Europe’s upturning graphs

The return to business, and to profit, across Europe’s hotel markets was revealed in more detail, as operators Whitbread and Scandic reported trading updates.  

Substantially reopened UK markets look to be performing well off the back of strong leisure demand, while Scandinavians are also travelling in their region once more. In Germany, where vaccinations and market reopening has been slower, there are signs of improvement, albeit from a lower base.  

At Whitbread, whose Premier Inn brand leads the budget sector in the UK, CEO Alison Brittain said that since the UK market came out of lockdown in May, business had returned more quickly than expected. “We’re really encouraged by the trading performance. We’ve seen the leisure bounce but it’s been stronger than we anticipated. London and airports are the two areas that are tough still. We’ve been pretty pleased by how broad the recovery has been in other areas of our estate.” 

Premier Inn tracked UK occupancy from 32.8% in March to 40.2% in April, and 56% in May as lockdown restrictions there eased; by this point, 95% of the group’s UK hotels were open and trading, as were 75% of its associated restaurants. The first quarter delivered revpar of GBP17.30 off a GBP40.92 average room rate. The group said it was trading ahead of its competitive set, with Brittain predicting some independent competitors will not reopen.  

“We traded significantly ahead of the market in the UK, despite government restrictions,” said Brittain. “We’ve seen strong trading and very strong forward bookings in tourist locations, and a gradual increase in business demand.” 

At Scandinavian operator Scandic, there was also optimism off the back of steadily improving business. But the group remains in the red, as levels of occupancy are lower than in the UK. The group expects to book an average 35% occupancy in June, and based on forward bookings reckons July 2021 will beat the 42% occupancy of the same month in 2020.  

Occupancy has steadily grown, from 20% in April, to 25% in May and is consistently stronger at weekends. “The improvement came almost entirely from domestic leisure demand,” said president & CEO Jens. “Our business on the books for July is clearly at a higher level than it was last year.” Oslo is the leading city market in the region, reaching a maximum 35% so far this year.  

CFO Jan Johansson said revpar is continuing to pick up from a low base, reaching SEK229 in May. The second quarter will see the company receive SEK200m of state aid, but will leave Scandic still bleeding cash, as it needs 50% occupancy to start breaking even.  

“We expect to have a positive cash flow at about 50% occupancy – hopefully we will have a reality test on that in Q3.”  

Mathiesen said there was evidence of growing business and events demand. “We have seen smaller meetings lately, but that is in line with the easing of the number of people gathering. But the main part of the meeting industry has been postponed to autumn. But we do have meetings on the books for then.”  

In Germany, trading remains poor, as the markets there are just starting to ease from lockdown. Premier Inn saw occupancy of 14% in April improve to 18.2% in the last two weeks of May with two thirds of its portfolio trading, and 30 open at the end of the quarter. Scandic, too, reported improvement from a low base at its German properties. Premier Inn continues to grow in Germany, picking off three further properties in the last quarter to take its combined trading and pipeline figure to 73 hotels.  

Whitbread’s Brittain said there was little forward visibility: “What we are seeing is late booking – so we’ve not got a huge amount of sight of the mid-term.” She said the strategy had been to expect strong leisure demand and price accordingly, but added: “We’ve been pricing for occupancy – we want to be occupancy-led, and then start to recover our price.” 

The group’s blue collar business occupiers have continued to provide consistent bookings, as they did during lockdown as essential workers. Brittain said there had been “a gradual improvement in non-trades business.” Finance director Nick Cadbury said the group’s recent strategic move to grow business bookings, by signing agreements with travel management companies had yet to deliver results, but they would come: “We’re working hard with the TMCs, we think it will be a big opportunity for us.”    

At Whitbread, the improvement in UK business has meant turning the capital investment taps on, once more. The company has restarted its programme to upgrade a select number of rooms in the estate to its Premier Plus format, heading to a target of 2,000 rooms; pre-pandemic, the upgraded rooms were delivering a great revpar return for a modest additional spend.  

HA Perspective [by Chris Bown]: So far, so predictable. Pent up domestic demand is being unleashed, in markets where governments ease movement restrictions, and where vaccines give consumers confidence to travel.  

Whitbread is performing strongly in the UK, where anecdotally some of its hotels are currently asking GBP200 a night for weekend rooms this summer, at coastal locations. And it’s looking forward to some market rivals not reopening, or falling from the market in the coming months.  

In Germany, its business is at the point where it’s all about investment for growth. So picking off more stressed assets is clearly in the plan, and it will not be surprising to see further signings during the rest of the year, as it builds more scale.  

At Scandic, the numbers are all heading in the right direction – and the group looks like it will return to profit next quarter without having to tap lenders or shareholders for more cash. But it will still have a mountain of debts to climb, during the next couple of years.  

Additional comment [by Andrew Sangster]: It is very easy to focus on the micro economic aspects of investment (the firm and its potential within its industrial sector) ignoring the macro economic (the wider economy as influenced by national government and global policies). But all too often it is the latter than derails the best of investment strategies. 

And here we are in the UK, with fabulous prospects for hospitality, but a Government that appears deaf to the immediate need to allow the industry to begin trading normally again. Despite the apparent indifference of the authorities, the economy is recovering strongly. The Confederation of British Industry said at the end of last week that GDP growth this year in the UK will be 8.2% and 6.1% next year. It now expects a much lower peak in unemployment rate at 5.5% rather than the 7.3% it was expecting as recently as December. 

The big worry remains the low level of business investment, which is forecast to be 5% below its pre-Covid level at the end of 2022. The CBI blamed the scale of the decline during the crisis and “lingering uncertainty over the longer-term impact of Covid-19 on business models”. A clearer Government strategy is crucial to fixing this latter problem. 

At Whitbread, a bellwether for UK hospitality, there are also signs of strong recovery despite the confused Government policy. Analysts at Morgan Stanley said Whitbread’s results showed a recovery not just in traditional tourist destinations but also city centres (apart from London). They noted that “blue collar” corporate demand also continued to improve. 

At Credit Suisse, analysts in a note prior to Whitbread’s trading update, said that April’s data indicated corporate travel had already recovered to 92% (hotels were still closed to leisure travel in this period). “This highlights the nature of Whitbread’s guest profile, and minimal risk of disruption from virtual meetings, unlike the European asset-light peers,” said the analysts. 

I’m not so sure there will be long-term disruption as a result of the rise of virtual meetings, but it is undoubtedly the case that these will take longer to come back compared to the “white van” business that Premier Inn is more focused on. 

There was a more negative view of Whitbread’s prospects from Bernstein. The analysts pointed to evidence that pricing remains weak, down a third or so on pre-Covid levels. Perhaps Whitbread’s strategy is to keep the pressure on its weaker rivals but holding prices.  

The big picture for Whitbread is how well it can seize the opportunities presented by the downturn in both the UK and its other core market of Germany. If demand does not flow back as strongly as anticipated it will hamper its efforts to be a consolidator. While opportunities will be even more inviting, shareholders will be less keen for the company to spend cash. There is more to a successful recovery than an upward sloping graph: the gradient matters. 

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