Analyst: Vegas a blueprint for labor talks

Home » Analyst: Vegas a blueprint for labor talks

After meeting with representatives of the Culinary Union and its parent, Unite Here, Truist Securities analyst C. Patrick Scholes “came away maintaining moderate caution on the degree of hotel-level profit and operations impact from this year’s union contract negotiations.”

Scholes was initially concerned about the effect on the Marriott, Hyatt, and Hilton chains. (Marriott enjoys a marketing affiliation with MGM Resorts International.) Union members had informed him that “pretty intense negotiations” were taking place.

From the hoteliers’ own perspective, outside of the San Francisco and Hawaiian markets, labor talks were “not a major nationwide concern at this stage.” Assuming wage increases, Scholes projected “continued pressure” on lodging REITs’ ability to grow their operating and profit margins.

He wrote, “We assume greater potential labor-cost growth for markets that have had more significant cost of living increases since the pandemic and markets where RevPAR/hotel profitability have recovered more significantly.” Scholes also noted that REIT-owned hotel properties tended to be concentrated in union-intense markets.

As for the three franchisors he focused on, Scholes observed that they were the public face “for negative news such as hotel strikes and any inefficiencies/customer frustrations from union work rules (i.e., a bell staff that can bring luggage from a taxi to the front desk, but not upstairs to a guestroom and where a guest can get frustrated to have to tip two employees).”

Scholes didn’t believe immediate raise hikes would be problematic, but that “more material catch-up wages” would manifest in 2025 and 2026. He reminded readers that there hadn’t been a major negotiation since 2018.

The analyst opined that much would depend on hotels’ ability to push prices in order to keep up with cost inflation. “A critical factor for how wage growth manifests to hotel profit trends will be the hotels’ ability to push ADR and catering revenues above labor cost growth without considerable guest pushback or a deteriorating macro [economy].”

Lacking contract specifics and still several months shy of the actual contract expirations themselves, Scholes nonetheless remained convinced that the outcome of talks would be a “moderate headwind” to profitability. He added that Unite Here and the Culinary were aware that profits remained challenged since the pandemic.

As for the unions, they were said to be conscious of the profits made by the key hotel companies, as well as of the “underwhelming” performance of lodging-based REITs. Scholes conveyed a warning, writing that “difficult contract terms and strikes can impact capital flow to unionized markets and over time the number of union jobs.”

Expanding on his theme, Scholes was of the view that widespread strikes would reflect badly on unions rather than management, given the weakness of the post-COVID lodging industry. In particular, he criticized a proposal in Los Angeles to place homeless people in hotels “next to paying guests.”

Scholes was unworried about the major hotel chains, outside of the San Francisco market, saving his concern for third-party operators such as Aimbridge Hospitality. He noted, “We view the major hotel brands in general tend to pay market-leading wages/benefits as an intentional strategy.”

For Scholes, what was past in Las Vegas is prologue to the current talks, with Unite Here centering on wage increases and stemming job reductions. Its mantra was “restoring daily room cleaning.”

Another union demand was “a seat at the table” when implementation of new labor-affecting technology is being considered. “We assume technology concerns are particularly related to ways for hotels to potentially permanently replace workers via automation/AI/robotics, although we are dubious to how much this transition would occur anytime soon, especially for higher-end hotels,” Scholes wrote.

Another sticking point was stability of income, including tips. Scholes also fretted about “high undocumented border crossings” affecting the industry. “Additionally, we assume the hotel negotiations will include the normal matters on healthcare, pensions, seniority, severance, and other non-wage benefits.”

If unions are banking on using their Las Vegas deals as leverage, they may be mistaken. Scholes pointed out that post-2019 casino profits were “up materially,” improving Unite Here’s bargaining position. Caesars Entertainment, for one, enjoyed cash-flow margins of 45 percent last year.

Scholes’s data showed gross operating profits for the lodging industry only five percent higher over that same period, against a 19 percent inflation rate. “Additionally, Las Vegas’s negotiation was centered around three major operators … relative to a more diffuse and geographically diverse constituency in U.S. hotel operations and ownership.”

The analyst didn’t anticipate the hotel pacts matching the 10 percent Year One raise increases seen in Las Vegas, let alone the six percent escalator in the remaining years of the Culinary pact.

Casino-related discussions were, Scholes said, largely backward-facing, “as representatives will use lessons learned from Vegas in upcoming lodging negotiations. … Union representatives also highlighted the successful implementation of stronger protection language for technology-related worker displacements in the new LV contracts, which they had highlighted as key concern.”

Scholes noted that in-hotel sundries shops and catering staff were not proving easy to replace. He also implied that worries involving robotics were exaggerated, citing union anecdotage of bartending robots that were quick to break down and costly to maintain. He underlined his point by citing an all-robotic hotel in Japan that had to sack half of its mechanical “staff.”

While Scholes saw housekeeping making a comeback, he viewed room service as an endangered species and not a priority for the unions. “We argue in-room dining has been a generally poor profit item for hotels for years and with mixed-at-best guest satisfaction,” he wrote, adding, “we do not see hotels eager to bring back in-room dining where it has been eliminated.”

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