Hotel Profits May Drop 20% in 2002 as Occupancy Rates Dive

Hotel occupancy rates are expected to plunge below 50% in upcoming weeks, and industry profits will be depressed for more than a year in the aftermath of last week’s terrorist attacks.

The significant drop in demand comes at a time when hotels nationwide usually are packed with fall convention visitors. Although the industry remains relatively healthy and continues to churn out huge profits, most major hotel operators say earnings could fall at least 20% next year, and the industry is not expected to stage a recovery until 2003.

“It’s a particularly bad time because the hotel business was already under [financial] pressure,” said J. Cogan, a hotel industry analyst at Banc of America Securities. “You are just going to see reduced levels of business and leisure travel for a long period of time.”

Beverly Hills-based Hilton Hotels Corp. was one of the first of what is expected to be a long list of publicly traded hotel companies to prepare investors for disappointing financial results. Without providing details, Hilton said Tuesday that it will fail to meet Wall Street earnings expectations for the remainder of the year. Earnings had been estimated at 16 cents a share for the fourth quarter, said Chief Executive Stephen Bollenbach.

“For the next six to 12 weeks we will see extraordinary times in our business, probably the worst times we have seen in business travel,” Bollenbach said during a conference call with financial analysts.

Bollenbach declined to quantify the drop-off in business, but said the hotel chain, which includes nearly 2,000 properties, has reduced employee work schedules and canceled most advertising after last week’s terrorist attacks on the World Trade Center and Pentagon.

“It makes no sense to promote rooms in Manhattan when people can’t take airplanes to get there,” Bollenbach said.

Other hotel company officials echoed Bollenbach’s remarks.

Marriott International Inc. warned that one key measure of hotel performance--annual revenue generated per room--may fall by as much as 10%. Before the attack, the company had anticipated a decline of about 6% amid a softening economy.

“These events are having an immediate impact,” said Tom Marder, a spokesman for Marriott, which reported that two of its Manhattan hotels were either destroyed or heavily damaged. “Our hope is that as we go forward, fundamental strength will return and business will pick up.”

Industry officials are struggling to salvage their fall group and convention business. Some firms have taken comfort in the fact that the vast majority of cancellations--about 80% in the case of Hyatt Hotels--applied only to bookings in September.

Ty Helms, Hyatt vice president of sales, said the Chicago-based hotelier is trying to mitigate its losses by helping customers break up big national meetings into smaller regional events that would be easier to reach without flying.

Hoteliers already had been struggling to cope with a sharp drop in business travel before last week’s terrorists attacks. Now, the leisure end of the business, which had held up well in recent months, also is expected to drop.

Leisure travel “has fallen off more dramatically [than business travel] because it’s optional,” said Bjorn Hanson, who heads the lodging consulting practice at PricewaterhouseCoopers.

The large volume of travel within California should help sustain the state’s hotel business, because regional travel is not expected to suffer as much as longer distance, national and foreign travel.

“In the Southwest, you’ve got a huge regional business,” said hotel industry specialist Bruce Baltin at PKF Consulting. “We’re not going to be as impacted as a city like Orlando might be.”

The hotel industry’s largest players boast strong balance sheets, industry observers note.

*

Times staff writer Melinda Fulmer contributed to this report.