talent.” 

The group reported revenues down 54.8% at EUR1,621m, and an ebitda loss of EUR391m. CFO Jean-Jacques Morin reported: “If you exclude Europe, the positive way of looking at it is that RevPAR is sequentially improving quarter after quarter since the Q2 trough in each of the other geographies.” 

Looking further ahead, Bazin sees great potential in Accor’s new lifestyle brands division, Ennismore. “I am a big, big believer that the lifestyle segment will account for probably more than 20% of all the offerings of hotels on the planet over the next 20 years. It is what individuals want – something more unique and with more fully local content. And so we made a long bet and a big bet in creating Ennismore and putting within the Ennismore platforms, the brands we’ve been acquiring, securing over the few years.”  

Accor still holds a 30% stake in hotel owning vehicle AccorInvest, and Morin said Accor would be pitching in its EUR154m share of a recapitalization, designed to right the ship. This, plus similar inputs from other partners would sit alongside a EUR477m state guaranteed loan and asset sale proceeds secured of around EUR250m, “which is far sufficient to buffer any volatility, uncertainty for the next 24 months ahead.” 

IHG called revpar down 52% for the year, sending operating profits down 75%. Careful cashflow management left the business with USD2.9bn of gross liquidity at the year end.  

Thanks in large part to the loss of a major portfolio to landlord SVC in the US – where IHG opted not to pay a minimum rent guarantee – the group’s system size was effectively static. The group opened 39,000 rooms but lost 37,000.  

CEO Keith Barr commented: “We expect to see an acceleration of growth, but really 2020 and 2021 are sort of transitionary years.” He added he was “very confident of getting back to that industry-leading net rooms growth. I think the industry will be growing a little bit slower in the coming years. I think everyone will see that.” 

Innovations at IHG include the introduction of Attribute Pricing, the next phase of the company’s guest reservation system upgrade. “This is expected to be live across the estate by the end of this year, enabling a tailoring of stays and a selection of add-ons,” said Barr. “Initial pilots in 2020 were conducted in each region, demonstrating to owners the ability to generate maximum value from their hotel’s unique attributes.” 

In Spain, both NH and Melia focused on cost cutting, as they battled dramatic falls in revenues with hotels caught between pandemic lockdowns, with only temporary summer respite.  

At NH, revenues were down 68.6% at EUR539.7m, and the company negotiated rent reductions to help reduce overheads. The company lost an average EUR28m per month through 2020, but ended the period with EUR346m of liquidity.  

Melia saw revenues plummet 70.7% in 2020, to EUR528.4m, and declared an ebitda loss of EUR151.5m. It finished the year with EUR316m of remaining liquidity – and says it continues to look at other options to maintain that liquidity, including potential asset sale and manageback deals.  

The company said it is “moderately optimistic about a strong increase in bookings from May and June, particularly in resort hotels, due to improvements in pandemic control and the opening of borders in the UK.” And in the Caribbean: “We have seen a certain recovery in sales over 

recent days, with the highest volume of direct bookings since the beginning of the pandemic. This makes us optimistic, particularly about the second half of the year. But CEO Gabriel Escarrer is under no illusions: “We believe that the recovery of the activity and revenue levels we saw prior to the pandemic will not be achieved until 2023 or 2024. During the transition to normality, the preference for domestic and short-haul travel and the difficulties in the recovery of urban hotels and business travel, will benefit resort hotels – a segment in which Meliá are leaders – and the destinations most dependent on domestic markets.” 

Both IHG and Melia are making moves on the environmental front. IHG recently launched its “Journey to Tomorrow” manifesto, including a series of community and waste reduction initiatives. “Our new environmental targets include lowering absolute carbon emissions in line with climate science across our owned, leased and managed hotels by 15% by 2030 and reducing carbon emissions per square meter from our franchise hotels by 46%,” said Barr. “For new booked hotels, our ambition is that within three to five years, these will operate with very low or zero carbon emissions and to maximize the use of renewable energy.” 

Melia continues to rank strongly on international assessments of environmental responsiblity. And it has recently announced plans to bid for EU funds, in order to help it improve the sustainability of its portfolio in general, and convert a hotel in Menorca to a zero carbon establishment.  

“We do not aspire to be among the largest companies in the world, but we do aspire to being a good company for the world,” said CEO Gabriel Escarrer recently. “That means we have to manage the resources within our reach in a sustainable way, guaranteeing a balance between our growth, environmental protection and social welfare”.  

Barr and Bazin both insist that any pandemic impact on business travel will be short lived, and have a low impact on their businesses. “I think the death of business travel has been exaggerated by a number of pundits out there,” said Barr. I think it’s going to be impacted on the margin. And the reason is I think some business trips would be replaced by technology, without question.” 

“I think the vast majority of business travel is going to come back, but it’s going to be a measured recovery over a number of years. It’s not all going to come back at once because some of these things take years of planning for conventions and conferences and big groups. 

Bazin sees a minimal overall impact: “If you do the math appropriately, you probably stand to have a 10% overall impact when it comes to domestic and international business travel. Some of it will be buffered by the increase of leisure and most of it and even more will be surpassed by the sources of new businesses that I touched upon like unutilized spaces of Accor who could generate much better revenues.” 

Barr also sees an upside from new ways of working: “I think there’ll be other drivers as well, too, speaking to a number of CEOs who are now looking at reducing their office space footprint, they’re talking about people living remotely.” 

“And so instead of driving to the office five days a week, they may have to fly in once a month. Additionally, people are talking about having smaller offices and less meeting space as well. And so they’re going to have to use hotels as gathering places to do things in the past they’ve done in their offices, which could be two drivers of demand overall, too. So I think the business recovery will be more robust than people are giving credit for.” 

HA Perspective [by Chris Bown]: Right now, Asia leads the US leads Europe out of the pandemic. That timing means it looks like it’s going to be a longer slog for the Spanish-based hotel groups, while Accor and IHG, with a broader spread of hotels, can point to brighter parts of their empires.  

One characteristic of this pandemic is that the green agenda is finally gaining mainstream traction. The sector has a mountain to climb on this issue, but at least big names are now sharing the same hymn sheet, and looking to find a way to reduce their carbon impact.  

While all the big groups have got their financial ducks in a row, there is still distress – and a pile of debts to settle in due course. And this could drive further M&A activity. Is now a good time to weigh up the merits of IHG and Accor combining?  

Additional comment [by Andrew Sangster]: There are split views on who are the likely winners among the global brand companies as the recovery gains traction. On one side, there are the supporters of the US giants who believe that the net unit growth story tells it all; and then there are the supporters of the Europeans, who argue that it is what happens outside of the US which really matters. 

The Net Unit Growth battle looks set to be won in the short-term by the North Americans. Morgan Stanley collected the evidence which had Hilton as the winner at 5.0% growth in 2021, Marriott on 3.3% and Choice at 2.8%. In comparison, Accor was at just 2.2% and IHG cops the booby prize with zero. 

We will leave to one side whether IHG is really an American company wrapped in a British flag, and ask the question why are the Americans doing so much better? Is it that their domestic market is so much stronger than Europe? 

While North America is an already largely consolidated market, Europe remains much less branded. In theory, this provides a bigger opportunity for growth. 

Accor is the company that has the European heft to make a difference. According to Bernstein, Accor’s portfolio is 46% European against 9% for Hilton and 8% for Marriott (IHG is 14%). Outside of the US and China, Accor is the largest player in every region. 

For the two Spanish listed groups, who are not so widely followed by analysts, there is the additional opportunity of the dislocation currently going on in the resort market. Melia is particularly well-placed to exploit this, finally pushing aside tour operators in favour of booking direct. Whether they have the ability to raise the necessary capital to do this remains to be seen. 

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