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What are the foreseeable consequences of the financial crisis?

Recession, bankruptcy, bailout plans and lay-offs: these upsetting words are making the headlines of all the papers. The world economy is gradually sinking onto a durable crisis. This long descent into hell began in the summer of 2007. With the explosion of the subprime bubble, the smiles that had reigned until then in the financial world began to dwindle.

Postures stiffened as the players in finance shared some of the risk of these risky real estate credits. Then, bankers began to frown at investors come to ask for the means to finance their projects. Problem: debt is a primordial element in the real estate and hotel sector where the leverage effect is the cornerstone of all investment. Since this murderous summer, major operations have disappeared. Forgotten the takeover of Hilton by Blackstone, finished the sales of massive walls. During the Global Lodging Forum organized by MKG Hospitality last March – just six months after the summer shock – Jean-Paul Betbèze, director of economic studies at Crédit Agricole, estimated: “this is not a credit crunch yet – meaning drastic credit reduction – but prepare for the credit squeeze as more expensive operations require more equity capital”.In this context, hotel groups suffer. The stock ex-changes anticipate the business slump and heavily sanction the sector’s securities. Have they become potential prey? With the squeeze on credit, will their ambitious plans for development be affected? In these times of crisis, will companies that have strong backing be able to foresee interesting opportunities? The questions abound...Today the flow has stopped. At the end of summer 2008, world finances experienced a second ramming. The bankruptcy of Lehman Brothers set in motion an infernal mechanism that led to the total blockage of the financial machine, and, thus, the entire economy. The consequences should be profound in the short and midterm. Many analysts believe that two to three years will be necessary before normal credit conditions return and even more before the real estate market regains its dynamism.The brake on the world economy could not be inconsequential for hotel activities around the world. The WT&TC is not optimistic about the year to come. Tourism growth should undergo a real slump in 2009 and adopt a rate that is far from the 4-5% recorded in recent years. Confident until just recently, the group of experts at the WTO World Tourism Barometer also shows signs of loss of confidence about short term perspectives. According to Francesco Frangialli, its secretary general: “Experience teaches us that tourism is resilient, but there is no denying that there is a certain stage of deterioration of the situation beyond which tourism too will begin to suffer”.Very recently, hotel groups have devoted themselves to the difficult task of profit warnings. Accor modified its pre-tax target for 2008, from the 910 to 930 million euros range to and 870 to 890 million euros range. To face this, the group launched a plan to economize 75 million euros, of which 50 million in 2009 and reduction in its investment program. Marriott also revised its ambitions down for 2009, in the midst of a last quarter 2008 for which the American group anticipates a drop in revenues… its third quarter was already difficult. The net revenue dropped from 122 million dollars in 2007 to 94 million in 2008. While the American group’s hotel business may be pitching but not sinking, its timeshare activity is strongly impacted by the crisis. Due to its positioning at the crossroads of real estate investment and leisure hotels, two segments that are not profitable in times of crisis, timeshare shows a drop in sales by 13% in the third quarter.A trustworthy barometer of the economic climate, the hotel industry did not wait around for Lehman Brothers’ bankruptcy to feel the precursory sign of the overall slump. After a first semester in line with an excellent 2007, the summer period in Europe revealed a clear drop in occupancy. In August room revenues were in the red (-2.8%). September fits the same mould with a drop by 3.6%. And the trend should continue. This phenomenon is not limited to Europe. In Asia, the Hong Kong hoteliers federation foresees a drop in occupancy by 5% on the last three months of the year, from 90% to 85%. At the epicenter of the crisis, America’s hotel industry is hit hard. Marriott expects a 3 to 5% drop in its domestic RevPAR in the 4th quarter. New York, one of the leading destinations this summer for many Europeans drawn there by the weak dollar, is joining the ranks. October, a traditionally very strong month, was disappointing. Hoteliers began to experience cancellations and bookings being made later and later. Of the all, the MICE segment risks being hit the hardest. Reservations for 2009 are on hold for several reasons: waiting for budgeting, waiting for the perimeter of meetings and anticipation of a drop in hotel prices.For now, although the outlook is darker, the hotel industry sands strong. Hong Kong, New York, Paris or London continue to post enviable occupancy rates. And despite the slump recorded average daily rates are still following an ascending curve. Nonetheless, according to the analysis of hotel cycles presented by MKG Hospitality (see box), a continued drop in occupancy rates can not remain inconsequential. All the more so since, in order to sustain occupancy, the properties would have to turn to less profitable clientele (airline crew, leisure groups) or clientele who are more influenced by prices and promotions.In this context, hotel groups suffer. The stock ex-changes anticipate the business slump and heavily sanction the sector’s securities. Have they become potential prey? With the squeeze on credit, will their ambitious plans for development be affected? In these times of crisis, will companies that have strong backing be able to foresee interesting opportunities? The questions abound...

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