US hotels see flagging fortunes

Los Angeles: On New Year's Eve in downtown Los Angeles, hotel lobbies were crowded with revellers and guests, many of whom were planning to attend the Rose Parade or Rose Bowl football game the next day.

But the holiday crowds concealed the uncomfortable expectation that the incoming year probably will not be a very good one for the hospitality business.

A single flight of stairs above the busy lobby at the Westin Bonaventure, an arcade of shops was almost entirely devoid of customers, and the "sale" signs posted in the windows looked worn with age.

Visits from splurging tourists have diminished, said Donald Kim, who has operated a boutique in the hotel for more than three decades.

He still stocks gifts with gold-plated brands such as Dior and Givenchy, but he has added low-cost knickknacks meant to appeal to the conventioneers who now make up the bulk of his customers.

"Those people only buy souvenirs such as T-shirts," he said. "Not handbags."

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 travellers and vacationers cut down on trips. In 2009, US 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 travellers a break in the months ahead 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. Perhaps it will offer paying guests a third night free.

"We know that people have scaled back," he said. "The first-class traveller is travelling 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 per cent at US hotels in 2009, driven in part by room rate reductions.

The lean times, which are expected to last into 2010, follow a nearly decade-long booms. Hotel business dipped sharply in the recession of 2001 and 2002, especially in the months after the terrorist attacks of September 11, 2001. But after that interruption, the years that followed were good for hoteliers as travellers 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, which monitors the hotel industry. "The years 2005 and 2006 were all-time highlights for Southern California."

Much of 2007 also was great, followed by 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 travellers 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 Labour Day, business has been falling off a cliff."

Indeed, US hotels have entered one of the deepest and longest recessions in the history of the country's lodging industry, according to a December report by PKF Hospitality Research.

The report predicts a nearly eight per cent drop this year in revenue per available room, a key industry measurement of performance typically calculated by multiplying a hotel's average daily room rate by its occupancy rate.

That would be the fifth-largest drop in revenue per available room since 1930. The largest recent drop was in 2001, when the measurement slipped 10.3 per cent.

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 are also axing group events such as out-of-town sales meetings and seminars that usually are a reliable source of income for hotels.

This is in part to cut costs but also to avoid looking wasteful or frivolous, said hotel investment banker Donald Wise of Johnson Capital. When word got out that AIG senior executives had attended a $440,000 company retreat in September, they were pummelled by critics because the event was days after AIG had received an $85 billion bailout from taxpayers.

"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 that 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 financially tolerate before they crash.

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

Many hotels are no longer worth as much as their outstanding mortgage debt.

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