Hotel industry prepares for worst of times

Hotel industry prepares for worst of times
By Roger Vincent | Tribune Newspapers
January 19, 2009

Hotel industry fortunes fell hard at the end of 2008, and the prospects for 2009 look grim as Americans cut travel spending and leave plenty of room at the inn.

Hotel operators have seen room reservations fall drastically as business travelers and vacationers cut down on trips. In 2009, U.S. hotels will suffer one of the greatest annual declines in occupancy and revenue in history, according to analysts.

In their suffering, however, many hotels will give travelers a break by lowering prices or offering incentives, such as free meals, in hope of enticing more business.

"We just get creative," said Mehdi Eftekari, general manager of the Four Seasons Hotel in Los Angeles, where, he says, occupancy is down slightly. Incentive packages might include a free breakfast, car rental or spa treatment with room rental.


"We know that people have scaled back," he said. "The first-class traveler is traveling coach. The suite buyer is scaling back to a standard room."

The Four Seasons doesn't plan to lower room rates, but many others are. Analysts at PKF Hospitality Research predict net operating income will be down 14 percent at U.S. hotels in 2009, driven in part by room-rate reductions.

The lean times are expected to last into 2010 and follow several boom years.

Hotel business dipped sharply in the recession of 2001 and 2002, particularly in the months after the Sept. 11 attacks. But the years that followed were good for hoteliers as travelers resumed free-spending ways.

"This is a bad time in part because it is coming off of a great time," said Bruce Baltin, senior vice president of PKF Consulting Corp., which monitors the hotel industry.

There was a gradual loss of momentum into 2008 as occupancy dwindled. Then came the credit market meltdown last summer and the ensuing economic crash. Business and leisure travelers quickly cut back.

"September was definitely a point of departure, when hotel revenues around the country began a free fall," said Los Angeles attorney Jim Butler, a hotel specialist and industry blogger. "Since Labor Day, business has been falling off a cliff."

Most of the reasons revenue is slipping are obvious. Corporations are cutting back on travel expenses when they can, reducing the number of trips their employees take and often putting them in cheaper hotels when they do travel.

Companies also are axing group events such as out-of-town sales meetings and seminars, usually reliable sources of income for hotels.

This is to cut costs but also to avoid looking wasteful or frivolous, said hotel investment banker Donald Wise of Johnson Capital.

"Corporate America somehow woke up to the fact they have shareholders and stockholders," Wise said. "Suddenly, there was an awareness that in bad times you shouldn't be spending money like that."

As their incomes fall, hotel owners will respond by laying off staff and cutting other costs, which might include some guest services and amenities, PKF analysts said. Empty rooms help reduce operating expenses because they don't need daily services, but there is a limit to how many dark rooms hotels can tolerate financially before the lack of income becomes crushing.

"By and large, hoteliers have given in and are trying to compete on rate, which will create a downward rate spiral" of competition, Butler said. "That will mean significant pain for a lot of people in the hotel industry."

Many hotels traded hands during the boom years and, like many homes, are no longer worth as much as their outstanding mortgage debt.

"It's scary," Butler said. "Some owners will lose their hotels."

There will be bankruptcies, distressed property sales and loan renegotiations with banks, he said, but not as many as there were in the recession of the early 1990s.

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Los Angeles Times