Dog Days' Journey into Night

Rain, job jitters...Americans are forgoing vacations in droves

In 33 years as the proprietor of the Trade Winds Inn in Craigville Beach, Mass. on Cape Cod, Alan Isenstadt has never seen a travel season like this one. This time of year, the Massachusetts summer playground should be hopping. Instead, hotels have been slashing rates by up to 20%. Restaurants are pushing two-for-one specials. And in late July, Isenstadt spotted a sign advertising a vacation home in nearby Hyannis for the last two weeks of August. Normally, such places are gone by early spring, he says, adding: "I've never seen a sign like that."

It's a sign of the times. From Cape Cod to California, the U.S. tourist industry is having a lousy summer. Rainy weather early in the season, rising unemployment, new threats of terrorist attacks, and high gas prices -- all are prompting many Americans to stay home this year. "It's a challenge to get those leisure travelers traveling," says Bjorn Hanson, head of PricewaterhouseCoopers' hospitality practice.

Hoping to prod tourists from their funk, hotels, theme parks, and car rental companies are scrambling to offer up lavish discounts. That has helped boost traffic, but the promotions are putting pressure on earnings. Already, companies ranging from Hilton Hotels (HLT ) Corp. to Cendant (CD ) Corp. have reported weak second-quarter profits. And while a surge in August bookings has the industry hopeful for a better third quarter, it's not clear that the hike will be enough to offset a weak June and July.

As recently as May, the industry predicted sunny skies ahead. The war in Iraq was over, stocks were recovering, and consumer confidence was up. But as the ranks of the unemployed swelled, Americans seemed only to swap war anxieties for job insecurities. Nature didn't help. Weeks of unseasonably cool and wet weather from the Midwest to the Eastern Seaboard and scorching heat across the West prompted huge numbers of people to delay or cancel their vacations.

The result: In a June survey, consumer advisers Debt Relief Clearinghouse found that 54% of adults weren't planning a vacation this year, up from 49% last year. In the Northeast, where the weather was particularly abysmal and job cuts widespread, fully 68% said they would pass.

Once it became clear that the tourists weren't coming back as expected, travel purveyors began marking down prices. At Disney World, seven-night packages now go for the price of four. Aspen (Colo.)'s tony Little Nell Hotel is offering $195 rooms in July and August, half the normal rate. And Princess Cruises is promoting $99 companion fares on seven-day cruises this fall in the Caribbean and South Pacific.

Those discounts may have increased traffic, but the travel industry is paying for them. Margins at Disney's U.S. theme parks have fallen to 20%, down from 25% last year. Cruise-fleet operator Carnival (CCL ) Corp. says its net yields declined 8.6% in the quarter because of lower ticket prices and occupancy. Cendant says operating income at its Avis rental car unit slid, too.

Hotels are bearing much of the brunt -- especially since Americans are waiting until the last moment to book. That means hotels can't charge top dollar. The average room rate at properties owned by Hilton is down 3.9% this year over last, to an average of $146 a night. Largely as a result, Hilton's second-quarter profits slid 29% over last year, to $54 million. Operating income at Cendant's lodging unit, which includes the Howard Johnson, Ramada, and Travelodge chains, also slid 13%, to $150 million, in the second quarter.

Will August save the season? Starwood Hotels & Resorts (HOT ) Worldwide Inc. says bookings rose in July. Discount carrier AirTran Airways (AAI ) says its July traffic numbers were an all-time high; the airline describes bookings in August as "incredible," with sales way up to vacation sites such as Florida and Las Vegas. July attendance rose 3% at Disneyland and 8% at Disney World. But execs are uncharacteristically restrained in their outlook. "A dramatic rise in the near-term is unlikely," warns Disney President and Chief Operating Officer Robert A. Iger. That fabled American wanderlust? Maybe next year.

By Michael Arndt in Chicago, with Christopher Palmeri in Los Angeles, Faith Arner in Boston, and bureau reports

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