Portfolio.com: Itineraries

Starwood's Chief: The Freefall Is Over

Josh Moss — Fri, 24 Apr 2009 19:17:19 GMT

The scene inside the new W hotel is happily chaotic. It's the grand opening of the 29th property in the 10-year-old hip and luxury offshoot of Starwood Hotels & Resorts. This one is in Hoboken, New Jersey, and the skyscrapers of Manhattan are just across the Hudson River. Hundreds of revelers are packed into the lobby and the restaurant for what's billed as a 40s-theme party (even though disco from the 70s and early 80s is the music of choice). The booze is flowing, the hors'dourves don't stop.

Sitting in a corner banquette is Frits van Paasschen is Starwood's president and chief executive officer. A relative newcomer to the hospitality industry--he's been with the company for two years, after a two-year stint as was a senior executive at Nike for seven years before spending two years as president and CEO of Coors Brewing Co. and seven years as an executive with Nike--van Paasschen took time out from his party to speak with me about the state of the lodging business, the push to get business travelers back on the road, and whether the market has too many niche hotel brands.

Q: Make the case for business travel. Why people should be out on the road now?

A: One of the things we've been talking about is that business travel itself is a great way to get the economy back on its feet--the relationships that you make, the deals that you close, the sales calls you make, the training sessions, the product launches, the conventions, incentive trips--all things that lubricate the wheels of commerce. So in that aspect, business travel is essential to getting the economy back on its feet. In addition to that, the travel industry is a tremendous source of jobs and tax revenue.

We've been active in a number of ways to do that. As I'm sure you've seen, we went to Washington and continued our outreach to lawmakers to make sure they recognize the impact of their rhetoric on business travel and on the sense of fear that somehow it would be bad to be seen holding a meeting and we got what I believe are some very encouraging results from that, right up to the president.

Q: Has the tone changed or softened since the time when people where talking about the AIG effect and the excessive -and I'm putting that in quotes--the excessive nature of some trips?

A: I would describe it this way. I think the pendulum has begun to swing back in the other direction. That doesn't mean we're anywhere near where we'd like to be, but I think the real demonizing rhetoric that we saw a few months ago has been retracted or softened and I think that's an important first step.

Q: Do any of these negative viewpoints have validity?

A: We've been very clear. We understand and appreciate the need for a government that's using taxpayer money to tell people using it that they shouldn't use it for extravagant purposes. We can all fully appreciate that.

Where we felt things got out of hand is where meeting planners and business that were unrelated to TARP or taxpayer funds felt uncomfortable using their own resources to have meetings and we saw this even to the extent that people would move their meeting venues from Las Vegas to San Francisco, leave the deposit for the Las Vegas meeting, spend more money to have the meeting in San Francisco only because they didn't want to be seen as a having a meeting that was seen as a junket or as excessive.
Where we see it, candidly, is that the vast majority of business travel is used for productive, important business purposes.

Q: What's happening with your business. Are you still seeing as many cancellations as you have been?

A: We're in what we call our quiet period right now so I'm not going to make very specific comments about the performance of our business. What I can tell you is, what we're seeing is, we're no longer in the freefall that we saw in the fourth quarter of 2008 and in the first few months of 2009. That isn't to say we're at the bottom, it doesn't even mean that we we're not continuing to see declines, but the rate of decline has lessened.

Q: That's quite a commentary on our times, when we rejoice over saying things are getting less bad.

A: It's not just true in our industry. I think it's true in the psychology of consumers and the economy today, which is after months of continuing bad news and a seemingly endless series of realizations that the economy kept getting worse, that a sense that we've reached a plateau is consoling. And I think for a while all of us had no idea whether this freefall would just continue and that was a very frightening thing.

Now I've also wanted to be clear saying that I don't know if this is the bottom, or if we're approaching the bottom, or if this is another plateau and I think if we've learned anything from 2008 is that it's very difficult to predict these things. If the right things continue to happen, this could be the bottom and that would be a great thing. That's certainly where the consensus of opinion is. And it's also what we're starting to hear our customers say also.

We're seeing more confidence in, if not actual bookings, at least a willingness to talk about meetings and conventions in 2010 and 2011. I think we've all seen a shortening of the booking window, which is a function of people saying I'm not going to commit to travel out six months because I don't know what the world looks like then but I know I have to take that trip next week and I can do it."

Q: Can you tell me if one brand is doing better than another, or go deeper into exactly how the economy has affected you?

A: Without getting too specific, I don't think it would be a surprise to anyone that luxury brands are taking a bigger hit than more moderate price points and that markets in resort locations or in New York City are hit more hard than some other markets. It's the same thing you see on the retail sides so it's why Wal-Mart is potentially flat and Saks is down by 25 percent. And I think that's what we're seeing in the travel business. So rather than any specific brand, I can tell you by segment that's certainly our experience and you see that across the industry.

Q: Hotels that normally discount are now offering deals - a free night after you buy three nights, a $1,000 credit on package deals. How creative are you being?

A: Let me start with a more general observation. Since 9/11, the industry has gotten more sophisticated in managing its pricing behavior and the science of revenue management because of that that sophistication has told us when to be more aggressive with pricing and when we don't.

The other thing we learned from 9/11 is when you drop all the way down, it's very difficult to come back up so we're being very disciplined of where we're offering discounts. But to answer you question more directly, we are being creative and I think the SPG (Starwood Preferred Guest) free weekends campaign and promotion is a great example of that. This is probably our most generous offer ever. And what it basically says is if you stay with us twice, you'll get a free weekend night. And the whole point is to try to get people back out and traveling again.

Q: You've got multiple brands, with very ambitious expansion plans in the past. How has the economy impacted those? Has it caused you to step back and slow down? (W has plans to open 28 more properties between now and 2011).

A: Fundamentally we still believe in the long-term growth story for the industry and for Starwood. And the entrance of 2 or 3 billion people into the global economy and into the middle class that you're seeing around the world and that growth and prosperity is for us an unbelievable one-time, generational, growth opportunity. That having been said, the current economic meltdown has slowed that down. We see that as a temporary set back, not a fundamental long-term one. The other thing that's interesting is so many of the deals that we've singed two or three years ago are now coming to fruition so we estimate that we'll open between 80 and 100 hotels this year. They're obviously deals that were financed and planned in a different time, and when one gets far along in the development of a property, one doesn't stop. At the same time, the opportunity to sign a lot of new deals right now--particularly in North America--has been hampered, so the economy is absolutely having an impact.

Q: Well, here we are, sitting in this beautiful hotel, looking out across the Hudson, and you've got a jam-packed opening. It seems a little strange that you're doing this when the economy is in such a state.

A: This is a great hotel and a great addition to the brand. We look at it as a giant billboard looking out onto Manhattan. Another thing this is a branded property, and it's a newly built property. As W has gone global, we've come back to its birthplace and put in a great property. So we're really happy with it.

Q: Starwood recently filed a lawsuit against Hilton over its plans to add a new brand to its lineup. Care to use this as an opportunity to talk about that suit?

A: The short answer is I really don't want to comment on that right now.

Q: Speaking more generally about brands, this is just one of Starwood's brands, and you opened two new types of hotels last year. Is there a point where you have too many, where you give travelers too many choices?

A: I have a theory about that. In my view, if you go back a generation it used to be that a brand was a guarantee of quality. It was a promise that you were going to deliver a product that people were going to like and that was sufficient to create demand and I think as time has gone on the economy, broadly speaking, has gotten so good at giving people what they want that we no longer look to the brand just as a guarantee of quality. We look to a brand that we can have a relationship with and we can identify with. So the proliferation of brands--whether it's in sneakers, or beer, or hotels--to me is a social and economic phenomenon of wealth and plenty.

What Element and Aloft, for example, are providing is a finer segment of what people are looking for. So what we've done with Aloft is we've created an environment that's like a W hotel at a different price point and in locations where we'd never open a W hotel and our recognition of formalities that you have with a W can be recreated. It creates an opportunity to reach out to a new type of traveler.

With Element, we've been able to launch a brand in an extended-stay area, which is a really profitable and interesting area to being with, and as an extension of Westin with an environmental angle, so again it's what I think people will resonate with. And it goes beyond the expectations that if I check in, I get a nice room and clean bed. It's if I check in, I get a whole experience so if I have to be on the road, I'm going to be happy to be here. Or if I'm on vacation, it really makes me feel that I'm at home with friends.

Q: Do you see brands dying as new ones come in.

A: I don't see them going away. I think it's a great question because with Sheraton, we've made a significant investment and spent a great deal over the past several years to breathe life into the brand and give it a contemporary feel. Longstanding brands have a level of recognition and approval from people that's very hard to replicate and so it becomes an easy economic argument to upgrade Sheraton hotels because people recognize the name, and as we've done that, people increasingly believe in the great experience they're going to have there.

$2 Billion in Losses for Airlines

Josh Moss — Thu, 23 Apr 2009 15:35:49 GMT

The last of the big US carriers reported earnings this morning. The bottom line: it's not a good time for the traditional carriers (though it could be worse) but there are profits to be had for the budget airlines.

First, a wrap of the latest earnings:

US Airways: a net loss of $103 million, or 90 cents a share.

JetBlue: a profit of $12 million, which it attributed to lower fuel charges.

Alaska Air: a net loss of $19.2 million, or 53 cents a share.

In all of the cases, the airlines did better than analysts expected they would do. That follows the same pattern in the past week as the other airlines reported their earnings. Besides JetBlue, the other carrier to post a profit for the quarter was AirTran.

According to Bloomberg, the latest earnings "pushed first-quarter operating losses to $2 billion for the domestic industry's 9 biggest carriers. Airlines slashed fares in an effort to win back travelers, obscuring the benefit of a 52 percent drop from a year earlier in jet fuel's average price. The combined loss was narrower than the $2.3 billion estimate by Michael Derchin, an FTN Equity Capital Markets Corp. analyst in New York. Including costs for fuel-hedge contracts at above-market rates and other accounting items, the quarterly net loss for the group was $1.84 billion."

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The Answer Man

Josh Moss — Wed, 22 Apr 2009 21:56:35 GMT

The AP's David Koenig offers a good Q & A to give some perspective to the slate of airline earnings. JetBlue is the among the last of the big US carriers to report first-quarter numbers tomorrow, joining US Airways and Alaska Airlines left to report earnings.

One question Keoning tackles: When will business travel strenghten?

When there are signs that the recession is lifting.
Airline executives said travel is one of the first things companies cut when the economy slows, and it will return when companies feel more confident about spending.

"Corporate travel is down pretty significantly, and that's discouraging," said Gerard Arpey, chairman and CEO of AMR.

But, Arpey said, companies "need to go to conventions. They need to go out and drum up business. And I think if the economy begins to pick up steam ... that will bode well for our traffic in the back half of this year."

Watch for more travel executives make the argument that to make money, businesses need to spend money and one way to to do that is to get out in the world. It's a nice line, but as long as companies continue to lay off swaths of their workforce, it's a tough sell.

Biting Boeing

Josh Moss — Wed, 22 Apr 2009 16:23:02 GMT

Boeing Co. saw its first-quarter profits nearly cut in half, the Chicago-based company reported today. The declining fortunes were attributed to many of the same problems afflicting the companies flying Boeing's planes--a downturn in the number of passengers flying and a drop in the amount of cargo being carried by air.

For the quarter, net income was $610 million, or 86 cents a share, down from $1.21 billion a year ago. Revenues, meanwhile, rose 3.2 percent to hit $16.5 billion.

The company, the nation's largest manufacturer of aircraft, had braced investors earlier this year when it announced a cutback in production of its popular 777 wide-body aircraft. Plus, Boeing said final prices on airlines in production would be less than expected, which would affect earnings.

Then there's the 787, the next-generation plane dubbed the Dreamliner that's already two years late in its development process. Boeing officials vow it will take its first test flight in the next few months. "It's going to fly this quarter," Boeing vice president for marketing Randy Tinseth said at a conference in New York on Tuesday. He also promised that the first deliveries of the plane would take place next year.

The problems related to the 787 are chronicled in a new story in the May issue of Condé Nast Portfolio. The piece, by Jeffrey Rothfeder, details how Boeing subcontracted out construction of various parts of the plane to outside vendors, but didn't adequately ensure everyone was talking to everyone else.

The Dreamliner's delays are expected to cost Boeing as much as $10 billion in canceled orders and compensation to airlines. The fiasco has become an object lesson for manufacturers in how not to do global outsourcing and has eroded Boeing's reputation for efficiency and innovation.

Now, on the eve of its big launch, the Dreamliner carries the company's hopes of recapturing lost revenue and repairing the damage to its image. If the plane passes the rigorous yearlong series of flight tests that begin this spring, it could lead Boeing out of the financial crisis. But if the Dreamliner fails, Boeing could become the General Motors of the skies, with enormous repercussions for the U.S. economy and the U.S. manufacturing base.

For more on the story, click here, and check out this slideshow of images on how the plane is being constructed.Related Links
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An Airline That Made Money?

Josh Moss — Wed, 22 Apr 2009 14:11:17 GMT

Two airlines reported first-quarter earnings today--the legacy carrier Continental and the budget carrier AirTran. One of them carries on the trend of other airlines this earnings season by posting a loss. The other does something we haven't seen lately by reporting an actual profit.

Care to guess which is which?

Alright, it's not that difficult a question if you've been keeping track of how the oldest and biggest US airlines have fared so fare this year. Houston-based Continental posted a $136 million loss for the first quarter, though it said $4 million was related to grounding some of its fleet. After that deduction, the airline's loss was $1.07 a share--better than the $1.18-$1.19 a share loss estimated by analysts for Bloomberg and Reuters, respectively. The story was the same at the other big carriers--American, United and Delta--all of whom had losses, but weren't as bad as analysts expected.

The story at AirTran is happier. Although it had a 9 percent drop in revenue, the Orlando-based budget carrier managed to pull in a $28.7 million profit, or 21 cents a share, for the first quarter. "Our ability to report a profit today is rooted in the difficult decisions we made last year. AirTran Airways was among the first airlines to react to the changing economic environment and we are among the first to show signs of recovery," chief executive Robert Fornaro said in a statement.

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Into the Boneyard

Josh Moss — Tue, 21 Apr 2009 21:55:30 GMT

Ever wonder what an airplane graveyard looks like? Scott McCartney, the Middle Seat columnist for The Wall Street Journal, has a great account today of one place big jets go to die (or rest, or get reborn)--the "boneyard" at the Pinal Air Park in Marana, Arizona, about 20 miles north of Tucson.

McCartney reports that the airline industry has grounded more 11 percent of its fleet at places like the Pinal Air Park, with US airlines parking 800 planes since mid-2008. The reason is simple: as the airlines have cut back on their capacity, first because of the high cost of oil and now because a bad economy that's keeping prospective passengers at home.

Some of the older planes will never fly again, and will be mined for parts. Other jets will get refurbished and sold to another airlines. Some might just fly again under the same tail markings as the airline that parked it in the first place. (For a photo essay of the boneyard, check out these images from Matt Coleman).

I got a first-hand look at the facility in the late 1970s when my dad moved my mom and I to Arizona from northern California. He had gotten a job with Evergreen International Aviation, the company that operates the maintenance facility at the Pinal Air Park. For two weeks, at the height of a desert summer, we called the park home and stayed in a western-themed motel on the grounds of the facility.

I was not happy. I'd wander around the mothballed planes, wondering what I had done to deserve being moved away out of the Bay Area just as I was starting high school. The most fun I had was exploring the rows and rows of planes with another kid whose parents were living there, in the middle of nowhere.

In time, after we moved into town, after I went to high school and college in Tucson, and after I had finally left the desert to start my career, I came to be fascinated by the boneyard. Driving north on Interstate 10 from Tucson to Phoenix, I'd look out at the planes off in the distance and wonder what it would be like to run between the jets once more.

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Hilton Halts Denizen Project

Josh Moss — Tue, 21 Apr 2009 20:51:43 GMT

Slapped with a federal grand jury subpoena seeking documents related to its new Denizen Hotel chain, Hilton today said it was putting the project on hold and would put executives in charge of the project on paid administrative leave.

The top execs on the project, Ross Klein and Amar Lalvan, came to work for Hilton from Starwood Hotels. Starwood claims in a lawsuit that Klein and Lalvan stole proprietary information, particularly pertaining the company's popular W brand of hotels.

Denizen was slated to be Hilton's 11th chain of hotels, and was being designed to compete with hotels like the W -- high-end properties that appeal to a younger, hipper demographic.

Besides Klein and Lalvan, Hilton also placed its luxury and lifestyle development team on leave, the Wall Street Journal reported.

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How Much Do Your Planes Really Cost?

Josh Moss — Tue, 21 Apr 2009 18:10:44 GMT

Get an executive from Airbus and another from Boeing on the same stage in what's billed as a debate, and you might think that what you'd hear is a long back-and-forth over which new airplane is better or in worse shape, the 787 or the A380. That may have been the case a year or two ago, but with the industry slammed by a steep drop-off in passenger traffic and cargo, interest veers to issues of money.

This morning, at the the 29th Annual New York Airfinance Conference in New York, representatives from the world's two largest aircraft manufacturers seemed a bit ill at ease when an analyst from Goldman Sachs asked them why their companies considered the actual purchase price of an airplane to be a secret.

"It is confidential information ... We're not selling commodities, we're selling assets of high value," said Andrew J. Shankland, Airbus' vice president for marketing. Shankland added that the company has basic, list prices for its various models on its website, but the final cost of a plane is between Airbus and the buyer.

Randy Tinseth, Boeing's vice president for marketing, said the final price of an aircraft was dependent on how the buyer wanted the plane outfitted. "At the end of the day we're selling a product that's a value to a (specific) airline," he said.

But some in the audience of airline executives, bankers, and avaition analysts weren't satisfied. One person pointed out to Shankland and Tinseth that the shipping industry has more transparency, so why can't the airlines follow this model?

The question was met by silence from the Airbus and Boeing reps.

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Losses Continue for Delta, United

Josh Moss — Tue, 21 Apr 2009 16:05:43 GMT

No surprise here, but airline losses continue in the first quarter of the year as Delta and United are the latest to report disappointing earnings. Delta reported a net loss of $693 million, or 84 cents a share. UAL, United's parent company, reported a net loss of $383 million, or $2.64 a share.

Both airlines sought today to spin toward the positive. Delta, which acquired Northwest Airlines last year to make it the world's largest carrier, saw losses that weren't as bad as analysts estimated to Bloomberg. "Things aren't good, but they're also not getting worse," Delta President Ed Bastian said today. At UAL, which also beat analyst expectations, one noteable trend has been a 43 percent drop in revenue from cargo.

One side note: Delta announced that starting July 1, it will charge customers a $50 fee to check a second bag on international routes. The company hopes the move will pull in more than $100 million annually.

The two airlines' reports follow last week's results from AMR, parent of American Airlines, and Southwest Airlines. Southwest Airlines reported its first quarterly loss since 1991. Continental Airlines reports first quarter earnings tomorrow.

At mid-day, the markets saw enough to cheer them about the airlines. The Amex Airline Index was up about 8 percent with all of its 13 compenents trading higher for the day.

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The Chaotic Traveler

Josh Moss — Tue, 21 Apr 2009 13:00:00 GMT

A theme emerges from business travel coverage so far this week: chaos and uncertainty make for unpredictable times.

Here's Joe Sharkey in the New York Times on Monday:

Nobody -- not us business travelers, not the online bookers, not the airlines themselves -- really knows what lies ahead. We are in uncharted waters as airlines cut capacity and try to raise cash with scattershot fare sales as weak demand persists. And once in a while, the airlines suddenly try to raise fares -- then hastily retreat like those Monty Python knights fleeing the enemy castle battlements yelling, "Run away! Run away!"

Here's my colleague Joe Brancaelli in Portfolio today:

This is the best time in a decade to get a deal. Long haul or short, budget digs or palatial stays, leisure and business travel prices have reached comparative, historic lows.

In other words, time to watch your back. If you think buying travel is tricky when prices are high, you have no idea how complicated life on the road can be when prices are falling. The travel industry doesn't lower prices graciously or transparently. There are always trapdoors, tricks, and an endless parade of extras that can needlessly inflate your fares and room rates.

Marilyn Adams writes in USA Today:

The recession and resulting falloff in business travel are taking a particular toll on second-tier business airports such as Cleveland, San Antonio and Hartford, Conn. Large airlines have reduced flights and switched to smaller planes since fall. Others have pulled out or shut down.

What this all means for travelers, especially the road warriors who the airlines and the hotels wish would get out there in bigger numbers, is that the time is right to make a sales call or do a meet-and-greet in a big city (as well as to book that summer vacation with the family). But if your business is focused on small communities, your travel plans are likely to be more complicated and more expensive.

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