Sep. 11, 2003 - After two years marked by fears of terrorism, a continued economic downturn and a war in Iraq, leaders in the hospitality industry are predicting a slow and modest turnaround in 2004.

"We seem to be getting off the floor now," said Jerry Westenhaver, general manager of the Hyatt Regency Sacramento. "But we aren't exactly in the chair yet."

The industry was experiencing a slight decline before the terrorist strikes on Sept. 11, 2001, but that event was the genesis of a dramatic downward spiral in many regions of the country.

Corporations beset by falling revenues reined back travel budgets, even as many leisure travelers opted to vacation closer to home. Hotels, coping with fewer guests, slashed room rates to compete.

Tenuous signs of a recovery are emerging. Future room bookings increased in July, according to the Sacramento Convention and Visitors Bureau, and local hotel and motel occupancy reached 81.6 percent in June, a high for the year.

What's more, a combination of tax cuts and the recent surge in the stock market could further loosen consumer spending, according to Ernst & Young.

Yet the latest report on room rates from San Francisco to San Jose shows steep drops, according to San Francisco-based PKF Consulting.

Average daily room rates fell 10.5 percent in 10 regions around the state in the first half of this year, compared with the same period in 2002, the PKF report showed. Sacramento did better than most in that comparison, falling only 4.6 percent.

Most areas of California saw declines in occupancy during the period.

"On a national basis, 2000 was a banner year for the entire industry," said Troy Jones, manager for the hospitality services group in Los Angeles for Ernst & Young. "The decline started in 2001, and then 9/11 happened and changed everything."

Sacramento was insulated from the worst of the downturn, especially through 2002. It benefited from geography and its market and even recorded minimal gains.

The region tends to attract drive-in visitors rather than those who fly to destinations. And it gains from its reliance on a combination of government, leisure and corporate travel spending.

"Even with the state budget crisis and the lack of funds that affected travel budgets, what we're seeing is that ... people are coming to Sacramento," said Kenneth Kuchman, vice president of PKF Consulting.

As the economy improves, he added, so will travel. Occupancy will jump first, followed by increases in room rates.

One key gauge of the future is the rate of bookings lodged as far as five or six years ahead with the Sacramento Visitors Bureau. An increase shown in the latest data has heartened the bureau's Leonard Hoops, vice president and chief marketing officer.

If the pace is sustained, Hoops said, the bureau will have 165,000 bookings for the fiscal year.

Few are cheering, however, for any significant gains this calendar year.

"California's increasing budget deficit, the lackluster technology sector and reduced international travel are threatening to affect California tourism throughout the remainder of 2003," Ernst & Young declared last month in its latest report on the lodging industry. Among the findings:

-- California's corporate travel budgets won't reach pre-2001 levels anytime soon, keeping room rates low.

-- People worried about geopolitical instability are waiting until the last minute to make travel plans. That has made it more difficult for hotels and motels to forecast business in peak periods.

-- Faced with lower revenues and demand for rooms, California hotels are experiencing increased pressure on their bottom lines.

Among the impediments to recovery are increased workers' compensation costs -- $15 billion this year compared with $6.6 billion in 1998, reported Ernst & Young.

At the Hyatt, Westenhaver said his workers' compensation premium will be $1 million in 2004, up $250,000 from this year despite minimal claims.

He remains realistic about the future.

"Hopefully we've seen the bottom, and we're starting to gradually come out of it," he said. " '04 will probably be a little better than '03, but it is not going to be a major swing in the other direction. It's still going to be a climbing process."

When San Francisco reduces room rates, as it has done repeatedly in recent years, it can produce a ripple effect on rates in Sacramento, said Westenhaver.

Other dampers on the hospitality business are more subtle.

The state cuts its budget, for example, and a computer show aimed at state buyers draws far fewer participants.

"It's still going to be a struggle for the next couple of years," said Westenhaver. "Our industry is the first in an economic recession, and we are usually the last to come out of it."

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(c) 2003, The Sacramento Bee, Calif. Distributed by Knight Ridder/Tribune Business News.