Airlines and hotel investments: A marriage made in heaven?

A closer look at whether the concept of airlines investing in the hotel sector is a financially competitive model.

The ‘glamour of flying’ was a phrase often linked to the iconic, now defunct American airline PanAm. PanAm built a reputation in the 1950s and 1960s for delivering world-class service.

Back in the 1940s, founder Juan Trippe sought to offer business travellers and tourists at destinations served by PanAm with luxury hotels to fulfil their travel experience. But hotels were also a necessity for crew accommodation during long international flights.

What started as a pet project to explore hotel ownership in Latin America grew to something bigger – the formation of InterContinental Hotels, which PanAm owned 100 per cent. The objective was simple: build, operate and manage a global portfolio of airport, city and resort hotels. PanAm created a hotel empire. But, hotels are also capital-intensive and require continuous maintenance.

Tying up capital investment in concrete blocks is like airlines buying flying machines outright that can run into hundreds of millions of dollars per unit. So, companies prefer management and leasing, respectively, to reduce the financial burden. Airlines have tried and tested the PanAm route, attempting to cash in on the hotel business. Owning properties, or running them through management companies, delivered a sense of pride and achievement. Having landmark hotels in capital cities was seen as trophy assets.

Air France, Swissair, Lufthansa, Japan Airlines, SAS and Air India have all tried through their respective hotel chains, Le Méridien, Swissôtel, Kempinski, JAL Hotels, SAS International Hotels and Centaur. But ultimately, hotels are non-core to airlines. PanAm’s financial troubles forced the sale of its highly profitable hotel business in 1981.

The others all fell by the wayside for strategic or, as was the case with PanAm, for financial reasons. It was mostly sold off to focus on running the airline. Decades on from PanAm, the last few years have seen a resurgence of airlines clawing their way quietly into the industry. Have lessons of the past not been learned?

Aviation itself has matured strategically. The strength of global super hubs as airlines pump capacity into high-density routes with multi-frequencies has created an environment for strategic risk-takers. And the two big players in the Middle East have done exactly that.

The Emirates Group ventured into hotel ownership with a select-few luxury properties across Dubai. Aside from catering to holidaymakers and business travellers, Emirates has been able to control accommodation costs and keep the cash flow in-house by housing passengers on long connecting and delayed flights.

Through its majority-owned joint venture with British company Whitbread over the past 15 years, Emirates has developed the Premier Inn budget brand in the UAE. There are currently seven in Dubai and two in Abu Dubai. It’s a clear strategy to cater to high-demand budget-conscious leisure and business travellers in a thriving hotel market targeting different segments. The investment strategy appears to have paid off. Emirates’ hotels portfolio revenue over last year increased 12 per cent to US$184 million.

Contrast that strategy to Qatar Airways, which entered the hotel business in 2010 by opening the Oryx Rotana Doha now under Hyatt management. Essentially for business travellers and airline staff flying into Qatar’s capital city, it was the start of a long-term plan to operate 50 luxury hotels worldwide.

The 350-room Sheraton Skyline Hotel at London Heathrow became Qatar Airways’ second acquisition. A smart move considering more than 100 of its crew fly into Heathrow on at least six daily flights from Doha. The airline is closely monitoring key airport and city locations globally for further investments. Properties in Melbourne, Edinburgh, Geneva, Doha airport and resorts in Qatar are already operating under the airline’s Dhiafatina hospitality division with leading international brands managing the hotels.

For carriers wishing to make their mark in the hotel sector, they can perhaps take a leaf out of American Airlines’ book. A new 600-room hotel in Dallas, its headquarters and biggest hub, opened earlier this year solely for crew and staff on business trips to the HQ. With multiple leisure, wellness and dining options, it’s a win-win situation for an airline looking to reduce its costs and keep employees happy.

And if airlines are keen on having hotels as trophies rather than functional assets, look no further to attract the wrong headline than Pakistan International Airlines. Cash-strapped for decades, PIA owns two of the world’s historic landmark hotels in its small portfolio — The Roosevelt Hotel in New York and the Sofitel Le Scribe Paris Opéra.

Words by Updesh Kapur. Updesh is a communications strategist, media trainer, and an aviation and travel industry analyst.