November 12, 2001

AFFECTS ON THE INDUSTRY

MR. BRUSH: Thank you very much. Our discussion will focus on the three major segments of the hospitality industry: the food service segment, hotels, and travel tourism. What I would like to do is divide our discussion into two segments. First I would like our panel to discuss what they feel the effects of terrorism are on those three segments. When this concludes, we will move onto the effects of the current economic situation to the degree that we can separate them.

When we are talking about the effects of terrorism, I would like the panel to think a little bit about how they are going to market their hospitality operations if there are operating implications. Also I would like them to think about the human resource implications with regard to the effects of terrorism.  The events of 9/11 have affected us all. How have they affected the travel tourism business? How have they affected travel? Would somebody like to take that?

MELINDA BUSH, PRESIDENT AND CEO OF HRW HOLDINGS, LLC: I will take that.

MR. BRUSH: Sure Melinda.

MS. BUSH: There has been a tremendous amount of research and commentary in the press about peoples sentiments about traveling and in general, you know, whether the Christmas holidays are going to be affected by this. I think that, overall, if you look at the research and the statistics, there is an underpinning of worry surely among Americans and surely among people abroad who will be traveling to America.  That underpinning is going to cause a lot of travel to stay within our boundaries, to stay in locations that are perhaps less vulnerable, to be more involved in traveling by car as opposed to traveling by air. It is hard to put your finger on it, but there just is a sense of worry about what is going to happen or a sense of inconvenience in getting on an airplane and going somewhere.

You know many hotels in major cities, especially New York and San Francisco, have a tremendous overseas visitor arrivals program. A hotel like The Plaza might have 25 percent of its occupancy from people abroad.  Companies abroad, especially German operators, British operators, have tremendous liability issues, issues that are much different than what we have in the United States.

So there is going to be a real pullback until there is an understanding about how people will be protected and what the insurance issues are with regard to sending guests to our country.

In general there is just an underlying sentiment that is very difficult to get your hands on that say, iaI think I will just stay home or I will drive to a shorter location and keep all my ducks in a row if you will, not risk anything.

MR. BRUSH: How about in the lodging industry? Mike, do you want to tackle that? How has it affected your business and your colleagues business across the industry?

MIKE LEVEN, CHAIRMAN & CEO OF US FRANCHISE SYSTEMS, INC.: Well I think a lot of what Melinda said, a significant portion of that deals with the leisure traveler. The leisure traveler is the first traveler to become concerned about safety. History will show us that anytime there is an incident, whether it be a tourist accident or a problem in a Caribbean island or in a European country, or even here, it immediately affects peoples desire to travel.

Clearly any other incident of terrorism will continue to diminish the desire to travel. More importantly, I think is the business conditions of today.  The terrorist incidents have provided businesses, corporations with the opportunity to restrict their travel. One, that they are not making enough money and they want to save it; and two, that they are concerned about their executives moving around -- the hassle as well as the cost.  The two most profitable segments in our business, in the hotel industry at least from my perspective, are the convention traveler and the business traveler. Those are the most price elastic. Those are the ones that spend the most money, and they represent half of the travel in the industry. So those two segments have been affected dramatically. Conventions are not canceling, but attendance is dropping. Although we are seeing some incidents of improvement and, as time goes on, it has improved in convention attendance, it is likely not to come back until the economic environment comes back.

So I prefer to spend my energy looking at the economy than looking at the terrorist incidents to really do my strategic planning for the future.  

MR. BRUSH: Good, thank you. We will get onto that in just a minute.  Curtis, what about in your area, Radisson Hotels? How have they been affected by terrorism? Have you done anything to market your hotels differently or operate them differently?

CURTIS NELSON, PRESIDENT AND CEO OF RADISSON
HOSPITALITY: Well, let me first address a question on marketing. It has long been a quietly known factor that you do not advertise what you do not want people to think of you as. So when it comes to safety and security, and when it comes to anything that we may do to protect our guests even more than we may have in the past, those things all stay pretty much silent because announcing it only brings top of mind for the consumer that concern.  So our experience really with all that has gone on is a little bit like Mike's experience in that first across the different segments because we have brands that really span all of the different segments. We have seen very much a different response, the upper end being hit the hardest, and then the drive markets and tertiary markets that are at limited service probably have felt this the least and bounced back. Their bounce back has been the most dramatic of all of the participants.

I think that what really happened is we had an economic situation that was festering. Already we were tripping into a recession. Many people were not willing to admit it; but then we had this terrible event happen and it pushed us all deep into a recession overnight. It was a dramatic reaction, whereas usually we would come down to gracefully fall into a lower level of business. Overnight most business area hotels, airport hotels, center city hotels saw a 35 percent decrease in business overnight.  We have now started to see that business come back. I think that we will continue to see the business come back to a certain degree. There are a couple of things that are now impacting the situation and exacerbating the situation from where we were. One of those things is that the leisure side of the business was holding up very well going into the beginning of this recession. Now that we have started to see unemployment increase at as rapid a pace as it has, I think that we will start to see the leisure side of the equation deteriorate a little more quickly.

Also, the leisure side is able to make a different decision. Take a drive vacation, or do different things much more easily. So we had this beginning recession that was largely impacting corporations. Then, all of a sudden, we get this big major event that now has leisure travel on alert as well. Then we get the economy fallout because of all that went on because of 9/11. So we kind of had three different impacts.

Eventually we will come back out of this as with any cycle. I think the question is at what level of business do we normalize now. Clearly, part of the response has been an economic one. Corporations were given an excuse not to spend when this event happened when they were already putting on the breaks because of the economic situation.  

The good news is we have started to see really a fairly significant bounce from that negative 35 percent down to now negative 10, negative 5, well actually negative zero in many of our secondary and tertiary drive markets to as much as negative 15 in some of our hotel markets. We have also seen the increases begin to stagnate a little bit.

I would be interested in more of the Smith Travel Research with regard to that. We see some evidence there that there is a wait and see now and that the economy is in such a place that we have had as much as a bottom as we are going to have and things are really kind of plateauing, and we have got a tough four or five quarters ahead.

MR. BRUSH: You think it is four or five quarters?

MR. NELSON: I do.

MR. BRUSH: Wow, that is interesting. How about the food service sector? Dick would you like to take that?

DICK CATTANI, PRESIDENT, RESTAURANT SERVICES,
RESTAURANT ASSOCIATES: Sure.

MR. BRUSH: You operate in a variety of different sectors of the food service industry? Can you talk a little bit about how maybe they are affecting one versus the other?

MR. CATTANI: Yes, they were all affected differently with different results. To start with our corporate dining group, we were really hurt hard with the tragedy. We lost five businesses and five corporate accounts at the World Trade Center. With that said, the corporate business has been relatively stable. In fact, we have seen an increase in our cafeteria business
because I think the vast population has tended to want to stay a bit closer to home and stay in the building rather than venture out in the street. So that business has been relatively stable.

Our restaurants certainly have been affected. Most of our restaurants here in midtown and that, coupled with the Anthrax, has really hurt our business dramatically. In fact when the incident took place at NBC, our restaurants at Rockefeller Center were empty for three days. It is an extraordinary occurrence, one that you really do not plan for.  In our cultural centers, specifically museums and performing art centers, varying degrees of impact. Certainly the museums that are children based -- Smithsonian, America Museum of Natural History -- devastating results. In fact they have not come back. They are still off 40 to 50 percent in attendance, and it is just that families are not traveling out of their homes per se.

In the performing arts centers not as affected, however the European traffic has certainly affected our operations at the Metropolitan Opera House; and we are starting to see that is going to carry forward for the next few months.

In the catering business, which is a significant piece of our business here in Manhattan, the day after, on the 12 th , we had approximately $1.5 million worth of catering cancelled on one day. That was just a knee-jerk reaction to what took place. However, that is starting to slowly come back.  On the other hand, we do not expect a tremendous December because there are a lot of corporations that are just not in the entertaining or celebratory mood and are just taking a pass or donating, in fact, the cost of those parties to charities.

So we expect to have a soft December. The concern we have overall, and globally, is how strong or weak December will be for us and then the impact thereafter of typically slow January, February, and March periods.  You know how bad will that be? I think that there are many, many restaurants that are just hanging in there for the holidays that really are at risk past the holidays if they are not strong. We probably will see quite a few restaurants close in the first quarter of next year.

MR. BRUSH: Scott, what about in your business?

SCOTT DAVIS, PRESIDENT OF FLIK INTERNATIONAL
CORPORATION: Very similar results to Dick's. We have seen a bump up in cash sales come through the register as people are cocooning a little bit and staying in the building once they arrive. A lot of the revenue that is conference/catering based has dwindled, particularly in the law firms. We operate about 12 law firms in New York and you see a lot of the business drifting from conference and catering business into more of the cash side. So that is where it has been picked up, but the revenues are gone.  I mean there is probably a total of about 20 percent off since September 11th. It was drifting a little bit prior to September 11 th , as organizations in the downtown area and the stock market had started to tighten up a little bit, but it is way off compared to where it had been the year prior.  

MR. BRUSH: Right. How about in your area of the business Roger?  You run restaurants primarily in the northeast on the retail side. Tell us a little bit about how it has affected you.

ROGER BERKOWITZ, PRESIDENT OF LEGAL SEA FOODS, INC.: Well, we certainly have been impacted by what has taken place. We have restaurants in urban centers, suburban centers, and also in airports. So we have been hit a little bit differently in the sectors.  I would agree with Curtis that we were in a creeping recession up to this point anyway. So I think that there was going to be an adjustment, and certainly September 11th pushed everyone off the cliff here.  You have a number of things, I think, going on. The suburban areas seem to be rebounding fairly well, and urban centers to some degree, depending on what is taking place. You have some odd things going on with consumer confidence right now. At first you can say people really are not fearful of terrorist attacks in urban centers, but I do not think that is true. I think there are still some fear factors going on.

I do a lot of work with the New England Aquarium, and their attendance is way off. It is interesting because a lot of communities are not allowing their students to take field trips into the city because they still feel that terrorism is going to take place.

Then you have businesses, organizations being impacted by a recession now. It may be in full force now. So you have a lot of different things taking place, but it really has to do with consumer confidence. It is coming back.

What are some of the things that can be done? What can bolster consumer confidence? I am not sure it is really a question of pricing because I do not think pricing necessarily is going to rebound the marketplace. As soon as people feel comfortable with what is happening . . . anytime there is a major disaster, I think Mike you brought it up, that there is sort of a pullback. Then as soon as people understand that it is safe to do certain things, then the mentality is for it to get back on track.  So I think this is a waiting period. I do not think that there is a quick fix to what is going to be taking place. One of the differences, at least in our sector of the business -- the food sector, I think in the last recession people looked at dining out as more of a privilege. I think this time around it is more of a right. So people are going to be looking at it a little bit differently, but they are going to be going more to what they perceive is value.  So I think that one of the things that we in our industry can do is make sure that people understand that they are getting value when they go out and then the consumer confidence hopefully will follow not too far behind.  

MR. BRUSH: That is an interesting point. Does value become all the more important under the current economic situations? In light of the peoples feelings about going out whether they are going to a hotel or traveling or to a restaurant, does value become more important now than it ever has been before? Mike?

MR. LEVEN: Well I do not know that it is more important now than it ever has been before. But statistically the research, as well as the actual, is showing that as prices come down, people are more apt to travel, are more apt to buy, and are more apt move.

I mean they recently had a sale out of Atlanta, a $31 airfare sale, and they sold more tickets in that few hours before they were sold out than they had ever sold in the history of the airline -- Delta. So basically what it is showing is that people are willing to put their fears aside as the price gets better.
Now all that of course is fine as long as nothing else happens. The most recent Yesawich Monitor I think which was exposed at the hotel show the other day indicated that clearly people are using this opportunity to buy better if they want to travel.

They sense that there is more opportunity for them in the marketplace to purchase better than it was before.  The hotel I am in in New York City this week has been sold out for the first time since September 11th but at 30 percent less on the average room rate than last year. Make no bones about it, in spite of all the complicated analyses of the hotel business that is done by Wall Street and others, at the end of the day the profitability of this business is tied to its room rate not its occupancy.

History will show you that the fortunate thing is that the industry when it comes back -- and I happen to agree with Curtis although I am even a little more bearish than four or five quarters, I think we are talking six or seven quarters-- when it comes back, it is going to come back from a higher base than what it came back from in 1990 and what it came back from in 1973.  So essentially that higher room rate base and that is good news if you can wait that long that what was said before, some people are not going to be able to wait that long and they are going to get hurt and they are going to close.