After several years of healthy growth, 2009 is expected to be much tougher for the U.S. tourism, hospitality and leisure (THL) industry. The combination of a housing debacle, credit crunch and rising unemployment has placed the nation’s economy at or near recession – leaving fewer discretionary dollars available for consumers’ leisure travel and other forms of entertainment. Corporations, meanwhile, are implementing cost-cutting measures such as reducing employee air travel and scaling back or eliminating group meetings at convention hotels and destination resorts.

Based on data from Smith Travel Research (STR), a leader in lodging industry benchmarking and research, 2007 was a banner year for the THL sector. On average, Manhattan hotels had occupancy rates within the 80th percentile. However, in August 2008, hotel occupancy rates fell, an alarming sign given that August is a typically strong month for U.S. leisure travel.1 By the beginning of fourth quarter 2008, the U.S. THL sector was starting to see measurable fallout from the economic crisis in the form of negative indicators in the hotel industry, a slowdown in the gaming sector and increased “trading down” from casual dining restaurants to quick-serve restaurants. The economic crisis isn’t confined to the United States, either. It is a global issue whose future impact might possibly spread to the THL industry in the form of decreased tourist activity from overseas.

Economic difficulties are expected to continue well into 2009, affecting how and where people travel. According to Deloitte’s October 2008 travel survey, 38 percent of respondents said they expect to spend less on vacation/leisure travel over the next 12 months, nearly double the 21 percent who expect to spend more.2 For example, consumers may be less willing to take a traditional, seven-day vacation, opting instead for a long weekend or a “mini-vacation.” Skyrocketing airplane ticket prices likely will prevent some people from flying to their vacation destination; they may decide to drive to a spot closer to home.

From a U.S. corporate travel perspective, companies will continue to look for near-term ways to cut discretionary costs – including business travel – to bolster their bottom line in this challenging marketplace.3 For example, an October 2008 Business Travel Coalition survey of 106 corporate travel buyers showed that nearly 26 percent had “implemented emergency travel cutbacks in the past weeks as a result of the financial crisis.” However, taking a longer view, the value placed on human connection and interaction remains important and business executives will still need to meet in person to make deals and decisions. While online video conferencing offers tremendous convenience and significant cost savings, it will never replace business travel or group meetings. In a November 2008 Deloitte Insights podcast, a THL industry senior economist commented that “[business executives will] still need to get together, look each other in the eye and understand one another’s body language [to conduct business].”4

Globally, while U.S. companies’ overseas growth may slow in the near term, THL companies view expanding their global footprint as an effective way to increase market share, build brand awareness and spread risk over the long term. The 2008 Olympics proved to be a big showcase for the THL industry and is expected to continue driving construction of hotel properties in China’s large- and medium-sized cities. In addition, most big hospitality companies were showing growth outside of the United States throughout the summer months. The cruise industry is expecting continued strong passenger numbers and is investing in bigger, more spectacular ships. Five cruise lines will debut their biggest ships to date within the next 15 months at a combined estimated cost of $4.47 billion. Among them is Royal Caribbean’s 220,000-ton, 5,400-passenger Oasis of the Seas, set to launch in December 2009.5

On the whole, THL companies can expect to be under continued duress well into 2009, but smart hospitality organizations with innovative and cost-effective programs will be able to increase customer loyalty and drive demand. Specific issues that are generating both challenges and opportunities for the industry include:

Building brand value

With economic conditions becoming more challenging by the day, building brand value is more important than ever. The competition for customers and market share is expected to intensify in 2009; therefore, the ability of a hotel, restaurant and cruise line or vacation destination to crisply define and consistently deliver on a distinct brand promise can help to increase demand and build customer loyalty. The hotel sector, particularly high-end properties, generally has been effective at building brand value, although companies still could make an effort to learn more about their visitors’ needs and preferences and, thus, deliver an even better customer experience. The airline sector, due to significant cost increases, appears to be doing less to build brand loyalty. Airlines’ practices of cutting flights, adding extra-baggage and additional surcharges, and failing to treat frequent flyers differently from occasional travelers, are eroding both their brand value and their customers’ brand experience. All companies need to make their customers feel special, particularly when there is more competition for fewer discretionary dollars.

Sustainability

A trend that, until recently, elicited only lip service from the hospitality industry, sustainability is now becoming a mandatory business requirement.  The sustainability movement is being driven and shaped by forces outside of the industry’s control – among them sharply rising energy costs, increased regulatory pressures and growing consumer demand. A Deloitte survey of more than 1,000 business travelers in April 2008 revealed that 95 percent of respondents think that lodging companies should be undertaking green initiatives.6 Also, 48 percent of respondents to Deloitte’s October 2008 travel survey said they try to be green when they travel, an increase from 41 percent a year prior to that.