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William Hanson

Prof. Wright

Intro Hospitality Industry

February 18, 2009

Economic Influence on the Hospitality Cycle

Recession, economic turmoil and the uncertainty of the world economy make one

wonder about the future of the hospitality industry. If the hotel industry could order

room-service for itself, the menu would include more conventions and the return of

business travelers. When will conditions improve for the industry? That's hard to say.

Philadelphia Business Journal states, “Twice as many U.S. companies as

previously expected are cutting their travel spending this year in response to economic

weakness and uncertainty. The Association of Corporate Travel Executives says 71% of

its member companies now plan to spend less on travel this year than in 2008. That's a

huge and unprecedented shift in corporate travel managers' plans from just five months

ago, says Susan Gurley, the association's executive director. Most companies are seeking

to spend 10% to 20% less on travel than they were expecting to spend just five months

ago, the latest survey shows. Using the most conservative figures for estimating the dollar
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impact of such cuts, the ACTE suggests that the 176 member companies that responded

collectively will spend about $880 million less on travel this year than they had planned.”

With more corporations cutting their travel spending the impact of fewer

conventions being held in larger cities creating less revenue for all. This directly and

indirectly affects the circular flow of the economy as it relates to the hospitality industry.

CIRCULAR FLOW: Foreign tourists spend money and that money generates

higher incomes, which is then spent by individuals on more products and services,

meaning more income for businesses, meaning higher incomes, etc.

Let’s start with travel. With the recession in full swing there are fewer people

traveling. This is not just in the U.S., but worldwide. The evidence started becoming

apparent around a year ago when Las Vegas started experiencing an influx of visitors

from the UK. At the time the struggling US economy saw a devaluation of our currency.

The British pound was nearly 2/1 to the US dollar. Now the currency of both nations has

been falling and we have seen fewer travelers from abroad. This means fewer airline

seats have been purchased, which led to layoffs in the airline industry. Now with less

travelers coming from out of state or abroad, car rentals have been declining, taxi cabs

have been needed less frequent and so on.

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Of course the other major affect of this economy is that there are fewer guests

staying at the hotels. As stated in USA Today “Nationally, the hotel industry saw an 8.9

percent decline in income received from rental of guest rooms last year, according to

PKF Consulting. This year looks even worse: the income on guest-room rentals is

expected to drop by another 9.1 percent. Back-to-back declines of that magnitude would

be the worst since the Great Depression, the organization noted. "Hotels are labor-

intensive, they have high expenses and have had very few productivity enhancements,"

said Mandelbaum. "Hotels benefited from the boom 1990s. ... Now, the industry has lost

its ability to charge (higher) prices, but it's still very expensive to operate a hotel."

Occupancy rates have dropped sharply around the country and are now dropping

in Las Vegas. The slow down of visitors has caused numerous issues ranging from a

simple cut in hours, elimination of shifts, loss of jobs and the halting of major

construction projects.

Now we continue with the cycle by using the example of the employees of the

hospitality industry and their role. Let’s say we have a popular lounge, in a major hotel

on the Las Vegas Strip. With the low occupancy rate fewer guests are going out for

drinks or spending as much money at the restaurants in the hotel. This in turn causes

management to start cutting hours do to the lack of business. The lack of hours affects the

employees in two ways; less money on their pay check, as well as, less cash from
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gratuities. With less disposable income people are not as apt to use funds on food and

beverage services or take the much needed vacation that we all need in the hospitality

industry.

Economy Less
in Spending
Recession on Travel

Less likely Fewer

to spend Flights/Car
money Rentals

Lower
Employees
Occupancy
Earn Less
Rate

This is was a very simple example to illustrate the scope of this cycle. Obviously

it goes much deeper than this. With less money in the market place, there are more

restaurants closing down (Chili’s, TGI Fridays) due to lack of patrons. Major casino

resorts laying off employees and so on.

In conclusion, the economic influence of the hospitality cycle is affected by many

factors. Factors such as the recent collapse of the mortgage industry, war, fuel cost and
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many others. There is good news however, the proverbial light at the end of the tunnel if

you will. The cycle does work both ways. Just as the downward spiral of the cycle goes,

so does the upward spiral. As people become more financially confident they increase

discretionary spending on entertainment, dining, and vacations. This in turn creates

income for hospitality employees who are then able to go out repeating the process and

thus begins to perpetuate the upward cycle.

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Works Cited

Reed, Dan. "Travel News." USA Today. 09 Feb 2009. 18 Feb 2009

<http://www.usatoday.com/travel/news/2009-02-09-company-travel-spending-

cut_N.htm?loc=interstitialskip>.

Van Allen, Peter. "Travel Industry." Philadelphia Business Journal. 15 Feb 2002. 18 Feb

2009 <http://www.bizjournals.com/philadelphia/stories/2002/02/18/story4.html>.