The boom in the budget hotel sector was demonstrated yesterday when Travelodge, one of the leading UK players, announced plans to double in size and create 4,500 jobs over the next six years.
The news came as Whitbread, the owner of a rival chain, Travel Inn, said it was giving £400m back to shareholders after selling its luxury hotels chain Marriott in a move that will leave the group's hotel interests purely focused on the budget sector.
Whitbread intensified competition in the budget hotels market last year when it bought Premier Lodge, the third largest brand in the UK, for £505m. This deal gave the company a market share of nearly 40 per cent.
Alan Parker, the chief executive of Whitbread, said Marriott hotels had consistently failed to deliver sufficient returns on the capital that was needed to invest in the business. As a result, Whitbread decided to sell its Marriott hotels in a deal that could raise more than £1bn for the group.
It said yesterday it was setting up a joint venture with Marriott International, the worldwide owner of the Marriott brand, which will take ownership of the hotels while they are being sold off. Marriott will take on the management of the hotels on long-term contracts. Whitbread will get additional proceeds when the hotels are sold and a further £150m could be returned to shareholders.
The company believes the budget sector delivers better returns than the luxury market, which has suffered amid a downturn in global travel. It is making a return on capital of nearly 14 per cent, while Whitbread's Marriott division generated return on capital of about 6 per cent.
Grant Hearn, the chief executive of Travelodge, a former director of Travel Inn, said his business can enjoy returns as high as 18 per cent. He said there was still huge potential for the budget sector to expand. "There are around 65,000 budget hotel rooms in the UK. Estimates suggest that there could be up to 100,000 budget rooms by 2010. That 2010 forecast, however, is only around 10 per cent of the total number of hotel rooms in the UK. In France, as much as 15 per cent of the market is budget accommodation and in the US, around 18 per cent are budget priced," he said.
Travelodge, which was bought by Permira in 2003, has 15,000 roomsdivided between 265 hotels. It plans to spend £20m on building 2,500 rooms a year to double in size by 2011, creating 4,500 jobs.
Mr Hearn said: "The sector has seen huge growth already in the UK. It is not just businessmen that want cheap places to stay on work trips. The biggest area of growth has been in leisure travellers."
Travelodge is still dwarfed by Premier Travel Inn, and Mr Parker also has ambitious expansion plans for his brand. It has 449 hotels with 28,129 rooms but announced in October that it would build 1,500 rooms a year with the aim of reaching 35,000 rooms by 2008.
Analysts welcomed Whitbread's move to exit the luxury hotel segment. James Wheatcroft, at Investec Securities, said: "We are now reaching the top of the hotel cycle after some very bad years and we still haven't seen any sizeable returns from Marriott. It is extremely difficult to do so. Selling now crystallises the gain in the value of the properties and Whitbread becomes a much lower-risk business."