Global travel and social contact restrictions mean demand for hotels is the lowest Intercontinental Hotels Group (IHG) has ever seen – with revenue per available room (RevPAR) expected to drop by 60% in March alone.
The group announced a number of measures which are expected to reduce costs and preserve cash.
In this environment, IHG have acted decisively across the business to challenge all discretionary costs and reduce salary and incentives, including substantial decreases for Board and Executive Committee members. These measures will result in a reduction of up to $150m in business costs. Similar actions, along with a reduction in marketing spend, are being taken across the System Fund in response to expected lower assessment fee receipts.
IHG are also taking further steps to protect our cash flow, including reducing our gross capital expenditure by c.$100m from 2019 levels and managing working capital. In addition, the Board is withdrawing its recommendation of a final dividend of 85.9¢ (c.$150m) announced on 18 February 2020 and will defer consideration of further dividends until visibility has improved.
The shares rose 15% following the announcement.
Keith Barr, Chief Executive Officer, IHG, said: “At this unprecedented time, our top priority remains the health and wellbeing of our guests, colleagues and partners, and ensuring that in light of such a significant impact on the global economy and, in particular, on the travel industry, we take the right steps to protect the long-term health of our business.
“Demand for hotels is currently at the lowest levels we’ve ever seen. IHG has a robust business model and the measures we are announcing today to reduce costs and preserve cash give us the capacity to manage the business through this unique environment and to support our owners during this incredibly difficult time.
“These were not easy choices and we are mindful of the impact these decisions will have on our colleagues and shareholders. However, we believe that these are essential to ensuring that we come out of this as strong as we possibly can and ready to capitalise on what remains an industry with excellent long-term growth potential.”
Emilie Stevens, Equity Analyst at Hargreaves Lansdown
With people being told to stay at home across the globe, it’s near enough the worst possible time to be in the hotel industry. So it came as no surprise IHG said demand is the lowest ever. With revenue per available room expected to be down 60% in March – that’s a real hit to earnings. And things could still get worse before they get better.
Despite this news the shares rose 15% this morning, which given the fact IHG’s share price used to dip at the mere sniff of a RevPAR decline, highlights we really are living in different world at the moment. Fundamentally, it’s one where cash matters most – how much does the company have, how much can it save and how much can it borrow if needed.
IHG said initial savings measures could cut around £150m of costs and are focussed on reducing non-essential spend and staff costs – including at board level. The group can also borrow cash if it needs. While IHG’s franchise model will help mitigate some of the pain initially – if franchisees are forced out of business that’s bad news for cash and long term profits.
Building on this was the other bit of good news that hotels in China are reopening, with 60 now closed as opposed to 178 at the peak. While recovery is likely to be slow, more open than closed is a good start.