The Global Hotel Industry Is Dominated By Large Players But Remains Relatively Fragmented

The hotel market is largely dominated by large global players, such as InterContinental Hotels Group PLC (IHG, BBB/Stable/--) and Accor S.A. (BBB-/Stable/--), representing about 50%-55% of the overall market. Both companies are well positioned in their respective markets and have benefited from resilient travel demand over the past 12-24 months.

IHG is the world's third-largest hotelier by the number of guestrooms, which exceeds 955,000 across more than 100 countries. IHG's comprises 19 brands, including well-known brands, such as Holiday Inn, Intercontinental, Regent, and Six Senses. About 66% of its rooms are upper-midscale and midscale, 23% are upper-scale and upper-upscale, and 11% are in the luxury segment.

In comparison, Accor is the largest hotel chain in Europe, Latin America, Africa, and the Middle East and has a strong presence in Asia-Pacific. It has over 838,000 rooms in more than 110 countries and operates across 46 brands. 28% of rooms are in the luxury, lifestyle, and premium segments, 35% in the midscale segment, and 38% in the economy segment. Accor features brands such as Novotel, Sofitel, IBIS, Orient Express, and Fairmont.

Asset-Light Business Models Are A Plus

We positively note IHG's and Accor's asset-light business models because they limit operating leverage, capital intensity, and earnings volatility.  Hotel companies' business models range from asset-heavy, where companies own and manage hotels directly, to asset-light, where they charge fixed fees for brand usage, with minimal operational involvement. Asset-heavy lodging companies tend to exhibit higher operating leverage than asset-light lodging companies, which translates, on average, into lower return on capital and free cash flow generation over the cycle. The leading hotel brand operators (such as IHG and Accor, but also Hilton, Marriott, Hilton, and Hyatt) have been moving toward asset-light business models and key players have been disposing many assets over the past few years to improve the stability of their earnings. IHG's and Accor's business models are predominantly asset-light, with owned and leased rooms accounting for only about 2% of their portfolios, while the rest are either managed or franchised (see chart 1. However, their resilience to economic downturns, such as during the COVID-19 pandemic, differed due to variations in their asset-light approaches.

Chart 1

IHG primarily operates its hotels through management and franchising contracts, with franchised hotels accounting for 71% of rooms and managed hotels for 27%, as of June 2024.  This approach provides IHG with a relatively variable cost structure that helps it maintain solid and stable margins and cash flows, even during economic downturns. This was evident during the pandemic, when IHG remained profitable, with S&P Global Ratings-adjusted EBITDA margins of 38% in 2020, 49% in 2021, and more than 50% over 2022-2023. Thanks to the asset-light model, IHG's capital investment remains relatively low as hotel franchise agreements stipulate that existing and prospective franchisees must cover the operating costs of their hotels.

Accor's business model strengthened over the past few years.  The company has made significant progress in its transition to an asset-light business model and moved from a fixed to a leaner cost structure. Most of the company's portfolio is now split between managed and franchised hotel contracts, which represent 54% and 44%, respectively, of total rooms. Accor and AccorInvest have a long-term management contract, by which Accor generated about 9% of its revenues for the year ended Dec. 31, 2023. Accor still holds a 30.5% equity stake in AccorInvest. Accor's share of managed contracts is higher than that of IHG, meaning Accor has a relatively higher fixed-cost base than IHG. This results in higher operating leverage for Accor.

Accor experienced more pressure than IHG during the pandemic.  This was due to the company's relatively larger fixed-cost base and resulted in EBITDA turning negative €278 million in 2020 and remaining break-even in 2021, compared with €870 million in 2019. IHG's EBITDA fell to $372 million in 2020, from $1 billion in 2019, and rapidly recovered toward $700 million by 2021. While we acknowledge that Accor has proven its ability to recover and decreased its fixed costs, we note that it took Accor longer to return to pre-pandemic levels than more asset-light peers, such as IHG.

Approach To Multi-Brand Strategy Differs

IHG and Accor pursue a multi-brand strategy across different market segments.  We consider their multi-brand strategies represent some of the key strengths for both entities as they enable them to target diverse market segments, from affluent travelers seeking luxury experiences to budget-conscious guests requiring essential amenities. Accor has 46 brands, with 25 brands focused on the luxury and lifestyle segments. Accor focuses on adding diverse brands to cater to various niche markets, enabling it to target customers with different preferences in various regions. In contrast, IHG had 19 brands as of June 2024, of which seven are in the luxury segment. IHG focuses on franchising its hotels and investing in its existing portfolio of global brands, while continuing to add new brands at a steady pace.

Accor has a vast brand portfolio with a more regional approach. This could pose some challenges to Accor when it comes to maintaining a standard across its portfolio and make Accor's regional brands more difficult to franchise than global brands, as is the case with IHG. This is also evident in the proportion of managed versus franchised rooms. As of June 2024, managed rooms accounted for 54% of Accor's rooms but only 27% of IHG's. Also, we note that upper-midscale and midscale hotels tend to be franchised. In contrast, luxury and lifestyle hotels are managed, given the usual requirement to closely monitor and enhance consumer experience.

Both Companies Benefit From Large Geographical Footprints

IHG's hotel portfolio is well diversified, especially in the Americas, Europe, and Greater China.  55% of IHG's rooms are in the Americas, 26% in Europe, the Middle East, and Asia, and 19% in Greater China (see chart 2). IHG benefited from its exposure to the U.S., whose business and leisure travel sector rebounded quickly after the pandemic. Also, about 80%-85% of IHG's rooms are in non-urban markets, which enabled the company to perform better than Accor during the pandemic and which contributed to its post-pandemic resilience.

Accor has a sizeable footprint in Europe and North Africa, where 44% of its rooms are located.  France is the largest market in Europe with 43% of the region's rooms, followed by the U.K. (13%), and Germany (14%). Accor's second-largest exposure is in Asia-Pacific and the Middle East (44%), with the remaining 12% in the Americas, mainly Brazil (see chart 3).

Chart 2

Chart 3

Accor's Lower EBITDA Margins Constrain Its Position

IHG's adjusted EBITDA margin is significantly higher than Accor's (see chart 4), but a comparison is difficult.  This is due to two main factors. Firstly, IHG's portfolio is more skewed toward franchising, which reduces operating leverage and hence results, on average, in higher margins. This became evident during the pandemic, when IHG remained profitable despite reduced sales, while Accor reported negative adjusted EBITDA in 2020, break-even EBITDA in 2021 and, generally, took longer to recover. Secondly, and more significantly, each company reports contributions from hotel owners differently in their financial statements.

Chart 4

IHG's reported revenues also include System Fund contributions and reimbursable revenues.  Since the System Fund and reimbursable revenues are not intended for profits, we exclude these contributions from adjusted revenues and EBITDA. This has a margin-accretive effect, with a reported EBITDA margin--including contributions--of about 25% in 2023, compared with an adjusted EBITDA margin of about 50.

Accor collects similar contributions, which it calls "Service to Owners" in its revenues.  Yet it does not disclose the corresponding cost payments in its financial statements. Therefore, it is difficult to adjust Accor's EBITDA, meaning its adjusted EBITDA margins are not directly comparable with IHG's. The higher proportion of managed hotels in the case of Accor--54% versus 27% for IHG--also puts pressure on Accor's EBITDA margins as managed contracts usually increase operating leverage and the cost base.

Growth In Luxury And Premium Segments Is Key For Growth

IHG and Accor enjoy a strong presence in the midscale segment, with growing investments in the luxury and premium markets.  IHG's and Accor's current portfolios are notably skewed toward the resilient midscale and economy segments, with 66% and 73%, respectively. The midscale segment has proven its resilience amid macroeconomic volatility and benefited from the demand from leisure, business, domestic, and international travelers. As a result, IHG and Accor reported strong average daily rates and occupancy rates after the pandemic.

Their strategies are also similar in their approaches to the luxury and lifestyle segments, which we understand provide better growth prospects. IHG and Accor aim to expand into this segment, which is evidenced by the fact that 22% of IHG's pipeline of rooms and 24% of Accor's are in the luxury and lifestyle segment.

Prudent Financial Policies Support Sound Leverage Metrics

After a strong increase in travel demand and revenues per available room, IHG and Accor have fully recovered from the pandemic, with leverage below pre-pandemic levels.  We expect Accor's S&P Global Ratings-adjusted leverage will remain at 2.6x-2.8x in 2024, similar to 2.6x in 2023, while IHG's leverage could potentially increase to 2.5x-2.6x from 2024, compared with 2.2x in 2023. While both companies resumed shareholder returns in 2022 for IHG and 2023 for Accor, we understand they have a strong commitment to the investment-grade ratings. This should translate into financial policies that will enable them to maintain sound credit metrics.

We expect both companies will remain cautious regarding additional shareholder remuneration and will maintain sufficient headroom under the existing ratings in the case of unforeseen events.  Accor has announced that it will distribute €3 billion to shareholders over 2023-2027 (see chart 5). We also expect IHG will distribute close to $1.1 billion in 2024 and continue its progressive dividend policy, while also distributing close to $400 million per year in the form of share buybacks (see chart 6).

Chart 5

Chart 6

Strong Cash Flow Generation Reflects Investment-Grade Status With Adequate Headroom

IHG's and Accor's EBITDA expanded on the back of the strong demand for national and international travel, which increased occupancy rates and prices.  This resulted in strong cash flow generation, with reported free operating cash flow (FOCF) at about €400 million for Accor and $800 million for IHG in 2023, with capital expenditure (capex) as a percentage of revenues at about 4%-5%, and stable working capital (see charts 7 and 8). As a result, FOCF to debt stood at about 15% for Accor versus more than 30% for IHG over that period. Nevertheless, we expect increasing interest expenses and taxes in the case of IHG will lead to adjusted FOCF to debt of about 18%-20% over 2024-2025. For Accor, we expect lower restructuring costs and nonrecurring capex will improve FOCF to debt to 18%-20% over the same period.

Chart 7

Chart 8

FFO to debt, which follows a trend similar to that of FOCF, constrains the outlook for IHG and Accor.  We expect both companies' FFO to debt will remain at about 25% in 2024 (see chart 9). However, we continue to monitor the companies' ability to improve their cash flow generation on the back of the current macroeconomic dynamics. Overall, we expect resilient demand for travel and prudent financial policy decisions will determine both companies' trajectory over the medium to long term.

Chart 9

What's Next For IHG And Accor?

We expect both companies will continue their resilient trajectory in line with our base cases. This is thanks to stable occupancy rates and average daily rates, which benefit from the increase in the past two years. We also expect that Accor and IHG will expand into the luxury and premium segments. Growth in their existing markets, such as the Middle East and Asia-Pacific will increase profitability and cash flow generation. We will continue to monitor both companies' operating performance in the current macroeconomic and geopolitical environment and their commitment to a prudent financial policy.