The lifting of COVID-19 restrictions across Europe is good news for travel and lodging companies. Despite macroeconomic challenges, revenue in the sector should be marginally higher this year than in 2022. Inbound international air traffic to Europe is set to reach 75%-80% of the 2019 volume (see "Europe's Remarkable Air Passenger Traffic Recovery Faces A Trickier 2023," published Nov. 21, 2022, on RatingsDirect). Additionally, freedom to travel abroad after more than two years of pandemic-led mobility restrictions will continue to fuel growth at least in the first half of 2023. S&P Global Ratings therefore expects occupancy in 2023 could rebound to 85%-95% of 2019 levels.

Geopolitical uncertainty in Europe combined with inflation will continue to bring volatility for the sector, however. Higher wage bills and energy costs will squeeze EBITDA margins, which we expect to be down 100 basis points (bps) to 300 bps. This, coupled with rising interest expenses and the need to catch up on capital expenditure(capex) could curb free operating cash flow (FOCF).

But stay-at-home and regional vacations may result in sweet spots, with theme parks and holiday homes emerging as winners. In addition, 2023 will be the first year since the pandemic began that lockdowns would not have an impact on full-year sales, as we saw in 2022, notably in Germany in the first quarter. Assuming no escalation of geopolitical tensions, we expect sales revenue to remain resilient this year.

COVID-19 Has Prompted A Shift In Consumer Preferences

Two years of minimal travel has led many European consumers to change their behavior. Many of them are more willing to replace branded food products with cheaper substitutes, eat in instead of out, and decrease other discretionary purchases than to compromise on vacations. However, we don't rule out trading down on hotels or a reduced number of vacation days to save on costs. Additionally, we saw business trips being turned into extended weekend breaks during the second half of 2022 and we expect this trend to continue in 2023.

Although forward bookings are not back to pre-pandemic levels, the gap is narrowing. We've observed an increasing number of travelers booking flights and hotels closer to the actual departure date, compared with before the pandemic. However, booking windows for international travel had lengthened to 32 days-35 days as of Dec. 31, 2022, compared with 45 days before the pandemic, indicating an improving trajectory.

Price Increases Will Also Fuel Topline Growth

Despite lower occupancies than before the pandemic, we still expect European lodging companies' revenue to increase by a single-digit percentage in 2023. Sales at theme parks and holiday homes exceeded the 2019 level, and we expect growth will continue (see chart 1). Hotels show mixed fortunes; for some (like Accord and InterContinental) occupancy will likely return to the 2019 level only in 2024, while others surpassed that in 2022 (see chart 2). Growth will stem mainly from the catchup of demand after lockdowns were lifted and strong ADRs, resulting in solid revenue per available room for hotels and holiday homes, and strong per capita spending at theme parks.

Chart 1

Chart 2

In some leisure destinations, ADRs strengthened to 15%-20% during peak summer season of 2022. Strong autumn sales reflect a similar pattern, with demand showing no signs of cooling off in the short to medium term. In our base case, we assume that ADRs will remain at similar levels as in 2022, albeit easing marginally toward the second half of 2023 as inflation subsides. We see similar trends in per capita spending at theme parks.

Cost Savings And Prudence Should Offset Weaker EBITDA Margins

Rising staff costs, energy expenses, and the overall cost of goods sold, due to inflation, will somewhat dilute EBITDA margins in 2023. Although companies actively hedged energy costs during the second half of 2022, in most cases these costs make up less than 5% of total costs. In addition, a shortage of labor and wage inflation will depress EBITDA margins somewhat in the short to medium term. We forecast wage inflation to remain elevated in 2023, particularly in Germany and the U.K. where the minimum wage is being raised and energy bills are doubling for some companies. Nonetheless, we expect these pressures to be partly offset by the continuation of cost-savings initiatives started during the pandemic times and a generally cautious approach to spending.

The picture diverges across subsectors. We do not expect hotel operators' profitability to be lower this year than last year 2022, due to the rebound of demand from the pandemic-related slowdown (see chart 3). However, persistent inflation means it will take longer for the recovery to pre-pandemic levels. By contrast, theme parks and holiday homes face a decline of only about 100 bps-300 bps in 2023, since the sector's profitability returned to its pre-pandemic level in 2022 thanks to the staycation trend (see chart 4).

Chart 3

Chart 4

Capex And Floating Interest Rates Could Put Free Cash Flow At Risk

Although leisure companies have implemented cost-savings initiatives since the pandemic began, and some of these will continue, we see potential pressure on FOCF. Although, some companies were able to reduce capex over the past two to three years, they may no longer be able to put it off over 2023 and 2024, owing to the backlog of investments needed for business growth (see charts 5 and 6).

Chart 5

Chart 6

At the same time, floating interest rates will remain volatile over the next 24 months. We expect the EURIBOR three-month rate to spike at 2.5%-3.5% over that period, therefore companies with a large share of floating-rate debt could see some erosion of FOCF. Some companies are actively hedging interest ratings and closely monitoring cash flows in efforts to prevent a strain on liquidity. Nonetheless, we believe that, on its own, an interest rates spike won't have a sizeable impact on hotels and lodging companies (see "Scenario Analysis: Can European Lodging Companies Sleep Easy About Rising Rates?," published Feb. 15, 2023).

Inflation And The Geopolitical Situation Remain Key Risks

European lodging companies will have to learn to live with inflationary pressures and volatile demand due to the Russia-Ukraine war.

If geopolitical tensions escalate this year, the sector's recovery could be in jeopardy. Due to Europe's proximity to Ukraine and neighboring countries, travel demand could easily shift to other continents, leaving companies dependent on international visitors more exposed than their U.S. counterparts.

If inflation doesn't ease over the next five years, costs in the sector could soar and consumers' discretionary spending will likely fall. However, people's increasing preference for staying in their home countries or regions, which developed during the pandemic, could see holiday homes emerge as the sector's winners for 2023.

Recent Developments By Company

Hotels and lodging

InterContinental Hotels Group (IHG):   We assume in our forecasts that IHG's S&P Global Ratings-adjusted net leverage fully recovered in 2022 and will remain in the 3.0x-3.5x range in 2023. We also believe that, thanks to its strong presence in the U.S., particularly in the midscale economy segment (according to the ADR), IHG will be able to pass cost inflation to customers and protect its profitability in the next 12-36 months (see "InterContinental Hotels Group Upgraded To 'BBB' On Recovering RevPar And Increased Leverage Cushion; Outlook Stable," Oct. 20, 2022). We expect IHG will make financial policy choices regarding share repurchases, dividends, and other investments that should enable it to keep adjusted net leverage lower than 3.5x, despite macroeconomic pressures, supported by its asset-light model, low capex needs, and larger share of the resilient midscale segment.

Accor:   Despite macroeconomic headwinds, we think Accor S.A. is on track to benefit from the continued recovery of leisure travel demand, ADRs, and recovery of the hospitality sector, as shown in its results as of Sept. 30, 2022 (see "Accor Outlook Revised To Stable On Recovery In RevPar And Improving Credit Metrics; 'BB+' Rating Affirmed," Nov. 10, 2022). We now expect 2022 revenue to reach €3.6 billion, versus €2.2 billion in 2021, with S&P Global Ratings-adjusted EBITDA at €610 million-€640 million. We now forecast that Accor's S&P Global Ratings-adjusted net leverage will remain close to 4.0x in 2022 and gradually decline toward our upgrade threshold of 3.5x over the next two years, assuming resilient trading in spite of high inflation and recession risks, assisted by Accor's strong diversification across markets, brands, and segments. We anticipate that the company will make financial policy choices regarding share repurchases, dividends, and other investments that should enable it to maintain S&P Global Ratings-adjusted debt to EBITDA close to 4.0x in 2022. Despite macroeconomic pressures, we rely on Accor's ability to pass on--to a significant extent--price increases to customers, particularly in the luxury and premium segment, implement cost initiatives, and maintain cautious capex, which should shield it from the high inflation we expect for 2023.

B&B Hotels (Casper Topco):   Casper Topco, parent company of B&B Hotels, reported robust results for the first nine months of 2022. A strong recovery in both leisure and business travel suggests that Casper's revenue will have reached about €895 million in 2022, up from €500 million in 2021. The company can pass the effects of inflation on to customers in the short to medium term, thus protecting its profitability. As a result, we now expect FOCF after leases and sale-and-lease-back operations to be about €20 million by the end of 2022, whereas we previously forecast that it would be negative €6 million. This indicates that, although B&B Hotels faces macroeconomic headwinds, we expect it to pursue revenue and EBITDA growth thanks to its operating model, hedging policy, and strong presence as a budget and economy hotel operator (see "Casper Topco (B&B Hotels) Upgraded To 'B-' On Stronger-Than-Expected Summer Trading; Outlook Stable," Oct. 20, 2022).

Travelodge:   Following a sharp rebound of the travel leisure industry during 2022, we expect Thame and London Ltd. (Travelodge) will report revenue above £900 million and an S&P Global Ratings-adjusted EBITDA margin of 47%-49% in fiscal year ended Dec. 31, 2022, leading to positive FOCF after lease payments. Please see "Thame and London Ltd. (Travelodge) Upgraded To 'B-' From 'CCC+' On Strong Trading Performance; Outlook Stable," Jan. 27, 2023. Although we expect a small decline in margins in 2023 as a result of inflation and other macroeconomic headwinds, we anticipate the group will continue to generate positive free cash flow after lease payments and keep leverage below 7.5x over the next 12-24 months. We believe Travelodge has sufficient liquidity to meet its financial obligations over that period.

Holiday homes and theme parks

Motion Midco (Merlin Entertainment):   We anticipate that, over the next 12 months, despite current pressures on consumer discretionary spending and macroeconomic headwinds, Motion Midco Ltd. can maintain its current credit metrics with a supportive financial policy of leverage tolerance at current levels or lower.

Piolin Parques Reunidos (Piolin Bidco S.A.U):  The group displayed a strong recovery during the first nine months of 2022, surpassing the full-year 2019 results, on the back of increased per capita spending and recurring cost-saving measures set up during the pandemic. Although we expect the group to face a challenging 2023, due to the discretionary nature of recreational park spending and inflationary pressures on the cost structure, we believe Parques Reunidos can sustain its performance in 2023 and expand in 2024 (see "Parques Reunidos (Piolin Bidco) Outlook Revised To Stable On Improved Earnings Prospects; Affirmed At 'B-'," published Dec. 7, 2022). We expect Parques Reunidos will continue deleveraging to 6.4x-6.6x over the coming year and display solid cash generation (after lease payments) of at least €20 million-€30 million over that period. We expect the company to sustain profitability at around pre-pandemic levels, supporting leverage below 8x, and neutral to slightly negative FOCF after leases in 2023. We expect improving industry dynamics on the back of normalization of operations, coupled with active yield management and successful operating efficiency measures.

PortAventura (International Park Holdings B.V.):   Spanish theme park operator PortAventura reduced its refinancing risk after extending the maturity of its upsized €640 million senior secured term loan B (TLB; €620 million before the transaction) to December 2026 from June 2024 (see "Spanish Theme Park Operator International Park Holdings' Amend-And-Extend Offer Reduces Refinancing Risk," Jan. 13, 2023, and "International Park Holdings (PortAventura) Outook Revised To Stable On Term Loan Maturity Extension," published Feb. 8, 2023). The company also upsized its revolving credit facility by €12.5 million to €62.5 million, of which €52.5 million matures in June 2026. We view the transaction as opportunistic since lenders could opt out of the maturity extension and would have been repaid by the original June 2024 maturity date and because those who consent will receive a step-up in the margin to 500 bps from 350 bps on the TLB with a 3% original issuance discount. We anticipate improving industry fundamentals. However, we expect that PortAventura could witness modest EBITDA volatility in 2023 due to a potential reduction in discretionary spending and macroeconomic uncertainty. In our base case, we assume that despite a marginal economic slowdown, debt to EBTIDA (leverage) would be 6.3x-6.5x on the back of increased park spending and positive FOCF in 2023.

Rompot (Sandy Holdco BV):   Holiday parks group Sandy Holdco B.V. (Roompot)'s acquisition of Landal from Awaze Ltd. is still pending approval by the Netherlands Authority for Consumers and Markets (ACM), so our 'B' ratings remain preliminary (see "Roompot (Sandy Holdco) Ratings Remain Preliminary With Regulatory Approval For Landal Acquisition Still Pending," Oct 31, 2022. Key concerns for the ACM are that the combined group would have a strong position in holiday parks in the country and become a leader for management of third-party parks, both of which could lead to price increases. We note that Roompot posted better 2021 results than we expected. Revenue and S&P Global Ratings-adjusted EBITDA increased to €444.4 million and €105 million respectively, supported by higher demand and improved pricing. The group also benefitted from the addition of property entities that generated company-defined EBITDA of €16.9 million. At the end of 2021, Roompot's stand-alone S&P Global Ratings-adjusted debt to EBITDA was 5.3x.

Appendix

Chart 7

Chart 8

Related Research

• Hotelbeds Outlook Revised To Positive On Strong Operating Performance; Ratings Affirmed At 'CCC+', Feb. 1, 2023
• Industry Top Trends 2023: Hotels, Gaming, And Leisure, Jan. 23, 2023
• Theme Park Operator Motion Midco (Merlin Entertainment) Outlook Revised To Positive On Strong Cash Flow; Rating Affirmed, Dec. 12, 2022
• Accor S.A., Dec. 9, 2022
• Europe's Remarkable Air Passenger Traffic Recovery Faces A Trickier 2023, Nov. 21, 2022
• Richmond UK Holdco Ltd. (PdR) Downgraded To 'CCC+' On Refinancing Risk; Outlook Negative, Oct. 21, 2022
• Spanish Theme Park Operator International Park Holdings B.V. (PortAventura) Affirmed At 'B-'; Outlook Negative, Sept. 28, 2022
• European Holiday Rental Operator Awaze Ltd. Outlook Revised To Stable On Resilient Trading; 'B-' Rating Affirmed, May 16, 2022
• InterContinental Hotels Group PLC, April 25, 2022
• B&B Hotels' Parent Casper Topco Outlook Revised To Positive On Improving Operating Performance; 'CCC+' Affirmed, April 25, 2022
• Thame and London Ltd. (Travelodge) Outlook Revised To Stable On Leisure Sector Recovery; 'CCC+' Rating Affirmed, April 25, 2022