Newsletter - March 14, 2002

BILL MARRIOTT SAYS INDUSTRY NEEDS BUSINESS TRAVELERS TO HIT THE ROAD

U.S. tourism is slowly recovering, but what the slumping industry really needs is for business travelers to get back on the road, the head of the Marriott lodging empire said Monday. 

"There's definitely light at the end of the tunnel, and the light is getting brighter," said J.W. "Bill" Marriott, chairman and chief executive of Marriott International Inc. 

"We're just waiting for business travel to get back to a high level," said Marriott, who was on Hilton Head to dedicate a $20 million renovation of the 512-room Hilton Head Marriott Beach & Golf Resort. The upturn should start "certainly by summer," he added. 

The tourism industry has been clobbered by the national recession and the drop-off in travel following the Sept. 11 terrorist attacks. 

As one of the world's largest hotel franchisers and operators, Marriott International has felt the pinch. The Washington, D.C.-based company recently estimated that its room revenues for 2002 would skid as much as 3 percent during 2002, with declines of up to 15 percent in the first quarter and up to 7 percent in the second quarter. It also expects profit margins to come in below 2001 levels. 

"Hopefully we'll miss that forecast and do better than anticipated," said Marriott, whose company's hotel brands include Courtyard, Renaissance, Fairfield Inn, SpringHill Suites, Residence Inn and Ritz-Carlton. 

The company's advance hotel and time-share bookings for this summer indicate a rapid recovery in the leisure travel segment, he said. 

"The information we have is that people are going to be taking vacations in increasing numbers, probably more than anytime in a long, long time," Marriott said. 

"The highways are going to be busy," he said. 

What remains to be seen is how quickly the lucrative business travel sector, which peaked two years ago, recovers. Typically, business travel does not begin to bounce back from a recession until three to six months after the economy starts growing again. 

Marriott said President Bush's economic stimulus package should help because it encourages companies to start spending money again, which in turn would create more demand for airline seats, hotel rooms and other services. 

"If we see business travel come along with business investment then I think we're going to have a good uptick," he said. 

Marriott, whose parents started the lodging giant as a root beer stand in Washington 75 years ago, also likes the idea of $500 tax credit to offset travel expenses. But he cautioned that he has not seen how the break would work. 

"I don't think it's going to stimulate travel very much if you give $500 to everybody who gets in their car and goes to see their grandma," he said. 

Marriott said the credit should be extended only to taxpayers who, at a minimum, board an airplane and stay in a hotel. 

"We need people ... to visit hotels, eat in restaurants, get on airlines, rent a car -- do the things that most Americans do when they travel and spend the kind of money that would help the travel industry get started again," he said. 

Marriott criticized the federal government for failing to spend money on a national tourism marketing campaign since Sept. 11. 

"I think it's criminal that the United States government thinks so little of our industry not to be out promoting it and trying to get people to visit the United States," he said. 

Introduction

Faced with an economic slowdown, a downturn in the technology sector, and softening in lodging demand, San Francisco’s top industry experienced the steepest year-over-year decline in the state of California for 2001. 2000 was a banner year for the city’s economy and its tourism sector, with tourism revenues increasing nearly 9 percent over 1999. In 2001, however, prior to September, San Francisco’s 34,000-room lodging industry was performing at approximately 10 percent below 2000 levels. Post September, San Francisco’s lodging market performance experienced declines above 40 percen compared to the prior year. With continued declines in business travel, increasing airline cutbacks and consumer flying concerns, as well as a looming recession, San Francisco’s lodging market is anticipated to be further challenged in 2002.

San Francisco Report

Major Demand Changes

The events of 2001 challenged the city’s lodging industry’s ability to perform at prior year levels. Following the technology sector fallout, office vacancy rates in San Francisco soared from approximately 4 percent in 2000 to slightly above 10 percent in 2001, with additional sublease lease space available. Consequently, office rent in downtown San Francisco is 50 percent below last year’s levels, impacting surrounding cities such as San Jose and Oakland, which previously enjoyed a resurgence in business demand following a lack of affordable space in San Francisco. Cisco Systems recently announced that it will indefinitely postpone the construction of its 6.6 million square foot world headquarters in San Jose. As the economy continues to weaken, the shrinking office market and associated weakness in corporate travel spending are anticipated to further impair the recovery pace of the highly lucrative business demand segment.

With more than 80 percent of San Francisco’s visitors arriving by air, consumer flying concerns and airline cutbacks are reducing lodging demand across all segments.  United Airlines, with a substantial San Francisco operation, recently reduced its flight schedule by 25% and announced 20,000 layoffs. Several development initiatives, however, are anticipated to contribute to San Francisco’s unique value proposition. The Moscone Convention center’s 750,000 square foot expansion is anticipated to be completed by 2003 and generate approximately $240 million in additional convention-related revenues. The University of California’s Mission Bay biotech park development should help San Francisco diversify its business mix and attract biotechnology firms. The proposed $400 million Bloomingdale’s development, scheduled for completion in the summer of 2003, is anticipated to convert San Francisco’s classic Emporium department store building into a large retail, hotel, and entertainment complex. In addition, the proposed $900 million transformation of downtown San Francisco’s Transbay Terminal into a mega residential, retail, and hotel development complex is currently in its late planning stages and groundbreaking is anticipated as early as 2003. Preliminary plans for a $300 million cruise ship terminal on San Francisco’s waterfront have received governmental support, yet many legislative issues must be resolved prior to groundbreaking.

Major Supply Changes

Several prominent hotel development projects, planned and constructed during the technology boom, have been recently completed and others are in the pipeline. During 2001, the 375-room Clift Hotel, Ian Schrager’s latest San Francisco development, opened in July while the 277-room Four Seasons San Francisco and an 18-story, 450-room Courtyard by Marriott located adjacent to the Moscone Convention Center opened in October. In downtown San Francisco, the 362-room Omni San Francisco is scheduled to open in January 2002 and the 269-room St. Regis Museum Tower is anticipated to open in 2003. Several other hotel projects are slated for San Francisco’s waterfront area, including the Argonaut Hotel, a 268-room Kimpton Group property, scheduled to open in the fall of 2002 and a 200-room hotel between Mission and Steuart Street, scheduled to open in 2003. In the preliminary planning stages are two Stanford Hotel Group developments including a 410-room Marriott located at San Francisco’s waterfront area as well as a 600-room hotel near the airport.  In San Jose, the Fairmont’s additional 300-room tower is scheduled to open in January 2002 and a 506-room Marriott City Center is anticipated to open in January 2003.

Political/Economic/Legal Changes

The city’s recent tourism downturn is anticipated to have a profound impact on the local economy. Last year, tourism spending accounted for approximately $7.6 billion and is estimated to have sustained 82,000 jobs and contribute over $474 million to the city’s budget. This year government officials are projecting a $100 million shortage in the city’s budget due to the decline in the technology sector and the sustained weakness in tourism. Airline cutbacks are also a concern given that the area’s three airports are estimated to directly and indirectly contribute more than $37 billion to the local economy and support approximately 1 million jobs. To stimulate tourism demand, Mayor Willie Brown announced several citywide tourism promotional programs and a governmental assistance package for the struggling local lodging industry is under consideration.

Contact:
ERNST & YOUNG
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WTO:  WORLD-WIDE TOURISM SET TO PICKUP

Agence France Presse  -  World tourism should revive in 2002 with growth in international travel of three to four percent compared with 2001, when such travel declined 1.3 percent, the head of the World Tourism Organistion said Tuesday.

But Francesco Frangialli told a press conference here that a return to normal in the tourism industry, hid hard in the aftermath of the September 11 attacks in the United States and a deterioration in the world economy, depended on the situation in the Middle East.

He stressed that a military conflict with Iraq would have negative consequences for the industry as it struggled to get back on feet.

The organisation, which is based in Madrid, forecast a return to normal between Easter holidays and the summer season, in particular in Europe, western Mediterranean countries and the Carribean, he said.

An expected improvement in the world economy would contribute to the recovery, he added.

But the Israeli-Palestinian conflict would continue to hurt tourist desitinations in the Middle East, Frangialli said.

The number of international tourist trips fell 1.3 percent from 2000 to 688.6 million in 2001.

Tourist trips last year rose 0.7 percent to Europe, 3.2 percent to Africa and 3.8 percent to east Asia and the Pacific but declined seven percent to the Americas, 8.8 percent to the Middle East and 6.4 percent to central and southern Asia.

FLORIDA HOTELS FACING TOUGH 2002 - ERNST & YOUNG REPORT

The Florida Hospitality Services Industry is facing its most difficult year in recent memory. The combination of the cooling economy, World Trade Center attack, ensuing war on terrorism, mild weather in northeast feeder markets and prolonged reductions in international and leisure travel, have combined to make for what may be the most challenging operating and business environment in the last decade. In a report released today, Ernst & Young's Hospitality Services Group describes the challenges this year will bring, analyzes the major Florida lodging markets and offers advice on how to ride out the storm.

The report, a follow-up to Ernst & Young's National Lodging Forecast, provides a detailed analysis of the Florida lodging industry. The full report titled, 2002 Florida Lodging Forecast is available at: http://www.gallen.com/eykl/HSGReports.htm.

Not surprisingly, the report found that some markets are fairing better than others. Daytona Beach, a top tourist destination, fresh off the Daytona 500 NASCAR race of February 17, should rebound the fastest of any Florida city. Daytona hotels, already well on their way to recovering, should be back into good health in the next 3 to 4 months. Tampa, Ft. Lauderdale and Jacksonville are next in line for recovery where steady corporate demand has mitigated the drastic impact felt by destinations driven primarily by leisure demand. Miami and Orlando, facing big supply increases and more dependent on international and leisure travel, have had to cut rates significantly in the short term, which has created some excellent values for consumers. As the economy continues to pickup both Orlando and Miami will improve but it's likely that most, if not all, of the year will be necessary for them to regain rates and occupancy.

Report author, Mark Lunt -- E&Y's Florida and Caribbean Hospitality Practice Leader, says some Florida hotels may change hands before this year is over. With plunging occupancy rates and reductions in room rates, hotel profit margins are getting thinner and thinner. The profit picture will not be getting much better for several months in some of the markets and it is anticipated that some hotels may default on their loans. Weaker operators may get bought out as buyers looking to enter the Florida market grab an opportunity to buy on a discount, Lunt predicts.
Other effects from the struggling hospitality industry include lower tax receipts to state and local governments. The Florida tourism industry generates approximately $3 billion in taxes. These taxes play a large role in helping local governments pay for a variety of city services and re-development projects. The reduction in bed tax receipts will no doubt limit local governments' ability to initiate new projects in 2002.

There are some steps hotel operators can take to help get through the next few months says Lunt. Smart operators are making moves now that will help them not only get through the rough months ahead, but also position themselves for the markets eventual recovery. Some of the efficiencies include: financial restructuring, property re-valuation, outsourcing of services, improved information technology efficiencies and the rationalization of human resources.
The long-term health of the Florida hospitality market is good, where 843,000 Floridians are employed by tourism. Florida welcomed 71.5 million guests in 2000, with New York, Atlanta and Chicago being the top three visitor markets. Internationally Canada, the United Kingdom and Venezuela were the top three visiting nations. The average stay for domestic visitors was 5.4 nights and 12.4 for international visitors.

Florida remains one of the top tourist destinations in the world. The short-term slump we're in poses significant challenges for the next several months, but we believe the lodging markets will recover in late 2002 and return to normal sometime in 2003. Florida is also one of the most visited states in the nation, is the theme park capital of the world, has fantastic weather and always delivers as a popular convention destination, and that's not going to change, said Lunt.
The complete report which includes Ernst & Young's original research and market analysis on numbers compiled by Smith Travel Research, can be downloaded at: www.gallen.com/eylodging.com.

ASIAN HOTELIERS MAKE UK RICH LIST

Twenty of the 275 people listed in the Asian Xpress Rich List 2002 made their money in the hotel and leisure sector. They are worth a combined £991m.

And the top five Asian hoteliers in the list, published last week as a supplement to the Asian Xpress newspapers, are worth £429m in total.

The wealthiest, at number four in the overall list and worth £400m, is Jasminder Singh, founder and chairman of the Edwardian Hotel Group.

Firoz Kassam, who owns the Firoka Hotel Group and chairs Oxford United FC, clocks in at number 11, and is worth £120m.

The other three high-flying hoteliers are: Diljit Rana (£51m), the Belfast-based owner of the Andras House property and hotel group; Satinder Gulthati (£49m), a director of Edwardian Hotel Group; and Harpal Matharu (£49m), managing director of London-based hotel operator Global Grange.

Six hoteliers made their debut on the list this year: Surinda Arora (£44m) of Arora Developments; Harish Patel (£20m) of Comcrest Hotels; Arvan and Arun Handa (£18m) of Newcastle-based Station Hotel Ltd; Vasant Dhrona (£6.5m) of Woodley Hotels; Prakash Kaneira (£6m) of Ambassadors Hotel; and Gokaldas Popat (£5m) of Jayhems Hotels.

Source:  Caterer & Hotelkeeper  www.caterer.com

AUSTRALIA HOSPITALITY OUTLOOK FOR 2002

By Rutger Smits,Sydney - Andersen

Unsettled hospitality market despite economy

Since 2000,Australian tourism operators have adjusted to several major impacts on the industry, which have created an unusual shift in traditional tourism patterns. Set against the shadow of a buoyant Olympic year, hospitality businesses reported a distinctly weak final quarter 2001.During the first two quarters of the year, the indirect effects of slowing global economies, waning consumer confidence and a softening business investment environment served as dampeners to tourism momentum. Against this background the impact of the U.S. terrorist attacks in September and the subsequent collapse of Ansett Airlines further undermined consumer confidence and perpetuated a mood of economic uncertainty.

Concerns about the length and breadth of a U.S. economic contraction have eased somewhat in recent weeks, and prospects for the Australian economy are relatively positive in the near term. In the September quarter ,GDP grew at an annualized  rate of more than four percent due to robust consumer spending and housing invest- ment. However, the softening impact of global events on other parts of the economy will become increasingly clear during 2002,at a time when the housing upswing will begin to moderate .Provided consumer spending and business invest- ment hold up, the Australian economy should continue to record better growth over the year ahead than other comparable countries, but at a rate below its longer-run potential.

The Reserve Bank of Australia reduced official interest rates by 25 basis points to 4.25 percent after its December 2001 meeting, leaving rates 2.25 percent above the U.S.federal funds rate of 2.0 percent. Despite the reasonably robust domestic economy, the bank deemed it necessary to further ease monetary policy due to the weak international economy. Given the synchronised   downturn, it is likely that 2001 and 2002 will record the weakest growth among Australia ’s major inbound markets since the early 1980s.

Preliminary data on international tourism arrivals suggests a 1.6-percent decline for the year to date November 2001,with the most notable falls post-September. The U.S., Japan and New Zealand exhibited the most significant declines post-September, due to the influence of reduced air capacity, a reluctance to use air transport and uncertainty regarding economies. To their credit, Australian operators have been proactively targeting new market segments to minimise the effects of weaker inbound demand.

Domestic travelers remain timid in the wake of Ansett ’s collapse; however, anecdotal evidence suggests a switch to ground transport, stimulating the mid-market drive destinations and coastal routes during the summer vacation period. Operators with product in the premium and luxury markets are likely to be more affected.

Increased air service by Virgin Blue and Qantas restored airline capacity following Ansett ’s  collapse. The aviation sector looks set for continued development in 2002,with Ansett ’s fleet likely to re-launch if creditors approve a $1.1-billion takeover proposal. Another factor is the emergence of Australian Airlines, a subsidiary of Qantas which will provide limited international services by mid 2002.Inspiring a reasonably disillusioned public will be critical to stimulate leisure demand, whilst renewed corporate demand for air services will depend on the rate of upward economic momentum.

Although analysts expect the U.S. economy to rebound in the near future, uncertainty continues to undermine business investment and consumer sentiment. For hotels, declining occupancy rates during the final quarter of 2001 and strong price competition has in some instances accelerated room rate discounting, placing downwards pressure on room yield performance. Several projects mooted for construction have extended their development timeframes accordingly.

Although many operators feel the hardest months are behind them, the first quarter of 2002 remains a concern to some hospitality and tourism providers. Despite regional and global uncertainties, Australia ’s defiant economic situation remains a saving grace in the light of global uncertainty.

Property valuations falter along with share pricing
Like other global markets, hotel property prices in Australia came under significant pressure following Sept.11,as trading forecasts were revised downward and investors were once again reminded of the volatility of the hotel industry. Share prices of the few remaining listed hotel trusts in Australia dropped significantly post- September as many trusts were already under share price pressure prior to Septem- ber with significant discounting of listed stock price to net tangible asset backing.

Several hotel transactions in the middle of due diligence prior to September ’s events did not attract the anticipated investor interest and/or were subsequently pulled off the market to await recovery of investor sentiment. Hotel valuations completed before September were no longer considered accurate, and valuations post- September indicated declines that reflected weakened 2001 trading results and an uncertain short-to medium-term outlook.

In this uncertain tourism landscape, some operators that secured or defended market presence through equity investment in recent years are now exploring ways to remove these assets from their balance sheets while retaining management rights. The recent devaluation of properties, combined with the low Australian Dollar, may provide opportunities for counter- cyclical investors, with particular interest from opportunistic overseas investors. Several of the remaining listed vehicles are likely to be restructured, which may result in additional properties being offered for sale. Many of these properties will be bound by existing management contracts, thus deterring owners and owner-operators wishing to re-badge the investment. At the same time, domestic institutions remain unconfident that hotels are worthy investments.

Global investment funds gear up
Australian debt providers display an increasing lack of enthusiasm for exposure to hotel assets, with cautious loan-to-value ratios and tightening credit criteria. The refinancing of stressed (overgeared) assets or more adventurous transactions is likely to be hampered as a result. Until hotel performances show marked improvements, led by strengthened domestic and global economic performance, this scenario is unlikely to change.

Overseas providers of both equity and (mezzanine)debt seem more likely to play a key role in funding major transactions at higher gearing ratios than domestic lenders are willing to support Several global investment funds are actively pursuing deals, and 2002 is likely to see several transactions culminate.