Some of the largest hotel chains are expected to follow in the footsteps of Hilton in the quest to shore up liquidity during the COVID-19 outbreak. Hilton raised $1 billion from an advance sale of loyalty points to its co-brand credit card partner, American Express.
In a Securites and Exchange Commission filing dated April 16, the company said that the sale contributed to cash of around $2.8 billion, which would provide it with adequate liquidity to fund its operations over the next 18 to 24 months.
Hilton said: “American Express and their respective designees may use the points in connection with the Hilton Honors co-branded credit cards and for promotions, rewards and incentive programs or certain other activities as they may establish or engage in from time to time.”
Atanas Christov is founder/CEO, Affinity Capital Exchange, a New York-based technology start-up developing technology and infrastructure to allow airlines, hotels, banks and institutional investors to access financial instruments backed by loyalty point portfolios. He told us: “Hotels are following in the footsteps of the airlines and discovering a different way to monetize their programs. We have seen examples where the largest programs have been a way to unlock liquidity for their parent airlines, in good times and bad. More are discovering that the true power of a good loyalty program goes far beyond the more obvious customer-focused benefits. Using the program as an ATM has a number of benefits, as the buyers have a direct interest in sustaining and growing program relevance.
“Hotels—the ones that can—are following the airline model because they are in need. And a large co-brand card portfolio is valuable to both the hotel chain and the credit card issuer. So I don’t expect a substantial drop in price for the presold points; the profits generated by their use are compelling and discouraging penny-pinching.
“Of course there are risks (as Hilton remains able to set terms and conditions on its point currency, and may even devalue the points). Some of those risks are managed contractually, others take care of themselves: Neither company has an incentive to upset the apple cart.
According to Christov, this is the first jumping-off point for hotels as they try to be more innovative and respond quickly to the new world: “This is a very efficient way to generate cash, where other means may fail or deplete.”
Christov highlighted that recent accounting changes have made the valuation of loyalty points more standard and reliable. He pointed to the way in which loyalty points were now accounted for on balance sheets, commenting: “They used to be footnotes, but now they are more central and show up on the balance sheet, more adequately valued. They are not ‘free money’—but have enormous potential and a good runway to create value.”
Christov estimated that the majors would raise at least $10bn using points during the crisis. His firm was working with several financial services firms to structure and manage collateral for transactions like these and others, more directly targeted to institutional capital markets. “We are in active discussions and trust our work will help attract and focus liquidity, both now and in the future.”
Hilton said that it had seen a 56 percent to 58 percent decline in revpar for March. The company's hotels in Europe, the Middle East and Africa, saw revpar down 62 percent to 64 percent for the below, with properties in North and South America down 54 percent to 56 percent. In the Asia Pacific region revpar declined 74 percent to 76 percent.
The group said it had seen “early signs of recovery” in the Asia Pacific region, particularly in China, with current occupancy of approximately 22 percent, up from approximately 9 percent in early February and with over 130 of the nearly 150 hotels in China that had previously suspended operations having reopened.
As of April 14, the company had suspended hotel operations at nearly 1,000 hotels, or approximately 16 percent of its global hotel properties. Regionally, approximately 12 percent of Hilton’s hotels in the Americas, 60 percent of its hotels in Europe, Middle East and Africa and 15 percent of its hotels in Asia Pacific had temporarily suspended operations.
Insight: For those of us embedded in the sector, loyalty programs mean two things; points which you accrue by the gallon but seem to equate to not so much as a mojito and, for the operators, a way to see off the OTAs and drive direct bookings.
More on how successful the latter is once hotels can reopen. In the meantime, it seems that loyalty points are more than something you read about in monthly emails, they are hard cash.
This hack first caught the suspicion of this when talking to Christov a few years ago, but there’s nothing like $1 billion landing in the Hilton coffers to really ram this home. As he said, this is not “free money.” But it’s certainly not expensive and if Marriott doesn’t follow suit, then expect a round of hat eating.
The relationship between a hotel operator and their credit card partner is a glorious and happy one. At Marriott International, in 2018, with the benefit of renegotiated terms with its financial partners, credit card branding fees delivered $380 million, a figure which was expected to reach between $410 million and $420 million in 2019. The franchise fees earned from the co-branded credit card program represented more than 10 percent of total gross fees.
There’s nothing not to like about having a credit card, which is why Accor announced plans to launch one with Visa as part of the relaunch of the ALL loyalty program. Where Accor was less likely to make out like Marriott International was that the interchange fees outside the U.S. were on average lower, and so the economics associated with credit cards were quite different (and don’t take my word for it, that was from Arne Sorenson). Handily for Accor, it is in a strong cash position at the moment, so has no need of a points-for-cash plan.
There is much debate about What Will Change After The Crisis but viewing loyalty points as real cash looks to be something that will stick.
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