In the opening moments of the film The Rock, a prisoner played by Sean Connery emerges from solitary confinement to confront federal agents who need a favour. The inmate, a veteran of Alcatraz, is promised anything his heart desires. Connery considers the offer, then says in his Scottish burr: "I'd like a suite, at the Fairmont."
Bill Fatt loves that scene. Easy to understand why. As chairman and chief executive officer of Canadian Pacific Hotels, Fatt calls the shots at the Fairmont, a 600-room icon perched atop San Francisco's Nob Hill. On his watch, $120 million has been spent restoring the 94-year-old landmark to its former glory--in the 1940s and '50s, the Fairmont hosted so many presidential visits it was nicknamed the "West White House." That meant restoring alabaster mouldings in the lobby, rebuilding swanky restaurants, and adding marble bathrooms and state-of-the-art electronics to the rooms. Now Fatt is making the hotel's name the centrepiece of what promises to be a global luxury hotel chain. Sean Connery bloody well better like it.
Fatt was parachuted into the top spot at CP Hotels three years ago, after a 10-year stint as chief financial officer of parent conglomerate Canadian Pacific Ltd. He was a trusted colleague of CP boss David O'Brien, who had big plans for the hotels. The chain's previous CEO, Robert DeMone, had retired at age 65.
As the new boss, Fatt was handed a string of 26 Canadian hotels that had enjoyed starring roles in their time, but sorely needed an inspired director if they were to play an important part in the growth of their parent company. In 1997, prior to Fatt's arrival, this modestly sized but impressive chain, famous for hotels such as Ottawa's Château Laurier and Quebec City's Château Frontenac, added just $54 million to CP's $860-million profit. Looking back, O'Brien says that in 1998, beefing up profits at the hotel chain was central to restructuring the entire conglomerate. O'Brien says: "In each of our divisions, we wanted to be market leaders. We want to focus CP into fewer businesses, and we want to do that transformation from a position of strength, not weakness."
Fatt appeared to be an unlikely candidate to head a hotel chain. The 49-year-old had spent his career in finance, and never placed a chocolate on a crisp, turned-down bed. He readily admits that his background--the Toronto native is a graduate of York University's economics program --gave him next to no insights on how to wring better day-to-day results out of a hotel chain. "There were strong operations people here when I arrived, and we've maintained and strengthened that team," Fatt says. "What we lacked was someone with strengths in finance, with a mandate to do deals. That's what I've contributed."
In 1997, while still with the parent company, Fatt helped create Legacy Hotels REIT, a publicly traded real estate investment trust that bought 11 CP hotels for $835 million, and has since bought several other properties from the chain. These infusions gave Fatt the money needed to continue refurbishing Canadian landmarks and buying up rivals in a consolidating industry. He's been spending more than $200 million a year sprucing up properties. With each restoration, Fatt tries to set his hotels apart from competitors such as Marriott International Inc. and Hilton Hotels, with their more modern properties. Low ceilings, and the broadloom and chrome installed in many Fairmont hotels during the 1960s and '70s, are being stripped away, replaced by the grand frescoes, marble lobbies and hardwood finishes that characterized the early days of these turn-of-the-century hotels.
Flush with cash, Fatt's first move as CEO was to buy the 35-hotel Delta chain for $94 million. The March, 1998, purchase gave CP a mid-market brand to go with its more upscale Canadian properties. Three months later, Fatt spent $540 million (U.S.) to buy the seven-hotel Princess chain from mining conglomerate Lonrho PLC of London, England. In October, 1999, CP Hotels made its biggest move, forming a new company, Fairmont Hotels & Resorts, in partnership with the U.S. chain's former owners, Los Angeles-based hotel-investment group Maritz, Wolff Co., which manages money for wealthy Americans such as the family that founded the Gap, and Saudi Prince Alwaleed bin Talal, who is also a minority partner in Four Seasons Hotels. CP contributed management contracts for 27 hotels, including Canadian landmarks such as Château Lake Louise, in return for a 67% stake in the new Fairmont chain. The Saudi prince and Wolff split the remainder of the company.
The results of all this wheeling and dealing: Through the first nine months of 2000, CP Hotels posted a $135-million profit on revenues of $656 million. Fatt is on track to almost triple profitability in three years on the job.
The facelift for the hotel chain required something of a personal makeover. Part of Fatt's job is to serve as a cheerleader, inspiring employees from different corporate cultures. As someone more comfortable digging through the numbers than standing before crowds, Fatt says the "rah-rah" part of his responsibilities was initially difficult, but something he's come to enjoy. This CEO likes his golf, but played only twice last year as a result of job pressures and family commitments: Married for 24 years, he has two sons. However, sacrifices on the links that led to strong performance at the hotel chain mean that, this year, Fatt will likely best the $265,000 bonus he added to a $435,000 salary in 1999. And CP Hotels biggest deals are still ahead of it.
Fresh from a trip to the United Kingdom, where he was scouting properties, Fatt said: "We are continually looking at opportunities around the globe." He said CP Hotels will likely pick up management contracts on eight to 10 hotels this year, but that alone won't make a big impact on the bottom line. It would take a major portfolio of quality properties to make CP Hotels the market leader, ahead of the larger Inter-Continental and Le Méridien chains.
In the past, CP Hotels considered bidding for both chains, but pulled back in part because the properties didn't fit the 20%-plus profit margins targeted in the upmarket Fairmont model. "They were off-strategy," Fatt says with a smile, knowing that he's lapsing into management-speak. "You can see obvious holes in our North American portfolio: Florida and Hawaii. And there are lots of wonderful hotels in London, Paris, Tokyo and Hong Kong."
Businesspeople who have dealt with Fatt come away commenting on how the CEO's command of financial details gives him the confidence to make quick, smart decisions on major initiatives. "Bill Fatt gets high marks. He's patient, methodical and prudent, and he won't do a deal just because he needs to do a deal," says Arthur Adler, an investment banker with New York-based real estate company Jones Lang LaSalle Hotels. If he can keep turning deals that build CP Hotels' profits, mark Fatt down as a likely successor to David O'Brien when the 59-year-old retires from the conglomerate's top job in a few years' time--traditionally, CP bosses have hung up their spurs at age 63.
Fatt tells stories about CP Hotels' finances the way Jerry Seinfeld tells jokes. He sketches out a series of points that lead to a profitable punchline. For example, when asked how anyone can justify spending $120 million on marble bathtubs at the Fairmont, Fatt smiles and explains that in hotel management, a major source of CP Hotels' profits, a large part of income is earned from incentive fees. Those fees get paid over the life of a contract. If CP Hotels participates in financing renovations, it gets a more generous incentive fee. Fatt says: "You know who's got the second-longest management contracts in the business? We do, at 45 years. Only Four Seasons is better, and they're at 55 years. Nice performance for two little Canadian companies, isn't it?"
Success at CP Hotels has come in part from Fatt's ability to capitalize on rivals who stumble. The stake in Fairmont was available partly because previous owners racked up oppressive debts building new hotels in Silicon Valley and Chicago. Problems also existed at Princess, as Fatt says: "The first time we looked at the chain, all we saw were a series of problems. We came back a second time, and started seeing the opportunities those problems might present."
Princess's woes started with the fact that under a mining company's reign of error, many of the hotels hadn't been upgraded in 20 years. The 343 rooms at the Princess Acapulco Pierre Marques didn't even have televisions. Down-market décor and ownership uncertainty meant tour operators avoided the Princess chain. Occupancy rates at the two Mexican properties were less than 30%. On closing the deal, CP Hotels had the cash to upgrade the chain and the clout to win back travel agents. Occupancy rates at the Princess resorts are already back to the North American average, at 64%. Chainwide, 70% of CP Hotels' rooms are filled each night.
Fatt can take advantage of others' mistakes, and is not afraid to reverse his own. His biggest blunder was trying to take the Canadian Pacific name to the world. In 1998, CP Hotels started a marketing campaign that saw its name tacked on Princess hotels in Mexico, Bermuda, Barbados and Arizona. The concept was, to put it politely, a disaster. Surveys of affluent U.S. travellers conducted by Goldfarb Consultants found that CP had absolutely no name recognition south of the border, with many potential guests saying they were less likely to stay at the hotel because they thought it was somehow connected to a railroad.
"We had a major problem. We had a great group of properties, and no cachet with the clients we were trying to attract," Fatt recalls. However, the same surveys showed that the Fairmont name resonated with CP Hotels' target market--affluent travellers who used the city hotels on business trips, then took their families or conventions to the resorts.
The solution was obvious, even if it meant changing century-old brand names. In November, most of this country's largest hotels, from St. John's Hotel Newfoundland to Victoria's Empress, added Fairmont to the front of their names. For the moment, the title Fairmont Château Frontenac may not trip off Canadian lips, but Fatt is confident that in a few years the locals will adjust, while a whole new crowd of affluent Americans will pour in. With this audience in mind, Fatt is rolling out a strategy for pampering wealthy guests, while still moving through big crowds of conventioneers. Fairmont has created deluxe floors within its hotels, an offering marketed as an Entrée Gold class hotel within a hotel.
North America-wide, hotel occupancy rates have been creeping slightly downward since 1997. CIBC World Markets analyst Rossa O'Reilly says CP Hotels' strategy of marketing the Fairmont brand and keeping standards high should be a winner. As the strategy progresses, he says, "If demand softens, we believe companies with quality brands and management teams will continue to be able to produce solid gains."
With the new name in place, Fatt faces the challenge of bringing more guests to relatively expensive hotels at the same time as the economy softens. "Obviously, a real slowdown would hurt us, but our strong presence with business groups that book well in advance should help minimize any pain," Fatt says. "If the economy really does go bad, which we haven't seen yet, we'd have to look at expense reductions, along with additional incentives programs to bring in guests."
If Bill Fatt can extend that Fairmont name to new landmark properties, and get the travelling public pumped up about his made-over hotels as well, those solid gains may take him to the very top of one of Canada's largest companies.
THE WORLD'S LARGEST HOTEL CHAINS
(Ranked by number of hotels)
Le Méridian 123 35,800
(Source: CP Hotels, R.O.B. Magazine)