The largest hotel companies have benefited from healthy U.S. demand so far this year, but the impact of the conflict in the Middle East looms large over their future expectations.
Hotel owners and operators broadly raised full-year outlooks on better-than-expected first-quarter performance, but the Iran conflict is carving a deepening hole in Middle East revenues and threatening to ground international travelers coming to the U.S.
Some operators are watching cautiously as a new set of risks enter the fold: disrupted air routes, surging jet fuel costs and diminished global travel momentum.
“We had a fantastic quarter all around, but it’s highly likely to be our strongest quarter of the year by far,” Pebblebrook Hotel Trust CEO Jon Bortz said on its earnings call. “Looking ahead, we remain appropriately cautious given policy and geopolitical risks, particularly the potential impact of the ongoing conflict in the Middle East.”
Pebblebrook’s adjusted earnings were $73.3M last quarter, up 29.5% from the same quarter last year and $9.3M above the high end of its prior outlook. The outperformance was spread across its portfolio and came from both higher revenues and controlled expenses, said Raymond Martz, the company’s co-president and chief financial officer.
The company left its outlook for this quarter and the rest of the year unchanged, planning to take it “one month at time” in the volatile and uncertain environment, Bortz said.
The company’s results were reflective of the industry’s performance to begin the year: Strong first quarters led many companies to raise their full-year guidance, but the conflict in Iran and muted World Cup hopes came up on earnings calls as headwinds for future growth.
Ryman Hospitality Properties President and CEO Mark Fioravanti said the company’s hospitality business delivered “meaningful outperformance” in Q1, with corporate group travel and leisure business performing above expectations.
But while the company’s executive chairman, Colin Reed, said the business is “firing on all cylinders,” he did raise concerns about potential rate hikes and the possible impact of oil price increases.
“There are some storm clouds in the horizon that we have to be cognizant of,” Reed said. “So there is a degree of caution in this.”
Marriott International Chief Financial Officer Jennifer Mason said in the first few weeks of the conflict, which began Feb. 28, U.S. travelers slowed international bookings, but those trends have normalized.
The hotel brand giant is back to seeing preconflict trends for domestic versus international bookings from the U.S., she said.
Marriott is expecting about a 50% reduction in revenue per available room in Q2 for its Middle East properties, and it expects the conflict will continue to impact Q3 and Q4. Its updated full-year guidance assumes the conflict in the Middle East could impact full-year global RevPAR growth by 100 to 125 basis points, Mason said.
Still, for the full year, Marriott expects 2% to 3% global RevPAR growth, driven by the hotel’s outperformance in the first quarter as well as higher than previously anticipated RevPAR growth in the U.S. and Canada.
“Maybe the most notable aspect of this conflict is how quickly the impact on fuel prices might change and what the impact will be on travel more broadly,” said Anthony Capuano, Marriott International’s president, CEO and director.
Air travel has become more expensive since the U.S. entered into its conflict with Iran. Jet fuel prices have shot up to $3.98 per gallon as of May 8, 64% higher than the $2.42 per gallon on Feb. 26, before the fighting began, according to Argus.
But not all hospitality executives projected that the conflict in the Middle East would drag down performance.
Hilton CEO Christopher Nassetta said on the company’s Q1 earnings call that he expects improving performance in the lower- and midtier scales with RevPAR strength continuing to move downstream from luxury and upper upscale toward “a C-shaped economy.” He pointed to continued investment in infrastructure and artificial intelligence driving business travel and growing hotel room demand as positive signals.
“There’s a lot going on in the world,” Nassetta said. “The Middle East is not helpful. But 75% of our business is still driven out of the U.S., and we have seen a really nice uptick in performance driven by a really nice uptick in demand across all segments.”
Hilton‘s systemwide RevPAR increased 3.6% year-over-year, which Nassetta said was driven by broad growth across all chain scales, brands and segments in the U.S. Q1 results were above Hilton’s initial guidance, and the company raised its systemwide RevPAR growth expectations for the year to 2% to 3%, factoring in a range of outcomes in the Middle East.
“I suspect there will be an off-ramp eventually, just given a lot of things, politically and otherwise, in the not-too-distant future. Things have already settled down a bit,” Nassetta said. “They’re still quite impacted, but they’re getting better.”
Beyond the Iran conflict, hotel executives used their earnings calls to discuss another hot topic on investors’ minds: AI.
These companies continued to ramp up their investments in AI and partnerships with popular tools to bring traffic to their sites.
Capuano said Marriott is continuing to optimize its content for AI services and is beginning the phased rollout of robust natural language search experience on marriott.com, with an app planned by the end of Q2. He said it will utilize real-time inventory to respond to guest inquiries and help them explore its portfolio more easily, answering hotel-level questions and supporting multidestination searches.
“While it is early days for travel searching and planning in AI, we believe AI presents an exciting opportunity to connect directly and in a more personalized manner with our customers, and we’re optimistic about the potential for AI to help strengthen our lower-cost direct booking channels,” Capuano said.
AI-driven travel planning still makes up a relatively small percentage of overall engagement, but early returns are promising. Less than a third of travelers have used AI tools to plan trips, but 84% of those who have said those tools improved their experience, according to a McKinsey & Co. study. Travelers directed to sites from an AI source also have a 45% lower bounce rate, or the rate at which users leave a site after viewing only one webpage.
Last quarter, Hilton deployed an Anthropic-powered platform for customers called the Hilton AI Planner. This large language model-powered tool combines Hilton’s property content with information about local venues and activities to allow customers to search for and tailor their experiences, Nasseta said.
Nassetta said the company is working with Gemini, OpenAI and Anthropic, banking on the likelihood that there will be “more than one winner” in the AI arms race.
“We’re working with everybody,” Nassetta said. “While it’s moving fast, there’s a long way to go. And so I do increasingly feel really good about what the opportunities for us are.”
