Taking Stock

Meetings & Conventions On Guard February 1999 Current Issue
February 1999

Taking Stock

With the stock market’s latest rounds of gains and losses, some suppliers are rethinking expansion plans. Is the end of the sellers’ reign in sight?

By Cheryl-Anne Sturken

Forget the Bill and Monica sex scandal and the presidential impeachment hearings. Forget St. Louis Cardinals’ Mark McGwire’s history-making 62nd home run or John Glenn’s much-ballyhooed second foray into space. Wall Street was where the true drama of 1998 unfolded. This year, the economy may well define a new course for the meetings industry.

Last June, a robust U.S. economy appeared immune to the creeping global economic crisis. And why not? Stocks were trading high, interest and inflation rates were down, and there were plenty of jobs to be had. One month later, all that suddenly changed. In July, as the Fortune 500 basked in the glow of healthy profit margins, memories of the 1991 recession a distant blur, the stock market suddenly bucked and nosedived, sending stock prices into a three-month-long free fall.

The remaining months of 1998 were among the most volatile in Wall Street history. August saw the collapse of the Russian ruble, while September’s near-bankruptcy of Long-Term Capital Management’s hedge fund brought the nation’s top banks to their knees. In November, fearing a total collapse of the Brazilian economy and a fallout that would ricochet throughout South America in a scene similar to the one in Asia the International Monetary Fund announced plans to throw that country a $41.5 billion lifeline.

Closer to home, pink slips began flying on Wall Street as the big banks, including Merrill Lynch, the nation’s largest brokerage firm, began a round of layoffs. Year-end bonuses at Wall Street’s big brokerage houses lacked 1997’s wallop. The average payout dipped 18 percent, with some firms opting to forgo bonuses altogether. Not surprisingly, analysts began reporting an ebb in consumer financial confidence as anxiety over a possible credit crunch increased.

The waning months of 1998 were particularly giddy. The Federal Reserve Board’s premature lowering of short-term interest rates and the news of big mergers namely Netscape-AOL and Exxon-Mobile breathed new life into Standard & Poor’s index. But, for every rebound, there was a dip in the Dow. Investors were either stampeding to buy stock or holding their breath as the market fell yet again. On Wall Street, motion sickness was practically at epidemic proportions. The only certainty seemed the market’s very uncertainty.

And the forecast calls for...
Exactly what will the market’s 1998 gyrations mean for meeting planners this year? More than meets the eye, say some analysts. Key 1998 industry factors predicted to shape the meetings climate over the course of this year are a glut in hotel room inventory, a slowdown in hotel expansion due to lack of available capital, smaller increases in room rates and an anticipated dip in business travel.

“There is no question that in the last few years the pendulum swung way over on the hotel side for group business, but it is slowly moving back over, more toward the middle,” says Robert Mandelbaum, director of research for PKF Consulting’s Atlanta-based research department.

Cristina Ampil, senior lodging economist for New York City-based PricewaterhouseCoopers, agrees. “We have had five consecutive years of record profits,” she says. “I don’t think there will be massive industry losses in 1999 as much as a soft landing.”

But Mandelbaum cautions, “If there is indeed a true recession, planners have to remember they will be planning less as corporations cut back on business spending. So, I would not get too giddy if I was a meeting planner.”

Bottom line, 1999 appears to be a turning point for planners, who can expect an easing up of the supplier stranglehold as the hospitality market begins to settle down from its pre-July 1998 gold-rush mentality. For the moment, there aren’t any major victories on the immediate horizon, only modest gains at the negotiation table. In the end, it will be Wall Street that continues to call the shots.

Hotel growth slows
The major lodging chains, including Marriott, Ritz-Carlton and Hyatt, lodging groups Promus Hotel Corporation and John Q. Hammons Hotels, Inc., and the country’s two leading real estate investment trusts, Starwood Hotels & Resorts Worldwide and Patriot American Hospitality Corporation, have all aggressively expanded their portfolios here and abroad within the past few years.

However, when the market entered its 1998 third-quarter downslide, lodging stocks were hardly insulated. In fact, they took a beating. As access to capital dried up, so did some chains’ expansion plans. Close to $2 billion of scheduled hotel development projects through the year 2000 are said to be on hold, according to The Wall Street Journal.

Springfield, Mo.-based John Q. Hammons Hotels, Inc., which currently owns and operates 48 domestic properties, was one of the first to announce it would suspend expansion. “We have made a decision that after our current projects open, four in 1999 and one in 2000, we will not be building for a while,” says Ken Weber, chief financial officer. “We want to look and see how our hotels continue to operate, and we also want to let our new hotels have time to mature.” Adds Weber, “Obviously, we would like our stock to be trading higher. We don’t think it reflects our true worth. Naturally, we will continue to watch the market and react in our best interest.”

While Memphis, Tenn.-based Promus Hotel Corporation, which added 200 properties in acquisitions and new developments to its portfolio in 1998, expects to have a similar expansion performance this year, concerns over a financial downturn remain, says John Lavin, vice president of national sales. “Although consumer confidence is high right now, I still think the market will be watched very closely by all the hotel groups. It could turn out to be relatively flat. There are key pockets that will be concerns for us, such as the Pacific Northwest, Florida and San Jose, California.”

Similarly, the mood at the Dallas headquarters of Patriot American Hospitality Corporation has switched from bullish to conservative. The giant real estate investment trust, which completed a $4.5 billion hotel-buying binge last June, was faced with a significant cash shortage when the market entered its third-quarter slide. That predicament caused Patriot to cancel third-quarter dividend payouts and announce the selling off of “certain hotels” that it leases to NorthCoast Hotels of Seattle, reported The Wall Street Journal.

“Expansion plans are now slower, industrywide and for ourselves. The third-quarter slowdown clearly impacted projects, which was not necessarily a bad thing,” says Mack Koonce, executive vice president of marketing and strategic planning for Wyndham International, Inc., a division of Patriot. “I think earlier on in 1998 things were perhaps a little too euphoric.”

“Downturn? What downturn?” scoffs Juergen Bartels, Starwood’s chief executive officer. “People like to talk in a vacuum about these things. I have made my budgets, and I am optimistic. I feel very good going into 1999.”

Last December, Bartels unveiled an ambitious global expansion plan for Starwood two signed properties a week for three years. The company, which grew from 10,000 guest rooms in 1995, gobbling up Westin and Sheraton along the way, expects to have 213,000 guest rooms under its wing by year-end 1999.

But, like Patriot, Starwood experienced significant third-quarter 1998 cash-flow problems and pulled the plug on several projects, such as its downtown Jakarta highrise that shut down construction at the fifth floor. Other Asia-Pacific development projects in the planning stages were also put on hold.

“The concerns the analysts have are for limited-service properties, not for a $200 million luxury hotel in downtown New York that takes eight years to build,” says a confident Bartels. “And who knows what cycle we’ll be in in eight years.”

Projects on hold for Host Marriott include construction of four full- service hotels, according to an industry source who requested anonymity. However, when contacted by M&C, Host Marriott refused to confirm or deny the cancellations. But a Reuters news report indicated Terrence Golden, president and CEO of Bethesda, Md.-based Host Marriott Corporation, was more blunt about the deterioration of capital markets on his company’s expansion plans during a hospitality industry conference in New York City last November. “We have basically stopped construction of one hotel, and have decided not to move forward on any projects that we haven’t already committed to,” he was quoted as saying.

Room rates ease up
The glut in hotel room inventory will actually work in meeting planners’ favor, says PricewaterhouseCoopers’ Ampil, who predicts planners will get a breather from heavy room rate increases during 1999.

“More supply growth is being added than is being absorbed, which makes for a lower occupancy rate,” she says. “There will be a moderation in room rate increases, which is good news for meeting and convention planners, because they won’t see the steep increases they have in the last couple of years.”

While lower occupancy levels will hardly have hotels sending armies of scouts out to drum up meetings business, planners may get a warmer reception when they come knocking, says Mandelbaum. How well they use their leverage will depend significantly on how well they track market conditions and their ability to sell their business.

“Hotel salespeople look at declining occupancy and read about a possible recession and go, ‘Okay, maybe I will not be able to replace this [meeting] business, so maybe I should sign up the first group as opposed to holding off for a better deal,’” says Mandelbaum. But, he cautions, planners shouldn’t expect to see the knee-jerk reaction of the early 1990s, when hotels slashed rates just to put heads in beds. “Hotel managers have learned they can suffer a decline in occupancy if they are able to maintain decent room rates and achieve a growth in profit that way,” says Mandelbaum. While there won’t be any bargains to be had at traditional peak times, he adds planners can expect a calendar with more holes, longer slow periods and more dead weekends.

Another caveat: Planners hoping to do business in the major cities of New York, Los Angeles, Chicago and Boston can expect the same tight squeeze in rates and space as in 1998, say analysts. According to Ampil, room supply isn’t growing as fast in the major cities as it is elsewhere in the country. “In gateway markets like New York City and Chicago, room supply isn’t growing as quickly, and demand remains high,” she says.

In its 1999 Trends & Forecasts Preview for the Business Travel Industry, New York City-based American Express Travel Related Services Company, Inc., estimates the average room rate in these cities will rise between 7 and 10 percent. However, the report is quick to point out that the forecast is based on 1998 second-quarter data, and projections for 1999 will continue to change based on the market’s performance.

No relief at convention hotels
As good as a leveling off of room rate increases may sound, association and convention planners may want to hold off on the applause. Much of the new hotel inventory that hit the market in 1998 (and most of the development already in the pipeline for this year), was in middle to lower-tier hotel chains, most notably extended-stay properties. That, say some analysts, will leave association and convention planners strapped for much-needed larger meeting properties.

“What’s not being built now are the new larger convention center hotels,” says Mandelbaum. “There were a lot of convention hotels in 1998 that were getting funding from capital. Now those may not get built because the funding is no longer there. We may be looking at another three-year window where availability of meeting hotels is no different in 2002 than it is now. Those developments would have been on the planners’ side, giving them more leverage. Those are all on hold now.”

Luxury level hangs on for the ride
At the upscale Ritz-Carlton Hotel Company, a combination of nervous anticipation and stoic optimism prevails. “Our industry is in for an incredible ride in the next few years. This [market] could be one of those events where things rocket off in a direction people did not expect,” says Atlanta-based Jim Schultenover, vice president of sales and marketing for the chain. “We have to remain anticipatory, because news will be happening fast.”

While Ritz-Carlton is confident it will maintain its expansion goal of a total of 60 flagged properties by the year 2002, it is gearing up for the immediate reality of empty rooms if further downturns in the market send companies scurrying to cut back on business travel.

“We do anticipate an increase in cancellations and that pickups will be less than what was contracted for,” says Schultenover. “We might have to modify who we are concentrating on, but we won’t modify our approach. We want to remember those who did business with us in periods of high demand. But we are not predatory.”

However, some analysts, including PricewaterhouseCoopers’ Cristina Ampil, think the luxury hotel companies are in a better position than middle-of-the-road chains to ride out tough economic times.

“The luxuries are less vulnerable in an economic downturn, because their demand is inelastic,” says Ampil. “Leisure travelers tend to be more price-sensitive and will cut back on their spending. Business travelers are less elastic. Transactions still have to get done.”

Recovery hinges on Japan's economy

How much longer will Asia’s economic troubles yield attractive deals for meetings? With recovery not yet in sight, planners can expect the bargains to continue for the rest of the year and possibly through 2000, according to hotel analyst Joseph Toy, director of hospitality and leisure for PricewaterhouseCoopers in Honolulu. “Right now, hotels are eager to get groups in and are being flexible across the board,” he says.

Major destinations in Asia can be expected to court U.S. meetings business with deep rate discounts and favorable air fares until there is a rebound of the region’s primary market: Asians traveling within Asia. “In particular, much of the Asian recovery hinges on what happens with the economy in Japan,” says Toy. “Japanese travelers, both business and leisure, account for much of the visitor activity in places like Taiwan, Korea, Hong Kong, Singapore and China. Until they are traveling again, destinations will be hurting.”

To help fill the gap with increased business from North America, the Hong Kong Convention and Incentive Bureau recently launched Hong Kong Value Plus, a direct-mail campaign to corporate meeting and incentive planners offering hotel rate discounts of up to 50 percent and convention center rental discounts up to 30 percent. Similarly, the Japan Convention Bureau has introduced discounted convention travel packages to 45 cities within the country.

Also making Asia affordable are currency exchange rates that have recently strengthened the U.S. dollar in countries such as Japan, Thailand, Indonesia, Singapore and South Korea. Because currency rates are unpredictable, international meeting planner Carol Krugman, president of Krugman International Group in Ft. Lauderdale, recommends working with a currency brokerage firm to get a “forward contract” that locks in the current exchange rate until the time of the meeting. Such contracts let planners set up accounts at the brokerage firm that can be converted to foreign currency at the guaranteed rate.

Passing up a bargain
Although some customers are attracted by Asia’s lower travel costs, they’re hardly coming in droves. Steve Goodling, Los Angeles-based director of marketing North America for Shangri-La Hotels, observes that while incentive bookings at the chain’s Asian properties are up, particularly to Thailand, corporate meeting business is flat and transient corporate travel is down.

“Some companies are taking advantage of the pricing in Asia, but the challenge is our own fluctuating economy in the U.S.,” he says. MARIA LENHART

Asia Still on Sale

A Farewell to Lamé ?
For the special events industry, 1994 to mid-1998 were heady times. “It was beginning to feel like the ’80s again lavish was in, no expenses were spared,” says Vince Steffan, director of George Trescher Associates, a New York City-based special events firm. But then, the stock market dipped sharply “and everything went ‘blip.’”

While the party isn’t exactly over, the brakes are on in vulnerable industries like banking, finance and those that rely heavily on trade with Asia. The first sign of skittishness: scaled-back holiday celebrations.

“Many of our clients trimmed their budgets between 20 and 40 percent, but in ways that weren’t obvious to the guests,” says Steffan. “They told us no more gold lamé overlays on the tables and no extra carving stations. For entertainment, they had four carolers instead of a whole choir.”

He says for the 1997 holiday season, his company had more business than they could handle and had to hire extra seasonal employees. This past holiday season, their schedule “had a lot more breathing room” and was easily managed by the in-house staff.

The economy’s effect is less noticeable at companies that watched their spending over the past few years. Joanne Wright, director of special events for Affairs to Remember, an Atlanta-based catering firm, sees no difference in the event spending habits of her clients, which include telecommunications, publishing and high-tech firms. “But these companies are budget- conscious, spending about $100 per person for events; the banking industry tends to spend more,” she says. Steffan, for example, has clients who spend more than $300 per person for events. Planners for such high-end affairs may feel the pinch first, Wright says.

John Daly, president of John Daly Inc., a Santa Barbara-based special events firm, says his clients mainly Fortune 500 firms are sticking to the same budgets in 1999 that they had in 1998, even though some of them have gone through mergers and therefore have more attendees at their events. “While no one’s cutting back outright, there’s definitely a sense of caution,” he says. “It certainly won’t be like the past few years, where the mentality was ‘let’s do more and more’ for these parties.”

He adds: “I don’t think it’s anything to be alarmed about it’s just that when things have been as good as they have been for the past few years, it’s easy to get caught up into thinking the good times will last forever and those of us who lived through the ’80s know they don’t.” LISA GRIMALDI

Airlines: Still Flying High?
The past few years have been very good to the airline industry. Sky-high travel demand in 1998 translated into hefty load factors and record earnings for most of the major carriers. While the airlines are forecasting 1999 will be another solid performance year, with higher fares and less availability, some analysts disagree.

“Airline revenues traditionally track against corporate profits and, to some extent, capital spending,” says Glenn Engel, airline analyst for New York City-based Goldman, Sachs & Company. “Business travel, contrary to what most people think, is actually more volatile than leisure travel. Corporations are having a hard time making their profit goals in this economic environment, so they will curtail business spending. And that means meetings.”

American Airlines’ spokesperson Chris Chiames counters: “We think if companies do make cutbacks in business travel, the meetings side of the equation won’t be affected.”

Seconding that optimism is Continental Airlines, which is predicting a banner year in 1999. “We are feeling good about 1999 and what it holds for us,” says Brenda Davis, manager of group and incentive sales development. According to Davis, meeting planners shouldn’t expect any easing up in heavily trafficked routes. “Load factors are high right now. And it’s not like there are going to be any more seats. Planners should look for destinations with availability, as opposed to looking for more seats to already heavily booked destinations.”

According to Davis, group-friendly cities this year with regard to price and seat availability will include second-tier cities like San Antonio, Texas, and emerging Latin American destinations, such as Costa Rica, Rio de Janeiro, Brazil and Quito, Ecuador.

Apparent optimism aside, American is proceeding with caution. This past November, the carrier decided to postpone several new international routes, including Chicago-Amsterdam and Chicago-Moscow, and to retire 10 old aircraft. The airline scaled down its 1999 growth projections from 6 percent to 4 percent. “This is a cyclical business,” says Chiames. “We are doing our best to brace ourselves for when the economy slows down.” C.A.S.

Taking Stock

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