As business travel continues to revive from a post-Sept. 11 slump, Hilton Hotels Corp. is benefiting from its strategy to fill its rooms with more executives and is doubling down on its bet.

The Beverly Hills-based hotel chain saw its guests pay an average of $158.72 a night during the first quarter up 6.7 percent from last year and indicative of higher-spending business guests.

Now it’s rapidly rolling out the welcome mat for what it expects to be an increasing number of business check-ins.

“That is really our choice, it is not indicative of any kind of a slowdown in leisure,” said Marc Grossman, a senior vice president at Hilton. “You will probably see that leisure slice get even smaller.”

Hilton has 450 hotels in the construction pipeline, more than any of its competitors. Two of its brands aimed at business travelers are expanding most rapidly: the Hilton Garden Inn, its upper mid-market brand, and Hampton Inn, its moderately priced brand.

With independent and group business travelers booking about 75 percent of Hilton’s room nights, net income climbed to $64 million in the first quarter this year, a 73 percent increase from the first quarter of 2004.

The hotel chain isn’t setting a specific target for the percentage of business travelers in its mix, but is directing general managers to give business travelers priority over leisure customers, with good reason.

For every dollar added to the room rate as business travelers return, the company reports that 90 cents goes to the bottom line. Also, group business travelers tend to reserve rooms long in advance and spend a disproportionate amount on food and drinks.

As of last December, there were 43 Hilton Garden Inn and 70 Hampton Inn properties under construction. These hotels are franchised and are comparatively easy to get started because they aren’t full-service facilities with meeting and banquet rooms.

Jan Freitag, director of professional services at Smith Travel Research, estimates that overall travel will be up 4.5 percent this year over last, with business travel probably picking up faster.

“For the year 2005, we will see very robust travel,” said Freitag. “It is just business as usual in terms of the number of travelers coming back to pre-9/11 levels.”

Hotel Industry


Others in the hotel industry are also being rewarded from the pickup in business travel.

Marriott International Inc.’s net income for the first quarter this year was $145 million, a 27 percent increase from a year ago. And its Courtyard by Marriott hotel brand, a direct competitor to Hilton’s Garden Inn, is one of the fastest-growing in Marriott’s portfolio, jumping to more than 650 units in 2004 from about 515 the prior year.

Starwood Hotels & Resorts Worldwide Inc., whose business-oriented brands include Sheraton and Westin, had net income of $79 million in the first quarter this year compared to $34 million a year ago.

“Most companies that own hotels in key urban locations are benefiting from a rebound in business travel,” said Will Marks, a managing director at JMP Securities in San Francisco.

And Hilton and other chains are poised to generate even more revenue because the new hotels are not being built fast enough, while in some key markets developers are taking rooms off the market as they convert them into condominiums. That’s happening at the Plaza Hotel in New York, while there is talk that some rooms at the Millennium Biltmore Hotel in downtown Los Angeles may be converted. That drives up rates for the remaining rooms.

Of course, there is one big danger, with the strategy: It presumes business demand will continue to increase, or at least hold steady. And some analysts believe a hotel glut is a real threat.

“We will probably actually overshoot and build too many,” said Freitag, referring to hotel construction generally. “It is just part of having a cyclical industry.”

But Grossman said that Hilton believes that the market is so undersupplied that there is a long way to go before it becomes oversaturated. Also, Hilton is hedging its bets by bringing hotels online that are almost exclusively franchised.

That allows the chain to count on steady franchise fees, while shifting the risk of a slowdown on the franchise owners. But there is a flip side: if business travel booms even more than expected, the company misses out on even greater revenues.

There were 2,259 Hilton hotels as of the end of last year. Of those hotels, Hilton had an interest in and operated 115, leased seven, managed 206 owned by others and franchised 1,900.

Lessons Learned


The lodging industry has learned to manage its properties more effectively since the post-Sept. 11 downturn, which had hotel companies fighting over a smaller pool of travelers and relying on what leisure customers there were.

In 2003, revenue from Hilton’s owned hotels totaled about $2 million, a decrease of 3 percent from the prior year, which the company blamed on its reliance on leisure travel, according to a Securities and Exchange Commission filing.

But since then Hilton and the other chains have trimmed costs and streamlined operations to cut debt. Hilton’s debt-to-equity ratio plunged to 2.9 in mid-2003 from 4.1 two years prior, and at the end of the first quarter Hilton had long-term debt of $3.63 billion, down from $4.45 billion two years earlier.

In addition, the company has successfully moved to capture the customers that used travel Web sites such as Travelocity.com when hotel bookings were harder to come by. Those sites sell rooms at cheaper rates and also take a cut of the action.

Hilton reported in a SEC filing last year that gross reservations through its Hilton Reservations Worldwide and other general Web sites increased 13 percent over 2003. Its online bookings through its branded Web sites increased 28 percent over 2003.

And in the first quarter, the company’s revenue per available room, a key indicator, was $111.65, a 9.1 percent increase from the same period last year. About three-quarters of the increase came from the more expensive rooms rented by business travelers.

Buoyed by the strong indicators, Hilton’s stock was up nearly 70 percent last week compared to two years ago, closing at $22.48.

Marks said Hilton appears well positioned for the next few years. “It continues to focus on its current brands so the company is very focused on maintaining and growing market share in its key brands,” he said.