The Other Dangers of a Downturn

There's been a lot of talk (and rightly so) about how the struggling economy and sky-high gas prices will affect the travel industry. Even though the summer vacation season is in full bloom, there's still no consensus on the mood of American consumers. Have they panicked and chosen to stay close to home this summer? Or will they use their economic stimulus package money to take the annual family vacation, even if it's closer to home than they'd like? And what about the business traveler? Will corporate bean counters mandate less travel?

While these are important questions for every lodging operator, they don't cover all of the dangers the industry faces in light of an economic system in turmoil. Rising oil prices, in particular, will undoubtedly have a significant impact on all aspects of hotel operations and, ultimately, profitability. Everything you purchase for your property — from guestroom pens to items for the continental breakfast to ff&e — will cost more, probably without exception. In fact, I'm sure you've already heard from most of your suppliers about cost increases — or fuel surcharges or other thinly-disguised fees — many of which have already been implemented.

Yet other dangers lurk on the horizon.

I got a call this week from a hotel owner who has among his portfolio a 109-room limited-service property in a midwestern city. He recently got notice that the county was doubling the property taxes on the property to more than $200,000 a year. It wasn't a phased-in increase, either; the new tax started immediately. As he pointed out, his hotel — a well-located property near a major airport and sporting a major brand — will barely be able to absorb this kind of onerous tax hike. But what about Mom and Pop properties in marginal locations and no brand that are just squeaking by as it is? Can they absorb the shock of a tax bill that doubles in a year? Probably not.

I won't be surprised to see other government entities looking at the hotel industry as a source of monies to shore up budget shortfalls. After all, officials may reason, when costs go up, hoteliers can pass them on to guests, who generally can't vote on tax issues or the officials who enact them.

Another danger, particularly for hotels in Hawaii, Mexico, the Caribbean and other resort destinations, is the contraction of the airline industry. Not only are airfares rising, but mergers, bankruptcies and service cuts in the airline business are putting a strain on the ability of vacationers to get to where they want to go when they want to. By the fourth quarter, American Airlines plans to reduce domestic capacity by 11 percent, including cuts in service to Hawaii and its Caribbean hub in Puerto Rico.

The situation is particularly grim in Hawaii. I recently returned from Maui and saw a lot of long faces among those in the tourism business (and who in Hawaii isn't?) in anticipation of a tough summer season. In April, visitor arrivals to the islands fell by 7.6 percent, mostly due to the shutdowns of both ATA and Aloha airlines.

Hotel owners and operators need to brace themselves for a rough patch. No one knows whether it will last a few months, a few quarters, or even longer. No matter, you need to be prepared.

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