Travel Makes a Swift Trip Back

By thinking local, tourism rebounds from September 11

A few months ago, no one would have guessed it. In the weeks after September 11, when the Mandalay Resort Group laid off 15% of its staff and halted construction of a Las Vegas convention center, chances that the company would soon be doing well seemed remote. As the recession deepened through the fall, prospects for a healthy travel sector seemed to fade even further.

But the big operator of such casinos as Luxor and Circus Circus now expects to set a record when it announces the company's first-quarter earnings on May 23. Room rates and spending at the company's casino hotels have recovered to levels not seen since last summer. "Give the credit to the American consumer," says Mandalay President Glenn Schaeffer.

Once thought of as the industry hardest hit by the combination of the terrorist attacks and recession, the $584 billion U.S. travel industry has bounced back much faster--and in far better shape--than many experts had predicted. Discounted rates, targeted advertising, and a rebound in consumer confidence have all helped lure leisure travelers out of their houses and into casinos, cruise ships, and hotels. The increased traffic is allowing many in the industry to raise prices again. At the same time, costs have been scaled way back, sending margins soaring. The combination has turned leisure stocks into winners on Wall Street. Although its performance has cooled a bit recently, the Standard & Poor's 500 Hotel Index, which includes the cruise industry, is still up 16% since the beginning of the year. That compares with a 5% drop for the S&P 500-stock index as a whole.

Big cost-cutting measures put into effect following September 11 clearly get much of the credit. Months ago, hotel and resort operators across the country shut down unprofitable restaurants and consolidated redundant reservation centers. Now, Marriott International Inc. (MAR ) says it expects 75% of such changes to result in lasting cost savings. Wall Street analysts estimate cash flow of the three largest U.S. hotel operators--Marriott, Starwood Hotels & Resorts (HOT ), and Hilton (HLT )--will rise 3% this year and 12% in 2003. "It's much better than we could have hoped for," says Hilton Hotels Corp. President and Chief Executive Stephen F. Bollenbach.

The travel industry is also getting more creative. The cruise lines, for instance, began offering more excursions from New York, Baltimore, and Galveston, Tex., thus sparing travelers the hassle of getting on an airplane to meet the ship. Operators of theme parks, meanwhile, have become more aggressive on price and marketing. Vivendi's Universal Studios Hollywood is offering free entry for a year to visitors who buy a regular-price ticket. Buoyed by families driving to local resorts, overall theme-park attendance is expected to rise about 3% this year, to a record 328 million visitors, according to the International Association of Amusement Parks & Attractions.

Family road trips may be a great boon to nearby amusement parks and casinos, but that's the airline industry's tough luck. Ticket prices and the number of passengers on the nation's airlines remain 10% to 13% below last year's levels. Airlines recently tried twice to raise leisure fares by $20, but the increases didn't stick, notes industry consultant Robert Harrell, an air travel consultant. He thinks the carriers, with spare planes on hand, will add more flights this summer, sparking a new round of fare wars that will keep ticket prices depressed for some time to come.

Nor will all sectors of the leisure market necessarily continue to improve, despite recent signs of strength. Robin M. Farley, a gaming-and-leisure analyst at UBS Warburg, thinks the casino industry's stock price runup may have gotten ahead of itself. "We're seeing earnings recovery. That's not the same as earnings growth," he says. Moreover, much of the optimism on Wall Street is built on assumptions of a return in business travelers and of the lucrative conference trade in the second half. That's hardly a given. For now, the best bargain may still be those discounts at the local amusement park.

By Christopher Palmeri in Los Angeles, with Wendy Zellner in Dallas and Michael Arndt in Chicago

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