Nov. 28 (Bloomberg) -- The Mumbai terrorist attacks struck India’s tourist industry at the start of peak season, compounding problems for airlines and hotels that were already facing the slowest growth in visitor numbers in five years.

“People are scared,” said H.A. Subramanian, general manager of Shiv Niwas in Udaipur, Rajasthan, a converted royal palace where suites cost as much as 80,000 rupees ($1,600) a night. “Travel agents will not take the risk of bringing people to India at least in the next couple of months. The market was already affected by the financial crisis.”

Subramanian said cancellations were already coming in for the hotel, owned by the Maharana of Mewar.

Terrorist attacks aimed at foreign tourists, such as the Mumbai assaults, may hurt hotel bookings and airline-ticket sales for more than a year. The island of Bali, which accounts for one-third of all foreign tourists to Indonesia, had not recovered a year after the 2002 bomb that killed 202 people, according to a World Bank report.

Shares of Indian Hotels Ltd., which runs the Taj chain, fell as much as 14 percent in Mumbai, or the most in seven years in intraday trading. EIH Ltd., owner of the Oberoi chain, plunged 18 percent, the biggest drop in more than 15 years.

Jet Airways (India) Ltd., the nation’s largest domestic airline, fell as much as 7.1 percent. Kingfisher Airlines Ltd., the second largest, tumbled as much as 10 percent.

“Hotel occupancy will be a major casualty in the short term,” K. Seshadri, vice president of research at Mumbai-based Jaypee Capital Services Ltd. “It will take at least two months for confidence to be restored and travelers to return.”

Restricted Travel

GlaxoSmithKline Plc, Europe’s largest drugmaker, Merck KGaA, which is seeking to expand in India, and other companies have asked employees to restrict travel to India after the attacks in Mumbai that killed at least 121 people. Terrorists may still be holding hostages at the Taj, the army said today, as gunfire and explosions rang out from the hotel.

Terrorists armed with grenades and rifles stormed into the Taj Mahal Palace and Tower hotel and the Oberoi Trident complex at about 10 p.m. local time on Nov. 26, saying they were targeting Americans and Britons, according to witnesses.

“The target in this case has been high-profile locations where tourists frequent,” Binit Somaia, a director of the Centre for Asia Pacific Aviation said. “You could expect air travel cancellations in the coming days and weeks. This is the start of the peak tourist period.”

Slowing Arrivals

Tourist arrivals to India rose 10.4 percent in the April- to-September period, compared with 14.2 percent a year earlier. One in five foreign tourists visits India in December or January, according to the Ministry of Tourism.

“I think leisure and tourism for sure will be immediately impacted,” Venu Srinivasan, Chairman of the Confederation of Indian Industry and head of motorcycle maker TVS Motor Co., said in an interview. “After 9/11, Britain had incidents, Indonesia had incidents and they have all come back.”

Earnings for the hotel industry in the quarter ended Sept. 30 “indicate demand slowdown on the back of moderation in both global and domestic economic activity,” Mumbai-based brokerage India Infoline Ltd. said in a Nov. 7 note to clients. Occupancy declined as much as 6 percentage points in cities such as Mumbai and New Delhi, it said.

Mumbai’s Taj Palace and Oberoi are popular with international visitors to the city, India’s business hub. Previous Oberoi guests have included News Corp. Chairman Rupert Murdoch and Microsoft Corp. co-founder Bill Gates, according to the hotel’s Web site. Mick Jagger and Prince Charles have stayed at the Taj, according to the Web site of owner Tata Group.

Unilever Chiefs

Unilever’s Chief Executive Officer Patrick Cescau and incoming Chief Executive Officer Paul Polman escaped unhurt from the Taj Mahal hotel after the attacks.

Indian Hotels, the biggest lodging chain in India, expects the attack to lead to a lot of cancellations, Vice Chairman R.K. Krishna Kumar said in an interview to CNBC-TV 18 in Mumbai. He said the top floor of the company’s hotel near the Gateway of India has been damaged.

“The Taj Mahal Palace and Tower Hotel and the Oberoi hotel in Mumbai contribute a lot to the revenue and profit of these companies because of the high-occupancy and room rates that they command,” Apurva Shah, head of research at the Mumbai-based Prabhudas Lilladher Ltd., said.

To contact the reporters on this story: Saikat Chatterjee in New Delhi at schatterjee4@bloomberg.net.

Last Updated: November 28, 2008 02:24 EST