Hilton’s Profit Drops 66% in ‘Difficult’ Third Quarter

Hilton Hotels Corp. on Tuesday reported a 66% plunge in third-quarter earnings and forecast dismal results for the remainder of the year amid a dramatic drop in travel triggered by the mid-September terrorist attacks.

Beverly Hills-based Hilton’s financial results were in line with or slightly exceeded the estimates of many securities analysts. While regarded as overly optimistic by some industry observers, company officials repeated previous forecasts of a steady and noticeable improvement in 2002.

“The [occupancy] trends we have seen since mid-September are validating our philosophy of managing for recovery and our theory that, after this very difficult short-term period, we will see steady improvement in 2002,” said Stephen F. Bollenbach, president and chief executive of Hilton.

On the New York Stock Exchange, Hilton shares rose 58 cents Tuesday to close at $8.98.

The effect of the attacks on the World Trade Center and Pentagon turned what had been a weak three-month period ending Sept. 30 into a financial disaster for Hilton, which owns and operates about 2,000 properties under the Hilton, Hampton Inns, Embassy Suites and other brands. Hilton’s net income fell 66% from the third-quarter last year to $21 million.

“The business was as bad as we expected,” said lodging industry analyst Jason N. Ader at Bear, Stearns.

The drop in Hilton’s profit was tied to a 17.3% decrease in revenue per available room, a key industry measure of operating performance. The decline in revenue at Hilton’s owned and operated hotels was accompanied by a 7% drop in the average daily room rate to $124.66.

“There is going to be more discounting in the latter half of this year,” said equities analyst Thomas Graves at Standard & Poor’s Corp.

Hilton’s profit was further squeezed by a substantial drop in meetings and conventions that undermined demand for high-margin food and beverage orders.

Mirroring an industry-wide trend, the company’s full-service hotels in major urban centers--such as San Francisco, New York and Washington--and its resort properties, particularly the Hilton Hawaiian Village, were hit hardest by the slump in air travel.

“These are not markets people are flocking to en masse right now,” said hotel industry analyst J. Cogan at Banc of America Securities. “These markets are feeling the brunt.”

In fact, Hilton’s third-quarter results would have been much worse if it had not been for the performance of its lower-priced, limited-service properties, such as Hampton Inns and Embassy Suites. These properties, which Hilton added when it acquired Promus Hotels Corp. in 1999, are more dependent on local and regional travel that is less dependent on air travel. As a result, revenue per available room fell only 3.3% for the Hampton Inns chain, compared with 18% for the Hilton brand.

“The company has proven that its Promus transaction was a good one for them,” Cogan said.

Hilton officials have remained optimistic about the company and industry outlook, based on a recent improvement in room occupancy rates and other positive signs. So far, 40% of the meetings and group business Hilton lost in September and October has been rebooked. Based on these and other factors, Hilton officials estimate that its owned hotels in 2002 will match or slightly exceed this year’s revenue-per-available-room results.

But industry analysts are less confident about the outlook, with some expecting that 2002 will yield declines in financial and operating results. Many don’t see measurable improvement until 2003.

“It’s going to take longer to recover,” said Ader, who projects long-term weakness in business-related travel. “Companies are going to be very careful about the number of people they send on trips.”