Understanding Hilton’s operating cost

Hilton’s operating cost

In this part of the series, we’ll discuss Hilton’s cost drivers. We’ll analyze the components of Hilton’s operating expenses and how each segment contributes to the company’s operating income.

Operating expense components

Hilton has operating expenses related to its owned and leased hotels and timeshare properties. This is separate from depreciation and amortization expenses and general, administrative, and other expenses. The property owner covers the expenses related to the managed and franchised hotels. Any operating expenses that Hilton has on these properties can be reimbursed by the owner. For fiscal year 2013, the components of Hilton’s operating expense included:

• Operating expenses related to owned and leased hotels accounted for ~60% of Hilton’s (HLT) total expenses. This included room expenses—house-keeping, laundry, front-desk staff. It included food and beverage costs. It also included property expenses—property tax, repairs and maintenance, rent and insurance. There were also costs related to sales and marketing, telephone, and parking. There were costs for operating spas and other recreation facilities. Hilton’s peers—including Marriott (MAR), Starwood (or HOT), and Hyatt (H)—also have more than 50% of their operating expenses related to owned and leased hotels. Wyndham’s (WYN) operating expense—related to owned and leased hotels—is comparatively less because most of its hotels are franchised. It only has two owned hotels. 

• Expenses related to the timeshare segment accounted for 14% of total expenses. It included sales and marketing costs and expenses on resort operations.

• Other expenses accounted for~30% of the total operating expense. It included depreciation and amortization costs and impairment loses. It also includes general, administrative, and other expenses. 

Hilton and its peers are part of different exchange-traded funds (or ETFs) including the PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ) and the First Trust U.S. IPO Index Fund (or FPX). The ETFs provide investors with an opportunity to diversify their risks.