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Travel pinch: Global financial crisis leaves big dent in tourism industry

Hotel occupancy, air travel way down

December 7, 2008

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The tourists chatting in multiple languages in the piazzas, bars and shops of Rome belie a more somber mood at the ancient city’s hotels.

Luigi Rinaldi, concierge of the Hotel de la Minerve next to the Pantheon, said American tourists have disappeared, although demand among German, Spanish and Russian tourists is solid.

The hotel is trying to lure guests by keeping prices steady — even during the high season at Christmas and New Year’s — and by adding weekend promotions.

“But we are a five-star hotel,” Rinaldi said. “We can’t be too daring.”

Rome is among many major cities around the world seeing dramatic declines in hotel occupancy this fall as consumers and businesses cut travel spending: Occupancy in Rome fell 17.5 percent in October compared with the same month last year.

Global air travel also has fallen off as the financial crisis has hit economies around the world. The International Air Transport Association says international passenger traffic declined 1.3 percent in October compared with 2007, and it dropped 2.9 percent in September. And executives from major airlines told investors Tuesday at a conference in New York that erosion of demand for seats will force them to cut capacity next year.

“I think it’s going to be a very cold winter, and I’m not a weatherman,” said Calyon Securities airline analyst Ray Neidl.

Troubled airlines

Airlines, which already made dramatic cuts to their fall schedules as oil prices soared over the summer, have cited the economic slowdown as reason enough for them to continue to be cautious, even though oil prices have dropped significantly the last few months.

Several U.S. airlines have promised or hinted they will cut domestic and international capacity further in 2009. Atlanta-based Delta Air Lines Inc. suggested Tuesday that more job cuts could be on the way as it disclosed that it will reduce consolidated system capacity by 6 percent to 8 percent in 2009, compared to the current year.

Delta said in a recent regulatory filing that demand has slowed during the fourth quarter, which began Oct. 1. Its domestic advance booking rates are running two percentage points higher year-over-year, reflecting capacity reductions in the domestic system. International bookings are down 4 to 5 points, Delta said.

United Airlines, the nation’s third-largest carrier, said in October that it expects its overall capacity to shrink 8 percent to 9 percent during 2009. At Tuesday’s Credit Suisse Global Airlines Conference, an executive said United, a unit of Chicago-based UAL Corp., would be willing to cut more capacity to get profitable, though it does not believe it will need to. An executive at Seattle-based Alaska Air Group Inc. said his company could hike fares in some markets as it looks for ways to increase revenue.

According to the IATA, the number of passengers traveling on premium airline tickets — who tend to be business travelers — dropped 8 percent in September, reflecting the severity of the global financial crisis and a slump in the confidence of manufacturers in the U.S., Japan and Europe. Premium traffic slumped in North Atlantic markets, between the U.S. and Asia across the Pacific and within the Middle East. That’s a bad sign because business travel helps drive airline profitability.

An “open skies” agreement between the U.S. and the European Union, which took effect in March, allows airlines to fly to and from any point in the U.S. and any point in the EU.

“There’s more capacity now with Open Skies at the same time you’re having a severe downturn in potential demand,” Neidl said. “But once we get through this financial crisis, and hopefully it will happen by next spring, people will start traveling. People have to travel for airlines to make money.”

Hotel downturn

In Rome, meanwhile, business is down sharply at the five-star Grand Hotel Plaza, one of the city’s most prestigious hotels just a few steps from the Spanish Steps, according to sales manager Paola Ucciarello.

Other cities are being hit hard, as well.

STR Global Managing Director James Chappell said he was surprised by the extent of the downturn in the United Kingdom, where London’s five-star hotel market has been hit particularly hard because guests are trading down to less pricey accommodations. September and October also brought hotel business declines in Hong Kong, Los Angeles, Madrid, New York, Paris, Toronto and Sydney.

Hotel occupancy across Europe fell 4.9 percent in September from a year ago, and 6.3 percent in October, according to STR. In Italy, revenue per available room — a key gauge of a hotelier’s performance — has been on the wane since May and plummeted about 20 percent in October. In London, hotel occupancy fell 5.2 percent in September and 4.2 percent in October compared with the same months last year, according to STR.

In the hotel industry, the current downturn is exacerbated by increases in supply over the past several years from a flurry of hotel development that continued into 2008. In Beijing, for instance, occupancy dropped 20 percent in October compared with 2007, which Chappell largely attributed to an excess of rooms at hotels built for the Olympics.

Markets in the Middle East and Africa, where hotel supply is still catching up with rising demand, are bucking the trend. Occupancy in both Dubai and Cairo gained during October.

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