Hilton CEO: Bring On The Money Press, Inflation Is No Big Deal To Us

Hyperinflation is no big deal to the CEO of Hilton, who says “We can reprice our product every second of every day.”

He’s not actually expecting hyperinflation, just the Janet Yellen-Jerome Powell kind of course. And though Hilton is a global company, he’s focused on U.S. inflation. But he makes the case that investors who worry about inflation should buy Hilton stock because Hilton can easily raise prices as the value of money falls. He’s not worried if monetary and fiscal policy drive inflation,

The ability to raise prices is helping hotel owners offset higher wages. Combined with new operating standards that require less labor, owners will likely see better margins on the other side of the pandemic, Nassetta said. Meanwhile, the strong leisure demand that’s driving the lodging recovery is likely to stick around for a while.

“If you look at the $3 trillion of incremental savings during Covid, there’s a long way to go to spend it all,” Nassetta said. “Thank you Federal Reserve and the U.S. Congress for fiscal and monetary stimulus.”

So what’s inflation actually going to look like. I don’t know. It seems to me it’s likely to be elevated for some time without recession, above levels we’ve gotten used to, but probably not over 5% (which may still be troublesome)?

  • I don’t know how much room the Fed has to mitigate it. When Paul Volcker induced a recession to reign in inflation, he had the support of the Reagan administration (though he was a Carter appointee). Current politicians in power would be more likely to cheer inflation than recession.

  • On the other hand, the 10 year Treasury yield is just a bit over 1.5%. In real terms investors may be willing to accept negative yield for safety, but that’s hardly pointing to hyperinflation.

Still, Hilton’s CEO is wrong to brush off inflation as a concern. He’s already changing his business to cut costs, of course, eliminating housekeeping positions by eliminating daily housekeeping service. And the end of free breakfast as a benefit in the U.S. means you have a food and beverage credit to spend as an elite… wherever and whenever food and beverage might be offered.

The problem most businesses face with inflation isn’t that ‘they can’t update their pricing board quickly enough’ so Hilton’s ability to change prices is a solution to the wrong problem. Hilton will face higher labor costs (that housekeeping reduction has already been baked into baseline expenses), higher construction costs, higher supplies costs – and they can’t just pass along those costs because they ‘change the price’.

  • Prices are determined by supply and demand, and while cost may influence the lower bound over time, the marginal cost of an unsold room on a given night is almost zero.

  • Customers may not be able to pay higher prices if their incomes don’t change at the same rate as Hilton’s cost inflation (wages may be sticky upward, not just downward). And some of their business customers may be more impacted by inflation than Chris Nassetta thinks his will be, causing them to cut back on room spend.

Contra Nassetta, Hilton does enter into long-term pricing agreements, not every room is sold a single night at a time. There are corporate pricing agreements (that aren’t just a percentage off) and event contracts are written 6 months and even years in the future locking in the price of rooms and meeting space.

One way in which Hilton would benefit from inflation is for any managed hotel properties where they’ve made minimum revenue guarantees to the owner they’ll find those guarantees easier to meet, and save on underperformance payments.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

More articles by Gary Leff »

Comments

  1. You missed the obvious point. He doesn’t mind inflation because Hilton has lots and lots of debt that will decrease as inflation rises. Furthermore, all of Hilton’s assets will likely appreciate in a high inflation environment.

  2. Hilton is least worried. They know they can use their name and family history to raise prices anytime they want, and still do good in the midst of the pandemic. Their name is everywhere.

  3. @Omar. I never thought that Hilton might be alleged piling debt. For some reason, I don’t see Hilton as a struggling business.

  4. I think you guys are missing the point:

    “new operating standards that require less labor, ”

    This means that room service is not coming back. It is absolutely insane to think that a pandemic that was supposed to improve standard of cleanliness (for those who were not already up to standards…and there are many) would result in the lowest standards of cleanliness in over a century.

    Can’t understand why people fork $150+ a room to not even have clean bed linens and marginal breakfast… But I guess to each their own…

  5. I actually think you’re underestimating the situation. Not going to get into a detailed discussion about it over the comment section of VFTW, but TL;DR – I believe US (and world will follow) is headed for some rough economic times.
    Specifically re: the stock market – I’m betting on a spiral down starting in the next few months. Personally poised to adjust my investment portfolio accordingly.

  6. As a daily reader I find the pop up adds very distractive & often breaks concentration from your message. I’ve read your blog for years now & I know funding is important, but this seems a little too much.

  7. Unfortunately, there is little the Fed can do to fight inflation by raising interest rates. When Volcker spiked rates our debt to GDP was 30%. Today it is 120%. If interest rates were increased to the historical normal of 4.5% more than 50% of our spending would go to servicing our debt. Both parties are guilty here. We need to stop spending. I’m afraid for our children and grandchildren the word austerity will be a word they will know all too well.

Leave a Reply

Your email address will not be published.