Holiday Inn 2005 Annual Report Download - page 3

This operating and financial review (OFR) provides a commentary on the performance
of InterContinental Hotels Group PLC (the Group or IHG) for the financial year ended
31 December 2005.
The financial statements for the year ended 31 December 2005 are the first annual
financial statements that the Group has produced in line with International Financial
Reporting Standards (IFRS). This OFR therefore compares financial year ended
31 December 2005 with financial year ended 31 December 2004 under IFRS.
FIGURE 1
Percentage of branded hotel rooms by region 2004
North America 65%
Europe 25%
South America 20%
Middle East 25%
East Asia 25%
Source: Mintel
US market data shows a steady increase in demand in the hotel
market, broadly in line with Gross Domestic Product, and shows
growth of approximately 1-1.5% per annum in real terms since
1967 driven by a number of underlying trends:
• demographics – as the population ages, increased leisure time
drives more travel and hotel visits;
• disposable income rising as the global population becomes older
and wealthier;
• travel volumes increasing as low cost airlines grow rapidly;
• globalisation of trade and tourism;
• the increasing affluence and freedom to travel of the Chinese
middle class; and
• brand preference amongst consumers is increasing.
Suppressing this demand are potential negative trends including
increased terrorism, environmental considerations and economic
factors such as rising oil prices. Currently, however, there are
no indications that demand is being significantly affected by
these factors.
Supply growth in the industry is cyclical, averaging between zero
and 5% per annum historically. The Group’s profit is to a large extent
insulated from supply pressure due to its model of third-party
ownership of hotels under IHG management and franchise
contracts.
BUSINESS OVERVIEW
Market and Competitive Environment
The Group operates in a global market, providing hotel rooms to
guests. Total room capacity in hotels and similar establishments
worldwide is estimated at 18.4 million rooms. This has been growing
at approximately 3% per annum over the last five years. The hotel
market is geographically concentrated with 12 countries accounting
for two-thirds of worldwide hotel room supply. The Group has a
leadership position (top three by room numbers) in six of these 12
countries – US, UK, Mexico, Canada, Greater China and Australia –
more than any other major hotel company.
The hotel market is, however, a fragmented market with the four
largest companies controlling only 11% of the global hotel room
supply and the 10 largest controlling less than 20%. The Group is
the largest of these companies (by room numbers) with a 3%
market share. The major competitors in this market include other
major global hotel companies, smaller hotel companies and
independent hotels.
Within the global market, a relatively low proportion of hotel rooms
are branded (see figure 1), but there has been an increasing trend
towards branded rooms and market research company, Mintel,
estimates that the proportion of branded rooms in Europe has
grown from 15% in 2000 to 25% in 2004. Larger branded companies
are therefore gaining market share at the expense of smaller
companies and independent hotels. IHG is well positioned to
benefit from this trend. Hotel owners are increasingly recognising
the benefits of belonging to a branded portfolio, particularly a big
brand family like IHG that can offer various brands to suit different
opportunities an owner may have available. Furthermore, hotel
ownership is increasingly being separated from hotel branding and
this requires hotel owners to use third-parties like the Group to
operate or brand their hotels.
InterContinental Hotels Group 2005 1
operating and financial review