Tourism may come off bottom, but pricing could pinch industry

CHICAGO — Coming off an awful 2009, travel-related businesses from casinos to cruise lines to ski resorts are crossing their fingers that 2010 will bring something of a rebound.

They’re looking to pent-up demand and lower costs to offset at least some of the pricing pressure that seems likely to continue into the near future.

Certainly, the comparisons will be easier.

Virtually every meaningful metric, from hotel occupancy to overseas arrivals to convention attendance, fell off a cliff in 2009 as cash-strapped consumers stayed home and cautious businesses squeezed every possible penny out of trimmed budgets. Through the third quarter, hotel chains reported sharp decreases in revenue per available room, cruise lines posted steep drops in profit and most airlines were drowning in a sea of red ink.

Don’t even get started on Las Vegas, the country’s most popular tourist destination, where visitation levels, occupancy rates and gambling revenue have been in free-fall for more than a year. That even as capacity continued to grow with MGM Mirage dumping thousands of more rooms into the mix just weeks ago with its opening of the massive $8.5 billion CityCenter development.

In response to the top-line pressure, operators have been cutting expenses wherever possible, laying off employees, freezing wages, canceling or deferring bonuses and beating up on vendors.

According to the U.S. Travel Association there were 400,000 combined travel industry job losses in 2008 and 2009. The industry currently employs about 7.7 million Americans, or 1 in 8 nonfarm jobs, meaning that any recovery will have an immediate impact on the unemployment rolls.

Still, USTA sees the potential for a modest rebound in 2010, with domestic leisure travel spending rising 2 percent, while domestic business travel could be up 2.5 percent. That compares to expected declines of 2 percent and 6.2 percent, respectively, in 2009, and it could translate into about 90,000 new jobs.

“Projected growth in leisure travel is an indicator of rising consumer confidence and disposable income,” said Suzanne Cook, senior vice president at USTA. After a difficult 2009, “businesses have a heightened focus on the value and bottom-line benefits of travel. We expect to see a slight increase in business travel (in 2010) based in part on pent-up demand for face-to-face meetings that drive growth and productivity.”

The group is expecting international inbound travel to increase 3 percent in 2010, although growth in overseas travel excluding Canada and Mexico will pretty much be flat. And foreign visitation to the U.S. in 2010 will still be below where it was in 2000, at 23.5 million vs. 26 million.

That may help the air carriers at least cut their losses a bit: The global airline industry is looking at an $11 billion loss this year and a $5.6 billion loss in 2010, according to the International Air Transport Association.

“Demand continues to improve, but we still have a lot of ground to recover,” said Giovanni Bisignani, chief executive of the trade group. “We cannot anticipate any significant improvement in yields in the coming months. So, conserving cash, controlling costs and carefully matching capacity to demand remain at the keys to survival.”

In one sign of life, passenger demand rose 2.1 percent in November over a year ago, IATA said, putting it 6.4 percent above its trench in the first quarter of 2009 but keeping it 6 percent below the peak reached in early 2008.

For the hotel industry, it has been a miserable year, with the only bright spot perhaps being a gradual reduction in the overall pipeline, which should constrain supply when and if demand recovers.

Last month, hotel occupancy in the U.S. fell 4.3 percent to 49.5 percent, according to statistics compiled by STR Global, and the average daily rate was down 8.3 percent to under $100. Revenue per available room, known as RevPAR and perhaps the industry’s most closely watched performance measure, was down 12.3 percent.

STR noted that group occupancy took a hit at the beginning of the year “with basically little improvement throughout” until lower declines began in October, mostly on the back of easier comparisons.

“Declining ADR has been the rule throughout 2009 for group business, and there is no evidence that this trend has slowed, as yet,” STR said. “By the second half of (2010), occupancy improvement should begin in a more meaningful way” although room rates will continue to be challenging.

“The group booking window is shrinking in many cases, and organizations are using their leverage to lock in discounted rates when booking business with a longer-term commitments,” STR pointed out. “Until supply growth slows and occupancies firm, ADR growth — for virtually any business segment — likely will be difficult in many markets.”

Hotel chains from Starwood to Marriott to Intercontinental saw their earnings cut by half or more in 2009, and few if any are predicting a banner 2010.

Earlier in December, Marriott International said that systemwide RevPAR outside North America for the fourth quarter of 2009 will be off 14 percent to 16 percent, slightly better than previous expectations, while domestic systemwide RevPAR will slump 16 percent to 18 percent.

The company is unwilling to look much further ahead, with Chief Executive J.W. Marriott Jr. noting at the time of its last earnings release that the industry “has been challenged by the economic environment,” and any “recovery may be slow and uneven.”

Cruise lines have also been facing rough sailing. Two weeks ago, Carnival Corp. reported that weak pricing and a slump in sales dragged down its overall profit by almost half as net revenue per available lower berth slipped 10.4 percent.

But looking ahead, the company said that booking volumes are strong and occupancy levels for 2010 are currently in line with this year’s numbers even though pricing is running “slightly behind” last year at this time.

The company added that it is “optimistic that the attractive pricing we have in the marketplace and pent-up demand for vacation travel will continue to stimulate strong booking volumes and lead to a solid wave season.”

Rival Royal Caribbean posted similarly dismal numbers in its most recent financial report, adding that it actually expects to lose money on the fourth quarter. Further out, the company said that the overall “business environment is largely unchanged and stable,” but it is “optimistic that 2010 will bring year-over-year yield improvement.”

Wall Street wasn’t buying it, though.

“We maintain our cautious coverage view on the cruise sector given potential for higher energy costs and an unfavorable 2010-2011 supply picture that will hold back pricing in an economic recovery,” wrote Steve Kent of Goldman Sachs in a note to investors.