Orient-Express Hotels (OEH)

TOP CONTRIBUTORS

Krishna K

Alan Ibrahim

Orient-Express Hotels (NYSE: OEH) is a hotel and leisure group, which is focused on the luxury market. The company owns and operates luxury hotels, restaurants, tourist trains, and river cruises in over 25 countries. The company earned $457 million in revenue and $69 million in net income in 2009.^[1]

OEH's hotels, many operated only seasonally, target luxury travelers, while other luxury operators, such as Marriott International (MAR)'s Ritz-Carlton, Starwood Hotels & Resorts Worldwide (HOT), and FOUR SEASONS HOTEL (FS) primarily target business travelers. Since high-end luxury hotels can only be added in select locations, company has been pursuing growth by adding rooms to existing hotels and acquiring other luxury hotels. The firm is also selling private residences attached to its luxury properties.

Just as other luxury hotel chains, OEH's is impacted by threats of terrorism, contagious diseases, economic cycles, and swigns in airline travel. Owing to these problems, people either stop traveling to those areas or choose alternative destinations for travel, which has a negative impact on the company.

Company Overview

Business Divisions^[2]

OEH has three main business divisions:

• Hotels and restaurants (87% of net sales): represent the largest segment of OEH’s business, contributing 84% of the company's revenue. OEH’s worldwide portfolio of hotels consists of over 3,600 rooms and suites in 42 deluxe hotels. Thirty-five of these hotels are wholly or majority owned and four are minority ownership. Of the owned hotels, 12 are located in Europe, seven in North America and 16 in the rest of the world. Revenue from hotels is generated from rooms, food, and beverages. Hotels owned by OEH achieve an average daily room rate of $407.

• Tourist trains and cruises (accounts for 13% of net sales): OEH's primary train is the Venice Simplon-Orient-Express, which operates an overnight service between London and Venice and short excursions in southern England. Another train is the Eastern & Oriental Express in Southeast Asia, which travels between Singapore, Kuala Lumpur and Bangkok. OEH also operates the "Road to Mandalay" cruiseship on the Irrawaddy River in central Burma and has a 50% stake in "Afloat in France" which operates luxury boats in France.

• Property development: accounts for the remaining 3% of revenue. OEH develops the real estate it owns adjacent to its hotels and sells deluxe residential villas and apartments.

Business Growth

FY 2009 (ended December 31, 2009)^[1]

• Net revenue fell 9.1% to $457 million. Revenue fell in all of the company's regional hotel groups, with the exception of North America, which had a 56% increase in revenue. European hotel revenue fell 26%. Additionally, the company's restaurant and tourist trains and cruises segments also had lower revenue.
• The company incurred a net loss of $69 million compared to a net loss of $27 million in the previous year.

Trends and Forces

• Economic Conditions: The hotel industry as a whole is vulnerable to economic conditions. An economic downturn, in the US or Europe, would have a negative impact on OEH' revenues. In a down economy, people don't take as many vacations, and the people who do take vacations tend to spend less money. However, OEH caters more to higher end luxury travelers and that market is usually less affected by economic conditions. So while an economic downturn may have a negative impact on OEH, the company may not feel the impact as greatly as some of their competitors who focus on middle or low income customers.

• Airline Travel: The majority of OEG’ customers travel by air to their luxury hotels. Therefore, OEH’ future profitability and success is contingent on the overall health of air travel. Terrorist attacks or disease outbreaks, such as the Avian Flu, could reduce the number of customers willing to travel to their properties. For example, Average Daily Room Rates in US hotels decreased 2.5% after 9/11.

• Weak Dollar: Three-quarters of OEH's revenues are generated outside of the United States and thus involve foreign currency. When the US Dollar falls in value against major currencies such as the euro and the yen, foreign currency translation effects increase revenues. One counteracting force is that nearly 50% of OEH's customers originate from US, who must exchange their weaker dollar when they vacation abroad and thereby won't be able to able to spend as much money. However, this may not have a big effect on OEH since they target luxury customers who have high disposable incomes.

• Seasonality: weather conditions play a large role in determining traffic levels for tourists. Thereby quarterly revenues vary as a result of higher traffic volumes during Spring and Summer months since many of OEH’s hotels and tourist trains are located in the northern hemisphere where they operate at low revenue or close during the winter months. Any event that disrupts travel patterns during the spring or summer would have an adverse effect on OEH's performance.

Competition

OEH is siginificantly smaller than its competitors in its geographic presence, but it operates higher end properties which have a higher revenue per available room or RevPAR, a key performance indicator within the hotel industry. The company competes with businesses like:

• Starwood
• Hilton
• Marriott

References

1. ↑ ^{1.0 1.1} OEH 2009 10-K "Selected Financial Data" pg. 50
2. ↑ OEH 2009 10-K pg. 5-18