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Hotels ride out financial storm

  • Story Highlights
  • While airlines struggle, business is steady for hotels, says IHG CEO
  • In a downturn customers demand value, but not necessarily cheaper prices
  • IHG is expanding in China and has plans for growth in Russia and Middle East
  • Rates are expected to remain stable, says IHG CEO Andrew Cosslett
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LONDON, England (CNN) -- While airlines are being hammered by oil prices, business remains steady for the hotel industry.

IHG CEO Andy Cosslett speaks to CNN's Richard Quest at the IHG Americas Conference for Owners and Investors in Los Angeles.

CNN's Richard Quest is in Los Angeles to speak to Andrew Cosslett, CEO of InterContinental Hotels Group (IHG) to find out how the group is coping with the downturn.

IHG operates Holiday Inn, Crowne Plaza and InterContinental and has more than 4,000 hotels and 600,000 rooms worldwide.

Richard Quest: These are difficult times. What's happening in your industry and what are you seeing at IHG?

Andrew Cosslett: We're moving into a difficult few months. But at this stage we seem to be quite resilient.

Occupancy levels are down a bit, but rates per room are compensating for that. We are very busy; we are still opening; and signing a lot of hotel deals.

So we're up -- more modestly than we have been in the last two or three years -- but we are still up. Video Watch Cosslett reveal how his hotels are managing »

RQ: While the airline CEOs are almost hanging themselves, the hotel owners don't seem terribly depressed. Within this industry we are getting two very different tales.

AC: If you're in the airline business, fuel and energy is a huge part of your overall profit and loss. In the hotel industry it's far, far less. So the fluctuations in the oil prices hurt, but they don't agonize.

The second thing is, if you look over the past four or five years, the hotel industry has seen a really good series of increases in rate and occupancy. So the margins have been very healthy.

Airlines have seen price wars, cuts in fares, and competition from low cost air carriers. The overall margin structure has been under more pressure.

But we haven't seen that in hotels. Therefore when the tough times come to bear we are able to withstand things a bit better.

RQ: Are you seeing any shift in what the traveler is prepared to pay for?

AC: When people spend their hard-earned dollar, they want to know that they're getting value -- not necessarily cheaper prices, but value.

And the big brand hotels offer a lot of value. You're plugged into a reservation system and you get loyalty points for your stay. Maybe 18 months ago people just accumulated loyalty points, but now they're a currency.

RQ: What can and can't you drop? Can visitors expect to see smaller portions or fewer towels?

AC: Customers know when they're being chiseled. If you start cutting corners and turning the lights off early people see it and they note it. If they're loyal customers they want to know that even if times are bad we are going to respect them, their needs and what they like

But there are some obvious things you can do with no trade-off. So some of the menus might be rebalanced in certain parts of the world, but nothing fundamental that would actually affect the customer's stay with us.

We've also got some schemes under development, which will hopefully reduce the amount of energy being used in hotels. And that's a win-win because if you can save energy and save costs, the hotel owners and the guests don't mind -- they actually prefer it.

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RQ: Are companies taking their executives out of expensive rooms and putting them in lower or different brands?

People are making choices to get their executives into the mid-scale.

The choice they're not making is not to travel. They're getting there in other ways and they're probably paying less because they're staying in different types of accommodation, but they're still coming.

We're well positioned because we have many more hotels in that mid-scale cluster than we do at the top. So we don't necessarily have to drop our rate because they are actually making a saving by bringing the traveler down a class or two.

RQ: What's the one thing on the horizon that could create trouble for IHG?

AC: A tightening in the financial and lending markets can't be good long term -- not just for the hotel business but mainstream American business -- because companies will start to lose the ability to borrow money to drive their day-to-day operations.

RQ: Is it difficult to keep investing when cash preservation is very significant?

AC: Well for IHG, we've sold a lot of our hotels so we're not investing in the capital anymore. [IHG signs deals with owners who own the hotels, and IHG operates them]. We're investing in systems, technology and brand management.

RQ: But you are requiring your owners to invest in capital management, particularly on your bigger brands where you are doing a complete relaunch.

AC: If you talk to the owners, most of them will tell you that now is exactly the right time to invest because it takes a year or two to get the re-launch of Holiday Inn completed.

It goes back to value: if you are doing something to update and up-rate your product in a community of hotels where everyone else is doing nothing, you will get more people through your door. And the savvy owners know that.

RQ: Who doesn't survive in this industry?

AC: The people who are finding life difficult are the ones who are not connected to a big system such as big loyalty scheme or a reservation center. Through a turbulent period we can continue to put demand through the doors of hotels for the owners.

And if you go to the bank now and try to get a loan to open a new hotel, unless you have one of the big brands on the front of the application form, you are not going to get the money.

RQ: We know you are expanding voraciously in China. What other parts of the world are you interested in?

AC: At the moment we are trying to balance the books in terms of where we manage our risk as a business. China is a big bet and we are growing very fast there. We have just opened our 100th hotel there and in other parts of Asia too.

The other places we are really interested in at the moment are Russia, where we have just taken a number-one slot in Moscow and we are expanding out of there.

And of course the Middle East. InterContinental is probably the best-known brands in the Middle East because that's where Pan Am, that gave birth to the brand in the 1940s, used to fly.

Now we're bringing all our other brands there too. And because it's the Middle East; they have a lot of money and they are developing at an incredible rate.

RQ: Do you fear a price war?

AC: Well, we are the biggest in the world with 600,000 rooms around the world. We have big competitors, but not really any that can put us in a position where we'd have to respond in a crazy way.

In the face of all this economic pressure, the rates charged in hotels in America are 4-5 percent higher than they were this time last year. As long as you're offering value, the customer will pay.

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RQ: What's the one thing that's bad value?

AC: Bad value? I think we're charging too much for phone calls in an era where people are turning up with their own mobile phone. That's something we should look at.

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