The bailed-out AIG’s lavish junket has led U.S. companies to cancel $1 billion in conferences so far this year.
Hoteliers are calling it “the AIG effect,” after the insurance company that took a public drubbing for spending freely on corporate perks despite its financial turmoil.
“Corporations don’t want to have to report lavish spending to the board of directors, even if it wasn’t really all that lavish,” said Donald Wise, an investment banker who specializes in hotels.
It all started with a kind of Marie Antoinette moment in September, when executives of AIG spent $443,000 at the St. Regis Resort in Dana Point just days after accepting an $85-billion federal bailout.
Reports of the junket quickly dominated the news and became emblematic of the excesses that many believed had brought down the economy. Outrage grew, as people who might or might not understand credit default swaps easily envisioned fat cats eating fancy food, playing golf and getting massages on their dime.
Hotels saw the effect right away. At the Mandalay Bay Resort & Casino in the business meeting mecca of Las Vegas, almost $131 million worth of business events have been canceled so far this year, said Chuck Bowling, executive vice president. The Four Seasons hotel in Los Angeles has taken a 15% hit in its meeting business.
With bookings dropping and self-denial replacing conspicuous consumption, the AIG effect is battering a hospitality business that was already suffering from a slowdown related to the recession.
Nearly 200,000 travel-related jobs were lost in 2008, and an additional 247,000 will be cut this year, according to the Department of Labor. More than 20% of companies have canceled events because of recent media and political attention, the U.S. Travel Assn. said.
In February alone, local hotels lost reservations for events that would have filled 95,000 rooms, according to the Los Angeles Convention and Visitors Bureau.
“The hemorrhaging is just frightening,” Wise said.
To win back business, Ritz-Carlton Hotel Co. is offering to donate 10% of the cost of a conference held on its premises to charity. The hope is that the meetings will seem less self-indulgent to corporate watchdogs and boards of directors.
“It helps to overcome the concern about holding a meeting in a luxury hotel during economic hard times and matches with many companies’ growing emphasis on corporate social responsibility,” spokeswoman Vivian Deuschl said.
Laurence Geller, president of the company that owns the Ritz-Carlton Laguna Niguel and the Hotel Del Coronado in San Diego County, among others, described a mood of “fear and paranoia” among his customers.
Bookings at the 19 hotels owned by Strategic Hotels & Resorts are down about 20%, Geller said, and those customers who are still coming are worried about being perceived as spendthrifts. Some have even asked to have their company names removed from lobby signs directing people to events.
“It’s a fear of being outed in public,” he said.
The firm’s hotel operators have laid off 1,250 people at 11 U.S. properties, Geller said.
The downshift runs counter to the industry’s direction over the last several years, when hotels upgraded deliberately to attract the lucrative junket business, adding yoga rooms, elaborate spas and cutting-edge restaurants — and many made a point of adding “spa” and “resort” to their names.
Meetings brought in more than half of the annual occupancy of many resorts and are crucial to their survival, said Peter Yesawich, a hotel marketer. In booming 2007, business travel amounted to $240 billion, according to the travel association, although how much of that was related to corporate meetings is unclear.
Now that business is dwindling — fast, said Mehdi Eftekari, general manager of the Four Seasons Hotel in Los Angeles.
“Group sizes are getting smaller, and their budgets are getting smaller,” said Eftekari, who typically books rooms and events for law firms, insurance companies and pharmaceutical firms. Those who do meet have been cutting back on the pricier menu options, such as serving “chicken salad instead of duck salad.”
The industry is trying to salvage its reputation with a public relations campaign and stepped up lobbying efforts.
The U.S. Travel Assn. estimates that the lodging industry lost $1 billion worth of corporate meetings or incentive trips in January and February. In response, it has bought print and online advertisements in USA Today, Roll Call and other publications.
It also put together what it calls a “war room,” where public relations representatives stand at the ready to respond to what they perceive as unfair criticism of business travel. Representatives have lobbied Congress and the White House to ease proposed restrictions on junkets for companies that accept financial aid from the federal government.
Their argument is that face-to-face meetings are important to business. And they say that hotel maids and other low-wage workers have been hurt by the slowdown in business travel.
“Our message is ‘Hey, let’s tone down the rhetoric,’ ” said Roger Dow, president of the U.S. Travel Assn. “If you want to lose a million more jobs, just keep talking.”
Dow, a former sales executive at Marriott, said junkets were an important way to motivate employees, particularly high-earning salespeople.
Not long ago, he said, Marriott sent its people to such desirable spots as Hawaii, Cancun in Mexico and London. During one trip to Los Angeles in 2002, sales reps and their guests were driven in limousines to the Kodak Theatre, where a fake Oscars show had been set up. The sales reps were treated like celebrities, walking on a red carpet as a swarm of actors pretended to be paparazzi and fans.
Meetings, Dow said, have been unfairly vilified — just because of the easy symbolism.
“You cannot photograph a large salary or bonus, but you can take a photo of a golf course or a beachfront hotel,” he said.