Hotels and casinos plan for slowing economy

By Chris Reiter

NEW YORK (Reuters) - The travel industry is bracing for tough times.

The slowing U.S. economy threatens the once-booming hotel industry, while the credit crunch is hampering expansion plans.

"As the economy slows down, there is going to be slowing of activity by business travelers," Tim Behle, manager at Ernst & Young's transactions advisory services, told Reuters Television ahead of the Reuters Travel and Leisure Summit in Los Angeles, which begins on Monday.

"There is definitely going to be a noticeable impact on hotels in the U.S.," Behle said.

Similar trends are expected in the casino industry, which is dependent on conventions and meetings to fill seats at poker tables and slot machines.

"I think the industry is certainly going to be down when you add it all up in '08," Jim Murren, president of MGM Mirage (MGM.N: Quote, Profile, Research, Stock Buzz), told Reuters in a recent interview.

"There's no doubt that at the lower end of our business, we've seen some softening in occupancy, some reduction in spend," Murren said. "That's clearly a result of the economy."

Investors have been anticipating the slowdown. The Dow Jones U.S. Hotel index .DJULG has fallen about 25 percent since hitting an all-time high in July.

Hotel companies have been scaling back expectations. Starwood Hotels & Resorts Worldwide Inc (HOT.N: Quote, Profile, Research, Stock Buzz), which operates the Sheraton chain, recently cut its 2008 earnings forecast because of the slowing economy.

WEAK GROWTH

The softening U.S. economy is expected to lead to the weakest growth in revenue per available room, or revpar -- a measure of hotel performance that reflects rates and occupancy levels -- in five years, according to Smith Travel Research.

The research firm is forecasting 2008 revpar growth of 4.4 percent, which would be almost half the peak growth rate of 8.5 percent in 2005 and the lowest since 0.5 percent in 2003.

Slowing room revenue could lead to weaker profits for hotel companies like Marriott International Inc (MAR.N: Quote, Profile, Research, Stock Buzz), Starwood and Wyndham Worldwide Corp (WYN.N: Quote, Profile, Research, Stock Buzz), if costs can't be cut enough.

On top of the slowing revenue growth, travel companies will struggle to finance hotel and casino building projects.

"The single biggest challenge that the hospitality industry is facing right now is actually the credit market," Behle said. The roughly 5,000 hotels in the development pipeline "for the most part are experiencing difficulties getting the financing that they need to actually start construction."  Continued...