Travel Outlook Makes Hotels Hot Properties

While economists and bankers wring their hands over the world economy, the good news is that a lot of smart money is confidently placing bets on global travel as a growth business of the next decade.

That’s one reason behind the recent rush of big money deals for hotels. Just last week, Japan’s Seibu Saison Group bought the Inter-Continental Hotel chain, which includes the Mark Hopkins in San Francisco, the Willard in Washington and Inter-Continental hotels all over the world. Last year, Aoki Corp. of Japan joined investor Robert M. Bass of Ft. Worth in buying the Westin chain, owner of the Bonaventure and New York’s Plaza Hotel--which Bass turned around and sold to real estate developer Donald J. Trump.

Yes, of course, the buyers are looking for appreciation in real estate values. The hotels in the eye-catching deals are unique properties in prime locations. But it’s rising global travel--this year the United States will receive more than 30 million foreign visitors, who will spend $25 billion--that supports the attraction for hotel buyers, because it promises the cash flow to pay interest on the mortgages.

Hotels can be highly profitable businesses. That’s why Marriott Corp., the $6.5-billion (revenue) company with 360 hotels worldwide, took a look at Inter-Continental. And Curt Carlson, head of the Carlson Cos. of Minneapolis, says his business will more than double in the next four years, from $4 billion in revenue to $9 billion.

Rooms Make the Money

Carlson’s companies include the Ask Mr. Foster travel agencies, TGIF restaurants and the Raddison chain of 170 hotels. “The secret of the hotel business these days is the chain system and the 800 telephone number,” says Carlson referring to the modern, centralized communications that allow hotel chains to easily make reservations nationwide--a far cry from communications in 1938 when he started his company. “That 800 number allows you to sell up to the last room in the house,” he says.

And the money is made in the rooms. “The out-of-pocket expense to put a guest in the room--for the maid who cleans up and to refurnish the sheets and towels--is $15,” Carlson explains. “And rooms rent for $80 to $100 a night”--and often much more. On the other hand, food and beverages don’t make money, but are there mainly to attract guests. The biggest cost and risk is making payments on the mortgage.

A hotel usually makes money if it fills more than 60% of its rooms, explains Diane Parmerlee of Laventhol & Horwath, an accounting firm specializing in hotels and travel companies. The business is more adaptable to changing economics than real estate--also riskier. “Unlike an office building that you rent on long-term lease, a hotel room you rent every night,” says Parmerlee. “In luxury hotels, income before taxes and debt service ranges from 20% to 35% of revenues, and it’s more than that in an economy hotel because you don’t provide as many frills.” Weep not for Motel 6, in other words.

At the moment, business is strong. Travel expenditures by Americans and foreigners visiting the United States totaled $272 billion last year, according to Washington’s Travel Data Center, a research organization. Globally, there were 355 million people on the move, according to the World Travel Organization in Madrid.

And the outlook is optimistic. Laventhol & Horwath has just completed a study on tourism to the year 2000 that predicts further growth, particularly as Asian travel increases to match that of Europe and America. Japan alone will send out 8 million tourists this year, perhaps 10 million within a few years; one reason Seibu Saison and Aoki Corp. are investing in hotel chains.

All of that is good news economically, of course. Anticipating growth in travel, the world’s airlines have Boeing and McDonnell Douglas backlogged with orders for new airplanes.

But it’s good news that goes beyond economics, too. Not only does it indicate a rising standard of living for the world’s people--it was not so long ago after all that travel was the province of the privileged and ordinary folk didn’t get around much. But, says Somerset Waters, who has published a travel industry yearbook for 32 years, “the simple fact is that you can count on an increase in travel except in times of wars and revolutions.” It’s a rare business that provides a measure not only of prosperity, but peace as well.