EMPLOYEE STOCK OPTIONS IN A STOCK-MARKET SLIDE

Are They Still Considered A Bonus?

Written By:  Keith Kefgen & Michael S. Kogen  HVS International

Stock Options Come Of Age

Since the late 1980’s stock option plans have increasingly been used as an effective means to reward and retain employees. The purpose of stock options is to link the interests of management and its shareholders. Broad-based stock option plans have become an integral part of overall compensation strategy. Publicly traded companies such as Starbucks and Starwood Hotels & Resorts offer stock options to employees at all levels of the organizational chart. In a recent survey by the National Center for Employee Ownership, it was estimated that upwards of 10 million employees in the US workplace receive stock options.

The majority of options granted in the U.S. are modified “American-Style” call options, which give the employee the right, but not the obligation, to purchase a certain number of shares at a fixed “strike price” over a period of time. For tax purposes, the strike price (also referred to as the “exercise price”) usually equals the current stock price at the time the options are awarded.

“Underwater” Stock Options

In a stock-market decline, “underwater” stock options are those in which the option’s exercise price exceeds the current market price. Employees holding underwater stock options would be better off purchasing the stock on the open market than by exercising their stock options. Companies using stock options to retain employees must come to terms with the impact of their declining stock price and its loss of value to their employees. Underwater stock options represent a threat to overall employee retention as employees become discouraged and less motivated. In addition, newly hired employees are receiving stock options with lower option prices, causing  current employees to feel further resentment.

Several ways companies are investigating the restoration of value to underwater options include repricing, option exchange programs, new option grants, and cash-based strategies.

Repricing

In a “repricing”, the option price is amended to reduce it to the current fair market value or, alternatively, the underwater stock option is canceled and a new stock option is granted with an option price equal to the current, now lower, fair market price. Most institutional investors strongly oppose repricing because the reprieve isn't available to the ordinary shareholders. Cendant Corp. repriced stock options for their top executives in late September 1999, contending it had to stem a loss of senior management talent. Earlier in the year, the Parsippany, NJ, franchising and marketing company earlier in the year disclosed massive accounting fraud that had badly depressed its stock price. Henry Silverman, Cendant's  then chairman and CEO maintained that many senior executives were tempted to go elsewhere because their options were so far underwater that they just had no further incentive.

Option Exchange Programs

The standard exchange program is a simple swap of existing options for a lesser number of new options at the current market value. An accurate exchange rate can be determined by using the Black-Scholes formula, which values the price of an option by factoring in market volatility. As the newly issued options are at current market value, an employee has a potential opportunity to make a gain on her/his options sooner than with the initially granted options.

For example, an employee gives up 750 options at $13 ($9750) in return for 500 options valued at $10 ($5000). The below graph illustrates how, with a hypothetical steady market growth rate of 10%, the option holder makes a quicker gain on his options than with his previous allotment. It takes the existing options four years to lose their underwater status and eight years before they outpace the new options:

Another option is to replace the underwater stock options with restricted stock granted at no cost to the employee. Due to the fact that the restricted stock is granted at no cost, employees would receive fewer shares of restricted stock than the number of stock options that were canceled. There are a variety of similar formulas that can be used to determine the number of shares of restricted stock employees will receive. However, shareholders may have obvious reservations about employees receiving stock at no cost as a result of the decline in stock price, while they have incurred a loss from their own investment.

A third alternative is to cancel a stock option and then grant another stock option after six months and one day have elapsed as per SEC regulations. The advantage is the future stock option most likely will be priced lower than the current stock option, however, there is also the risk during this time period that the stock price will increase. We view this simply as “repricing” in disguise

.

New Option Grants

Granting new stock options without making any adjustment to the underwater stock options is another method. Since the original underwater stock options would not be canceled, this would not mandate any special accounting considerations. In the event the stock continues to decline, however, this “double-down” mentality will compound the problem.

Cash-Based Compensation Strategy

Offering a cash settlement for the cancellation of underwater stock options is an alternative. It is also possible to structure a cash bonus to employees without canceling their underwater stock options. The bonus could be presented as a retention bonus, payable only if the employees continue their employment for a period of time. Shareholders view this approach negatively due to the immediate impact on earnings which can ultimately decrease share price.   

Conclusion

There is no simple solution for hospitality companies with regards to underwater stock options. Whether we measure the cost in terms of compensation expense, shareholder dilution, or cash outlay, none of the solutions are cost-free. The “correct” solution will depend on the company’s size, maturity, profitability, cash-flow, and relationship with its shareholders.

Many employees currently have stock options "underwater" as a result of today’s weakened economy. Nevertheless, the data from the National Center for Employee Ownership has shown that the majority of companies with broad-based stock options plans have no intention of eliminating them.

Prudent companies are now granting the options over a period of years, rather than offering a one time “mega grant”.  When employees receive only one grant during their employment (usually granted upon hire), all their shares are at one price and a single decline in stock value places all of their shares underwater. However, if employees have received multiple grants, then a decline in value might place some of their stock options underwater but other stock options might still be in-the-money. Granting smaller sized stock options but more frequently, the “dollar-cost average” approach, is a favorable mechanism in alleviating stock volatility in a declining market.

The illustration below shows the difference between granting 50,000 options at once, a “mega grant” as opposed to three separate smaller grants over a three-year under water time period:

Stock options are an integral part of attracting, retaining, and motivating employees. In a volatile market a well thought out stock option plan is an essential component of an overall compensation strategy.

Authors:
Keith Kefgen, President;   Michael Kogen, Vice President

HVS Executive Search

HILTON DIPS AS HOTEL RECOVERY DISAPPOINTS

The Times, London  -  Disappointment over the slow pace of recovery in its hotels operations left Hilton Group with one of the weaker performances in the FTSE 100.

David Michels, chief executive, briefed analysts last week before Hilton entered a closed period ahead of its first-half results. For its hotel side, he said that the absence of high-rate business travellers --particularly from the US -- continues to be felt, while the rate of recovery in demand has slowed from the first quarter of 2002.

However, the message from Ladbrokes, Hilton's betting division, was much more upbeat. Not only has it prospered during the World Cup, but it continues to gain from the effects of betting tax changes introduced last October.

In response, ABN Amro cut its current-year earnings forecast for hotels by Pounds 20 million, but raised them for Ladbrokes by the same amount. Although its overall figure stayed the same, some investors were concerned by the hotel outlook, leaving Hilton Group 7p off at 220p.

The wider market lacked direction, with the FTSE 100 veering between gains and losses to settle up 29.4 points at 4,685.8. Xstrata, the Swiss-domiciled mining group, put in the worst performance, off 58p at 791p, as Credit Suisse First Boston started coverage with a "sell'' stance and a 750p target. The broker thinks that investors have priced in future growth too quickly, and says the miner has not yet earned the premium rating that the market has given it. CSFB says that thermal coal prices have dropped sharply since Xstrata's listing in March, while earnings are under pressure from movements in the Australian dollar and the rand.

Bradford & Bingley ticked up 1p at 325p ahead of its promotion to the FTSE 100 today, filling the slot vacated by PowerGen after completion of its 725p-a share purchase by Germany's E.ON. Cable and Wireless, up 3p at 171p, was the second most heavily traded blue chip after a single block of 70 million shares --or a 2.9 per cent stake --changed hands at 168p. Dealers reckon that the transaction was one side of a derivatives-related deal handled by Dresdner Kleinwort Wasserstein.

Compass, the catering company, ticked up 1p to 399p, despite fears that it will struggle to find buyers for its Travelodge and Little Chef businesses. The main potential bidders cited last week --Whitbread, Six Continents, 3p better at 670p, and Accor of France --have all privately ruled themselves out.

GILT-EDGED: UK government bonds were trapped in a tight range, caught between the strong Nationwide house price survey and weak PMI and CIPS data. The September gilt future eased 2p to Pounds 112.71. Treasury 5 per cent 2004 gained 2p at Pounds 100.59, and Treasury 8 per cent 2021 was off 7p at Pounds 137.39.

NEW YORK: Wall Street shares dropped. The technology sector led the market's retreat, as investors braced themselves for the next big US accounting blow-up and fretted over corporate America's soggy profit prospects. The Dow Jones industrial average ended the day 133.33 points down at 9,109.93. 

SIX CONTINENTS HOTELS NAMES STEVAN PORTER  PRESIDENT FOR THE AMERICAS

Six Continents Hotels, Inc. (www.6C.com), the world’s leading global hotel group, has appointed Stevan Porter president of Six Continents Hotels - the Americas, following John Sweetwood’s decision to leave the company to pursue other opportunities.

Porter, assumes full responsibility for the Six Continents Hotels’ Americas region, and will report directly to Thomas R. Oliver, Chairman and CEO of Six Continents Hotels. “Steve is one of the premiere hotel operators in the industry and has made significant contributions to Six Continents Hotels since joining the company,” Oliver said.

Prior to joining Six Continents Hotels as Chief Operating Officer of the Americas region in October 2001, Porter was Senior Vice President, Hilton Hotels Corporation and Executive Vice President - hotel operations, with operational responsibility for all company owned and managed hotels.


“His 30 years of experience encompasses brands from Hampton Inns to the Waldorf Astoria, from hotel general manager to senior executive. He is more than ready to lead Six Continents Hotels in the Americas,” Oliver added.

“Steve and John will be working together to ensure a smooth transition in the upcoming weeks,” Oliver said. “John has contributed significantly to the company's achievements. He has been a driving force behind marketing, operations and service excellence. The company respects his decision and wishes him well with his future endeavors.”

Oliver concluded: “We’ve got great talent and bench-strength in this company, and thus, while there is a new leader at the helm, Six Continents Hotels strategic goals remain unchanged: continuing to build our midscale and upscale brands, upgrading our technology infrastructure, and finding additional ways to increase revenue through operations and major hotel investments around the world.” 

CORNELL UNIVERSITY SCHOOL OF HOTEL ADMINISTRATION BRINGS PROFESSIONAL EDUCATION ONLINE WITH eCORNELL

eCornell, the online distance-learning subsidiary of Cornell University, announces a new online education program from Cornell University's prestigious School of Hotel Administration. The program is comprised of courses developed from the Hotel School's sought-after executive education courses, and leads to a Certification in the Essentials of Hospitality Management from the School of Hotel Administration.

Our mission at the Hotel School has been to deliver the most relevant educational opportunities available to the hospitality industry, says Thomas J. Kline, Director of Executive Education, Cornell School of Hotel Administration. eCornell extends that educational opportunity to working professionals everywhere.

eCornell online education programs offer professionals the flexibility to participate at their convenience, the academic rigor of a world-renowned course of study, the best collaborative Internet technology available to facilitate learning, and access to tutors who mentor them throughout the coursework.

Hospitality as an industry has experienced vast growth and now ranks as the world's largest revenue industry and largest employer. says Kline. Our online programs support our efforts to ensure that opportunities and challenges within this industry are met by first-rate management experts with a passion for service and a strategic understanding of how to manage their businesses.

eCornell will introduce six new online hospitality management courses between now and November. The first course, available now, is Managing People More Effectively. Additional courses in the areas of Hospitality Marketing, Management of Hospitality Human Resources, and Hospitality Accounting will follow.

For more information or to register, visit the eCornell web site at http://www.ecornell.com/, or call 1-866-ecornell (1-866-326-7635) from within the United States, or 1-646-735-3070 from outside the United States.

eCornell is a wholly-owned subsidiary of Cornell University, and was formed to produce and deliver non-degree professional education programs in conjunction with the University's schools and colleges.

HEDNA AND HSA INTERNATIONAL OFFER INTENSIVE TWO-DAY HEDNA UNIVERSITY COURSES IN FOUR ASIA/PACIFIC LOCATIONS IN 2002

The Hotel Electronic Distribution Network Association (HEDNA) and HSA International have joined together to present the
HEDNA University course on electronic distribution in four major cities in Asia/Pacific.

Targeted for hotel professionals, “Understanding Distribution Marketing for
Hotels Through The GDS (Global Distribution System) and Internet” provides hoteliers operating within Asia and Oceania with information on the most current and emerging technologies in electronic distribution. An important consideration in developing these sessions is that content for the course has been adapted to specifically address issues pertinent to hotels in this region.

The rigorous two-day agenda is comprised of learning modules that include interactive presentations, participant material, hands-on case studies and other thought-provoking exercises, examples and activities. Those involved in the program also receive a copy
of the HEDNA GDS Pocket Guide to use as a reference tool in helping to decipher
GDS encrypted coding.

According to Doug Kennedy, President of HSA International, “This is a strategic opportunity for hotel professionals to gain easier access to information that is now
a crucial part of achieving success in the increasingly competitive global marketplace
of travel and tourism.”

This series of events follows the overwhelming response to the HEDNA
University launch in Asia/Pacific in September 2001, when over 60
representatives of hotel companies throughout the region convened in Singapore. Since that time, significant developments in electronic distribution have occurred that have created a need for an increased frequency of educational sessions on the topic.

With electronic distribution on the rise in hospitality hot spots like Bangkok, Hong, Kong, Singapore and Sydney, this highly valuable educational program is taught by HSA's finest professional trainers in the industry, said Roland Tanner, President of HEDNA and Vice President of Information Technology and Distribution for Utell. HEDNA is proud to be a part of this productive partnership, helping to drive HEDNA's goal of advancing hotel e-distribution via education.

Recognizing the uniqueness of electronic distribution as it applies to hotels in
Asia/Pacific, special consideration was given to designating Christine Toguchi,
Managing Director of HSA International’s Regional Office in Singapore, to serve as
the primary facilitator of the program. Her hotel experience and up-to-date familiarity
with distribution marketing were key elements in her selection.

In addition to the Hong Kong event that was held on Thursday & Friday,
27 & 28 June, the series of locations and dates for the program include:

Sydney
Thursday & Friday
25 & 26 July 2002

Singapore
Thursday & Friday
29 & 30 August 2002

Bangkok
Tuesday & Wednesday
24 & 25 September 2002

Sensitive to the current economic challenges in Asia/Pacific, HEDNA has made available special pricing for members of the association, as well as for non-member hotels and hotel companies. Individuals can register for the two-day program for US$495 if they are HEDNA members, and non-members are extended the rate of US$595. Fees include all conference material, refreshment breaks and lunch each day.

The most current updates and schedule adjustments are maintained on the HSA International web site at www.hsa.com . Those interested in participating in the HEDNA University program can also register online by visiting the site.

About HEDNA
The Hotel Electronic Distribution Network Association (HEDNA) is a not-for-profit trade association whose worldwide membership includes executives and managers from over 200 of the most influential companies in the hotel distribution industry. Founded in 1991, all of HEDNA's activities are intended to stimulate the booking of hotel rooms through the use of GDS, the Internet and other electronic means. HEDNA brings all segments of the hotel industry together to evolve systems and services into electronic distribution that is easy and efficient. 

For additional information, please visit www.hedna.org

2002 HOSPITALITY INVESTMENT SURVEY FINDS DECLINING VALUES DUE TO AN UNCERTAIN MARKET: PKF CONSULTING

Debt and Equity Investors Reveal a Wait-and–See Attitude

The 2002 Hospitality Investment Survey, released today, reveals that the recession and terrorist attacks of 2001 have had a significant effect on hotel investors’ perceptions of the market.  The investment survey was prepared by Atlanta-based PKF Consulting and its research affiliate, The Hospitality Research Group (HRG).  Both lenders and equity providers of investment-grade hotel properties completed the survey between April and June 2002.

Beginning in mid-2001, the majority of lenders have all but discontinued providing long-term financing for most hotel properties, particularly within the limited-service segment.  On the equity side, buyers and sellers of quality lodging properties are not in synchronization, as buyers are searching for good deals in a soft market while owners, most of whose loans are still within acceptable debt service coverage ratio limits, are not inclined to sell in a down market.

What began as a slowdown in the U.S. lodging market in the third quarter of 2000 continued through year-end 2001, as operating results nationwide declined.  According to PKF Consulting’s Trends in the Hotel Industry – USA, the major US markets experienced a 10.2 percent decline in RevPAR in 2001, as compared to the previous year’s results.  “Much uncertainty exists for investors in the lodging market because there is little evidence that RevPAR will increase past historic levels in the near future” said Scott Smith, MAI, Vice President of PKF Consulting.  “Lenders and equity providers largely have a wait-and-see attitude towards financing hotel properties.”  Forecasts from the HRG/Torto Wheaton Research  Hotel Outlook econometric model indicate that, as a group, the major metropolitan markets will not surpass their 1999-2000 RevPAR levels until 2004.  

The survey of both equity and debt investors reflects the added risk associated with estimating future cash flows in these uncertain times.  While overall capitalization rates remain stable, the decrease in net operating income, coupled with uncertainty in the market, has resulted in decreasing values. 

Survey Results

The results of the investor survey tend to bear out the preceding observations.  On the equity side, the overall capitalization rate for all properties so far for 2002 is 11.20 percent, similar to the 11.26 percent capitalization rate recorded by this survey in 2000.  The 2002 yield, or discount rate, is 16.31 percent, which is higher than any previous year since the inception of this survey in 1982.  The holding period, increased from 8.60 years in 2000 to 9.11 years in 2002, also indicates that investors are waiting for the market to rebound and not taking the discount on today’s values. Further, equity dividend rates, or cash-on-cash returns, continue to provide good returns of approximately 9 percent.  As the market appears to be at the bottom of its investment cycle, owners are selling only those assets that are distressed, over-leveraged, or not strategically desirable.  The recent sale of the Boston Marriott Copley Place by a subsidiary of the reinsurance company Overseas Partners to Host Marriott is an example of a sale of a nonstrategic asset. 

On the debt side, loan-to-value ratios decreased and debt coverage ratios (DCR) increased slightly.  The loan-to-value ratio in 2002 is 63.60 percent, which is the lowest it has been in the history of PKF Consulting’s investor survey.  The 2002 DCR is 1.52; this is higher than it has been recent years, but lower than it was in 1992, when the DCR was 1.60.  These debt parameters indicate considerable lender caution for hotel loans.

Comparative investment criteria for the full-service and limited- service segments reveal the desirability of the full-service segment as an investment vehicle in 2002 for equity investors, as the discount rate for limited-service properties has increased considerably over previous years, thereby lowering property values.

For lenders, however, neither full-service nor limited-service properties provide a considerably superior investment opportunity.  “Limited-service investment parameters are tracking full-service debt parameters closer than any other time in the history of this survey” noted Jack Corgel, Ph.D., Managing Director of Applied Research for HRG.  “The demand-side protection afforded by limited-service properties against changes in travel patterns, as well as the current low supply growth in the limited-service sector, jointly contribute to the narrowing of spreads between limited-service and full-service investment measures, specifically capitalization rates.” 

This survey did not include investment criteria for older properties approaching functional and economic obsolescence.  These properties are selling at highly discounted levels, with capitalization rates of 200-to-300 basis points higher than our reported 11.20 percent rate.  Cash-on-cash return for this type of property could range as high as 15 to 20 percent.  Lenders providing financing for this property type typically require a strong balance sheet with loan-to-value ratios less than 60 percent. 

Contact Gary Carr at PKF Consulting in San Francisco at 415-421-5378 to purchase a copy of the complete 2002 Hotel Investors Survey.

PKF Consulting is an international consulting and real estate firm specializing in the hospitality industry.  The Hospitality Research Group, based in Atlanta, is its research affiliate.  PKF Consulting and HRG, along with the PKF Consulting Capital Markets Group, are wholly owned subsidiaries of Hospitality Asset Advisors International, a U.S. Corporation.  HAA International has offices in New York, Boston, Philadelphia, Washington DC, Atlanta, Houston, Dallas, Los Angeles, San Francisco, and Singapore

TRENDS IN MALAYSIA, SINGAPORE, THAILAND, NEW ZEALAND

Malaysia - Malaysian travellers have become increasingly price sensitive, driven by special deals in markets driven by airlines. - The market is moving toward last-minute purchasing patterns as consumers hold out for better deals closer to actual travel dates. - Consumers still prefer to book through travel agents rather than direct.

At this stage only some retailers have Internet access. This is gradually changing as more companies adopt the new technology. Several major retail groups have consumer Internet sites that offer consumer newsletters and e-mail booking facilities. - Consumers are increasingly using the Internet as a source of holiday destination information. - www.australia.com delivered 204,230 pages of information to Malaysian users in 2001, up 44% over 2001.

Singapore - Singapore is the only market in Asia with a trend towards direct bookings, particularly for frequent independent traveller (FIT) packages. The medium- sized or smaller agents also go direct to product suppliers in an effort to increase their profit margin. - Consumers are driven by the best deal and are very price sensitive, generally waiting until the last minute to make a booking in the hope of obtaining a better deal. 

The airlines role in the FIT and part-packaged market - is predicted to expand with the continued enhancement of Internet booking capabilities. Airlines have largely driven the consumer trend to last minute bookings, with special deals and last minute offers. - For comprehensive travel services and planning complicated travel itineraries, most travellers still prefer to complete the travel purchase face-to-face with a retail travel agent. 

Airlines and large travel agencies have been proactive in establishing e-commerce sites and services. Major retail groups have consumer sites, with regular updates and last-minute deals. - Incentives are provided for consumers to take advantage of the convenience of booking point-to- point air tickets and hotel accommodation online. - Increasing numbers of Singaporeans are using the Internet as a source of destination information. www.australia.com delivered 720,893 pages of information to users in Singapore in 2001 Ð up 57% over 2000.

Thailand - The travel industry runs consumer travel fairs to target peak travel periods in an effort to capture business. - Thai consumers still prefer to book with a travel agent. - A few travel agencies in Thailand have started to use the Internet as a promotional vehicle. However, due to the relatively high cost of technology in Thailand, Internet use by both travel trade and consumer is limited. - www.australia.com delivered 199,448 pages to Thai Internet users in 2001, up 86% over 2000. - A small number of travel agents have access to the Internet at their desks. Agents generally prefer to make reservations via traditional computer reservation systems (CRSs) and by fax.E-mail usage is not high in retail agencies.

New Zealand - The New Zealand travel industry is dynamic and fiercely competitive, with traditional wholesale and retail distribution channels undergoing significant change as consumers become more savvy, waiting for and expecting deals, discounts and value add-ons when booking. - There is a trend toward direct bookings in the younger segments, particularly in mature gateway destinations that the consumer is comfortable with. 

Airlines are relying less on the traditional wholesale distribution system and are increasing their focus on direct sales to consumers, particularly via the Internet. - Consumers are very well informed on the available price and products and are extremely price-driven when making travel purchase decisions. - Consumers are predominantly using the Internet to research travel information and fares rather than booking online. However, online bookings are gradually increasing as security measures improve and consumer confidence increases. 

Online travel agencies travel.co.nz and travelonline.co.nz continue to provide aggressive trans- Tasman packages direct to consumers, mainly via their online consumerdatabases. - www.australia.com delivered nearly 360,000 pages of information to New Zealanders in 2001, up 5% over 2000. - The year 2002 has seen aggressive promotion of the site beginning with the launch of the ATCÕs new regional advertising campaign Discover Australia featuring a comprehensive online fulfillment component and advertising on related high-traffic sites designed to drive business to australia.com.

ECONOMY DEALS BLOW TO SAN JOSE HOTELS

SiliconValley.com   -    Benson Lee, manager of the Crowne Plaza hotel in downtown San Jose, can be excused for sounding a bit glum these days.

Lodging-industry profits dipped 19.4 percent in 2001 -- the worst plunge in more than six decades -- and among the hardest-hit are San Jose hotels that depend heavily on technology-related business travel.

The Crowne Plaza draws many of its customers from the San Jose McEnery Convention Center, one block away, where attendance over the past 12 months is down 15 percent from the previous year.

Lee has tried to lure travelers by lowering standard room rates from about $200 last year to $159 this year, but it has not helped much. Although the Crowne Plaza normally has at least 60 percent of its 239 rooms occupied this time of year, it averaged 45 percent full in June.

``We had a real rough month,'' Lee acknowledged. ``We are not doing too well.''

Lee has plenty of company. The hotel industry has been in a serious funk for more than a year because of the soured economy and the Sept. 11 terrorist attacks, which discouraged both business and leisure travel.

The falloff in hotel profits last year was the first decline in a decade, according to PKF Consulting, and the largest single-year drop since 1938. That year also saw economic and world events depress travel: The U.S. unemployment rate was at 19 percent in the midst of the Great Depression, and German dictator Adolf Hitler invaded Austria at the brink of World War II.

Bay Area hotels have been having an especially difficult time making money.

Nationally, the average revenue per hotel room fell about 9 percent from the first quarter of 2001 to the first quarter of this year, according to Smith Travel Research. But Bay Area hotels did much worse. Revenues over that period plummeted 24 percent at Oakland hotels, 30 percent in San Francisco and San Mateo, and 33 percent in San Jose and Santa Cruz.

``It is scary,'' said John Southwell, general manager of the Hilton San Jose & Towers, across the street from the Crowne Plaza in San Jose. ``It's a whole new world.''

Business travelers

A San Jose Convention & Visitors Bureau survey of 15 city hotels that book mainly business travelers found their room revenues for May were 36 percent lower than in May 2001 and nearly half what they had been in May 2000.

San Jose hotels draw relatively few tourists. So when businesses scaled back travel for meetings and conventions, those hotels did not have many other customers to turn to. In 2000, San Jose and Santa Cruz hotels were about 80 percent full, said Smith Travel Research. That rate dropped to 64 percent in 2001. For the first four months of this year, hotels averaged only 60 percent full.

Things could get even dicier, because several new hotels will open soon in the South Bay, adding to the competition for customers.

A 506-room Marriott is due to open next to the San Jose McEnery Convention Center in March, and construction is expected to start this year or next on a 254-room Courtyard by Marriott at Highway 87 and Santa Clara Street. And in Cupertino, the 224-room Cypress Hotel -- which features hand-painted ceilings and red mohair sofas -- plans to open Tuesday at DeAnza and Stevens Creek boulevards.

``We didn't foresee a recession or a serious setback for the high-tech industry,'' said Thomas LaTour, chairman of the San Francisco-based Kimpton Hotel & Restaurant Group, which owns the Cypress. ``So that is a little disappointing.''

No one is sure when the U.S. lodging industry, whose annual revenues exceed $100 billion, will bounce back. As LaTour put it, ``forecasting in this environment is treacherous, almost impossible.''

Some experts have predicted a rebound next year. But Christine Smith, general manager of the Maple Tree Inn, a 181-room operation on El Camino Real in Sunnyvale, is more pessimistic. ``I'm feeling, in this area, it's going to be like 2004.''

A positive outcome from the downturn for travelers is that some hotels have lowered room rates.

A few places -- including the Hilton San Jose & Towers and the newly expanded Fairmont San Jose -- have resisted cutting room prices. But many others have dropped theirs substantially -- a pleasant surprise to Nick Kohn, a 41-year-old furnace dealer and frequent traveler from Michigan who stayed recently at the Crowne Plaza.

``I thought it was a pretty good rate,'' said Kohn, who paid $115 for one night. That was about $45 less than what a preferred customer would have paid in the past.

Ripple effect

Empty rooms, however, hurt those who make a living off the travel trade. Business is down 15 percent so far this year at Frank & Ron Hotel-Motel Supply in Oakland, which provides the lodging industry with everything from tables and chairs to bathroom towels and air fresheners. Partner Bob Kalyan said business is the worst he has seen in 25 years.

Despite the empty rooms and some drastic cuts in room rates, most analysts say the hotel industry is in no peril. In fact, PricewaterhouseCoopers reported that because of cost-cutting at many hotels and motels after Sept. 11, hotel profits should increase this year and in 2003.

Moreover, while the average hotel's 2001 operating profit margin was 10 percent lower than the year before, it was still a relatively robust 29.4 percent, according to PKF Consulting, which specializes in hotel research.

``We're not seeing any signs of hotels dropping like flies,'' said Gary Carr, a PKF representative. And with leisure travel generally expected to increase this year over last, he added, ``it seems to be getting better all the time.''

INBOUND TRAVEL DROPPED 11% LAST YEAR

Article from the June issue of Lodging Magazine

Travel to the United States declined 11 percent in 2001, to 39.8 million international tourist arrivals, according to preliminary full-year data released by the U.S. Department of Commerce's Office of Travel and Tourism Industries. The contraction is attributed primarily to the terrorist attacks of September 11 and weakened economies in Europe, Asia, and South America.

According to OTTI data, total visitor arrivals fell 3 percent through August from record numbers in 2000. From September through December, monthly averages were off 29, 34, 29, and 21 percent.

"Unquestionably, the U.S. suffered its single-worst year of decline given the combination of a global economic slump and the September 11 attacks," says OTTI Director Helen Marano. "Few industries could maintain growth in such a climate. However, the 11 percent drop in arrivals [for the full year] reveals the elasticity of travel to the United States." The Travel Industry Association of America's Traveler Sentiment Index continued its steady recovery in the first quarter, increasing 2.6 percent (to 103.7) following a 4.1 percent gain (to 101.1) in fourth quarter 2001. (By comparison, the index posted its highest reading, 104.3, at its inception in first quarter 2000 and its lowest, 96.7, in third quarter 2001. An index of 100 in Q1 2000 serves as the baseline.) TIA attributes the first-quarter growth to increased consumer interest in pleasure travel and favorable impressions about its affordability.

Based on quarterly interviews with 1,000 adults who have taken at least one trip in the past year, the index measures consumers' interest in and perceived ability to travel. Among the five measured components—interest, time, finances, affordability, and service quality—the "interest" (92) and "affordability" (149.8) indices realized the most significant gains from the previous quarter, rising 14.6 percent and 7.4 percent, respectively (the affordability index achieved its highest reading to date.) Only the service quality index experienced a decline, falling 9.4 percent to 103.1.

More than 55 million Americans are "geotourists" and another 100 million are moving in that direction, according to a recent TIA study. Rather than a new, widespread love of the outdoors, however, the large numbers are indicative of a broadening of the term's meaning.