Andersen
Hotel & Leisure Executive Report

10/04/2001  

What impact will September 11 have on the global hotel industry?

It is clearly too early to evaluate the full impact of September 11's horrible events on the hotel industry but it is possible to suggest some of the elements that will have the biggest impact.

Safety is a core, and usually unsung, aspect of the product offered by hotels — but could become an even higher part of the value proposition. After the terrible hotel fires in Las Vegas and Heliopolis, the major branded hotel companies moved to significantly raise the bar in safety standards.

It seems likely that last month’s events will again draw attention to the standard of fire and life safety in all public places. The industry may be challenged to again raise its bar.

It seems likely that hotel guests will be considerably more concerned about the security infrastructure in the hotel, particularly when the decision is being made by an intermediary (tour operator, corporate procurement officer, crew negotiator) — for whom duty requires that the choice of hotel is a professional, not emotional, issue.

We expect to see a series of fresh initiatives to improve the risk management profile of the business. We expect to see efforts being made to make hotels a safer place for guests to visit and stay, while there will also be renewed efforts to make the physical asset safer.

What to expect in travel
At least in the short term, there will be less customers in many destinations. Already we have seen businesses curtailing travel to reflect the slowdown of the world economy. Now we see travel advisories at many major businesses counseling against nonessential travel.

A severe cutback in corporate individual travel, particularly by Americans or to America, seems likely over the next months. We also expect reductions in the number of conferences and conventions, or at least a reduction in the attendance at such meetings.

Globally, leisure travelers occupy the majority of hotel accommodation. In these segments too, we expect to see reductions. The slower, even negative, rates of growth were already feeding through to lower discretionary spending on travel and tourism, and this trend is likely to deepen as people re-think plans for air travel.

So, we think that there is an upside for hotels that can switch to target the domestic traveler arriving by car or train rather than the cross-border traveler arriving by plane. Of course, this suggests that airport hotels will be particularly hard hit.

So, too, there is an upside for those hotels that had been successful in attracting domestic leisure guests but where poor delivery of guest satisfaction means that alternative offerings coming quickly onto the market are suddenly more attractive to leisure travellers.

Impact on shareholders
Perhaps one of the most important results will be the impact on shareholders. The World Travel & Tourism Council and World Tourism Organization consider the tourism industry to be the biggest industry in the world and one component — the hotel industry — has reported excellent growth in profits in 2000.

Part of the ability to grow profits very fast is a reflection of operational gearing — the flow-through to profit of marginal revenue is very high in this industry. But if, as we suggest above, the likely short- and perhaps medium-term impact will be a sharp reduction in the revenues of certain hotels, there is bound to be a more than proportional impact to operating profits.

While the vast majority of the world’s hotel rooms are not owned by publicly traded companies, those that are seem likely to reflect sharp dips in profitability.

Issues to be addressed
Operational management will be able to mitigate these shortfalls, of course. And we expect to see labor levels being cut, with radically new processes used to eliminate cost (perhaps increasingly leveraging emerging e-commerce technologies).

This event will shake out those who understand how to use yield management systems from those who have simply installed a piece of technology. But in the short term, most cost will be eliminated simply by not doing things.

Thus we expect to see rooms being taken out of availability (whole floors being mothballed, hotels closed for periods when demand is expected to be below break-even levels, etc.), secondary restaurants closed, and conference and exhibition space taken out of availability. We expect to see discretionary spending curtailed and extraordinary rigor being applied to procurement policies generally.

Some may not survive
Some hotel companies may not weather the storm that is ahead. These may be businesses that lack tough leadership, or are over-exposed to the American market, or whose brands are young and with a thin base of loyal clients, or are over-indebted and thus unable to accommodate a lower level of operating cash flows.

This provides an opportunity for further consolidation. Once share prices stabilize, we expect to see some of the major brands taking advantage of the ravages of the recession to further expand their own distribution.

But most hotel companies will address the issues and we can look forward to a strengthened industry emerging. Like everyone else, we hope that last month’s events bring about the end of terrorism throughout the world.

If that is the case, the future for tourism and travel is indeed healthy. But in the meantime, the industry is likely to be negatively impacted. Much can be done by the executive teams managing the global hotel industry to address the short-term issues — but they would be well advised to ponder some of the longer term implications suggested here.

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Company Information

Andersen is a global leader in professional services. It provides integrated
solutions that draw on diverse and deep competencies in consulting, assurance,
tax, corporate finance, and in some countries, legal services. Andersen employs
85,000 people in 84 countries. Andersen is frequently rated among the best
places to work by leading publications around the world. It is also consistently
ranked first in client satisfaction in independent surveys. Andersen has enjoyed
uninterrupted growth since its founding in 1913. Its 2000 revenues totaled
US$8.4 billion. Learn more at www.andersen.com.

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