With 25 years plus of executive leadership logged in the pressure cooker that is the hotel business, Hilton CEO Christopher Nassetta has seen a good number of crises wreak havoc on his industry.
There was the sharp drop-off in travel in the wake of the September 11 terrorist attacks. The SARS outbreak in the early 2000s didn’t do the lodging industry any favors. The Great Recession of 2008-2009 hammered consumer spending and raised borrowing costs for the hotel chains that feast on cheap debt to fund expansion.
That royally sucked.
From a Hilton perspective, Nassetta rode into a company as CEO in 2007 that was saddled with enormous debt right after its $26 billion private equity buyout by Blackstone. Some 18 months into the top job, Nassetta found himself being a war-time CEO — battling the Great Recession, a lethargic corporate culture that required sweeping layoffs to fix and a lot of debt that had to be overcome through a clear growth plan.
All that had to be addressed before Nassetta was to become CEO of a public company via a hotly anticipated IPO in 2013 (it was successfully executed — the stock gained 143% from the December 2013 IPO to the late December 2019, pre-coronavirus outbreak peak).
In short, Nassetta has been through more battles than a CEO 20 years his senior (the guy is 56 years old). But now the war-time CEO finds himself back in the tank commanding the good ship Hilton — operating 6,000-plus hotels worldwide — through a situation that, by his own admission, is unlike anything he has ever witnessed before.
That would be the coronavirus pandemic that has brought global travel to a grinding halt and rendered hotel chains mere ghost villages camping out in urban and suburban locales.
“What is different about this is that it’s globally synchronized and it is deeper than anything we have ever seen in terms of impact in the business. People keep saying this is unprecedented, and it is. We have seen the most dramatic declines in the history of our business,” Nassetta tells Yahoo Finance in an exclusive interview.
Unprecedented may be an understatement. More like mind-blowingly shocking to even the casual follower of financial statements and stocks.
Hilton said in an April 16 update that system-wide revenue per available room — a key industry metric known as RevPar — declined in a range of 22% to 24% in the first quarter. The stats from the first quarter and April month-to-date are unsettling to put it lightly:
First quarter RevPar: Americas (-20% to -22%); Europe, Middle East & Africa (-20% to -22%); Asia Pacific (-43% to -45%).
Current occupancy rates per an April 16 release: Americas (17%); Europe, Middle East & Africa (13%); Asia Pacific (22% compared to 9%in February, reflecting the reopening of China’s economy).
“You will see much more dramatic impact in the second quarter and likely into the third quarter than you saw in the first quarter because you will have the full brunt of the impact,” Nassetta explains.
Making it through the storm
Nassetta and his executive team have wasted no time in dusting off their crisis leadership playbook to take strong action to ensure Hilton comes out on the right side.
First and foremost, the company has quickly raised liquidity to stem any fears of a cash crunch in the marketplace. Nassetta inked a clever deal with America Express to sell Hilton Honor rewards points. It netted him $1 billion for the cash coffers. The company is raising $500 million in debt. It drew down its entire $1.75 billion credit revolver in March.
As of March 31, the company had $2.8 billion in total liquidity — the aforementioned debt raise will add to that cash war chest.
Hilton says it has enough liquidity to fund its business for the next 18 to 24 months at its existing pace of business. There are no material debt maturities until 2024.
Other survival actions by Hilton have been more painful.
Nassetta will defer his salary for the entire year. The executive team’s pay has been cut by 50% for the duration of the crisis. Most corporate headcount has been put on furlough for 90 days. Those corporate employees not on furlough will have pay reduced by 20%. Dividends and buybacks have been suspended.
Industry experts give Nassetta high marks for the swift action.
“Based on taking a look at the balance sheets, the leverage of some of the major brands at this point, I think Hilton is the most well capitalized to make it through and weather the storm,” Deborah Friedland, hospitality practice lead at the accounting and advisory firm EisnerAmper, said on Yahoo Finance’s The First Trade.
But make no mistake, the storm will be rough for Hilton, Marriott, Choice Hotels and other hoteliers that are sitting on closed properties still incurring expenses. It’s anyone’s best guess when hotels will be allowed by government officials to reopen, making financial forecasting next to impossible.
The lodging sector is on pace to lose $500 million in room revenue per day, according to the American Hotel & Lodging Association. And that trade group predicts that could mean a loss of upwards of 5.2 million jobs in the hospitality sector.
Nassetta is confident the hotel industry will recover. But he acknowledges it will take time as society adapts to lingering social distancing recommendations by governments and hotels spend more money to keep buildings free of contamination.
“We will recover. You can start to see early signs of that already,” says Nassetta. “We are in a fantastic position to weather the crisis for a very extended period of time. We remain super confident in the long-term prospects of our business and our model. We just have to get from here to the other side of this.”