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InterContinental Hotels (IHG)
InterContinental Slides into Red
This is the time that families are typically packing up their cars or boarding flights to take one last vacation before the summer ends. Rising prices and declining incomes have dampened those plans. Industries that once thrived during the vacation season have watched profits decline each month. Intercontinental Hotels, owner of the Holiday Inn chain, is the latest company feeling the heat as consumers opt out of taking vacations. The hotel company posted a net loss of $56 million in the second-quarter after writing down the value of some of its recession-hit businesses. Why is the company still in the red despite a turnaround in the economy? How long will a recovery take?
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Although the economy is heading in the right direction, consumers are still not reaping the benefits. Unemployment may be slowing, but the amount of individuals unemployed or underemployed is still high. All these factors are preventing families from forking over money to pay for unnecessary items such as vacations. As a result, hotels have experienced a consistent decline in profits during the first six months of 2009. Some were expecting demand for accommodations to pick up during the summer, but skepticism regarding the economy and jobs market prevented that from happening. InterContinental Hotels report on second-quarter profits was a stark comparison to the same period last year. In 2008, the company posted a net profit of US$163 million. IHG chief executive Andrew Cosslett said that trading was “very challenging” through the first half and that he expects the rest of the year to be “tough.”
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The world's biggest hotel company is also being hurt by a decline in business travel. As companies try to eliminate costs, teleconferencing and video meetings are becoming the primary option. Business travelers remain elusive according to Cosslett. InterContinental Hotels is reducing expenses to compensate for a drop in bookings as business and leisure travel declines in the recession. The company said it has cut about $51 million in expenses so far this year, and it will increase its 2009 cost target to $80 million from an earlier $70 million. These initiatives combined with an improving economy have led the company to believe that profits will start to increase, but not very quickly.
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InterContinental is hopeful about the future, but has issued some realistic expectations. The company's chief executive said “We can't see anything in our numbers at the moment to suggest we've hit the bottom. It could be a couple of years before we get back to the levels we were at.” It sounds like investors will have to wait a little longer before they start seeing the same type of results from 2008. Further, the company said its Board has proposed an interim dividend per share of 12.2 cents, equivalent to 7.3 pence, same as the prior year. The dividend will be payable on October 2, to shareholders on the register on August 28. Shares of IHG were mostly unchanged during morning trading.
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