San Diego’s fourth-largest industry, tourism, looks as though it will take a hit in the current (fourth) quarter, and the pain will persist well into next year. This will hurt the ailing economy because the industry represents 11.4 percent of the county’s economic output and employs one out of nine workers. Tourism jobs expanded for a long stretch; in September, they were up 1.3 percent from the previous year, according to the California Employment Development Department. But September tourism jobs were down 1.8 percent from July.
The local visitor industry mainly attracts consumers, called leisure travelers, “and consumers are cutting back across the board, and that doesn’t speak well for tourism,” says Kelly Cunningham, economist for the San Diego Institute for Policy Research. San Diegans always used to brag that most visitors were consumers — unlike San Francisco, which depends so heavily on volatile business travel. That was supposed to give San Diego stability. But this is shaping up as a consumer recession. The three San Diego industries that are larger than tourism — manufacturing, military/defense, and tech research/services — are not as consumer-oriented.
In San Diego, both leisure and business travel are suddenly being hit. Cutbacks “are coming from all segments: leisure, corporate, commercial, conventions,” says Jack Giacomini, whose company operates the Crowne Plaza Hotel (formerly the Hanalei, in Mission Valley) and the Hawthorn Suites (also in Mission Valley). “The only segment that is not off too much is government. That seems to be holding up pretty well.” (However, state and local governments are in deep trouble, particularly in California, so that strength might not last.)
For the first 28 days of September, including Sunday and Monday of Labor Day weekend, San Diego hotel occupancy was down 6.4 percent, according to Smith Travel Research. Other recreational destinations were also down: Orange County was off 5.7 percent, Los Angeles 6.7, Orlando 9.2, and Oahu 9.5. “These are disturbing numbers,” says La Jolla–based hotel-industry guru Jerry Morrison. “I expect occupancies to drop for the rest of 2008 and into 2009. Remember that the lodging industry follows the economy,” and the freezing up of the financial system this fall is certain to pitch the national and local economies more deeply into recession, despite plans that would effectively nationalize financial industries worldwide. Businesses need short-term loans to meet payrolls and take care of ordinary expenses; when they can’t get those loans, these businesses have to cut back. Consumers are already cutting back, and they account for more than 70 percent of the U.S. and San Diego economies.
The San Diego Convention and Visitors Bureau has statistics through August, and they show the overall industry up 3.9 percent year to date, but up only 1.1 percent in July. However, the number of total visitors was off 0.4 percent for the year through August, and attendance at attractions was down 0.5 percent.
August tourism was reasonably good, despite the job loss from July to August, but then the U.S. financial system went into the deep freeze. Explains Robert Rauch, local tourism expert, “The first eight months of 2008 were good.” But in August, the number of domestic visitors landing at San Diego International Airport was down 3.9 percent, and international visitors were down 12.8 percent. That was a tip-off of what was coming. “We’re aware of the challenges that face airlines,” says airport spokesman Steve Shultz. He is not willing to predict what the fourth quarter will bring, although “we are certainly aware of difficult economic times.”
Rauch thinks San Diego tourism will be down 6 percent in this year’s fourth quarter, “and 2009 is going to be soft. It won’t be better than 2008,” but there might not be a 6 percent fall for the full year. He owns the Homewood Suites by Hilton San Diego/Del Mar and the Hilton Garden Inn San Diego/Del Mar at Torrey Pines. The former is enjoying 80 percent occupancy, and the latter, open only six months, is at 70 percent. “But we have to be very aggressive in marketing. We are spending more and working harder” to achieve those occupancy rates.
Rauch, who teaches hospitality at San Diego State University, says that as recently as last year, companies “used to book two to four weeks out. Now it’s two to four days out. In the last five weeks, in some cases, there has been a one-day notice on business travel.” The reason: “economic uncertainty.”
Skip Hull, vice president of CIC Research, specializes in travel statistics. He looks for a 4 to 6 percent drop in overnight visitation for the fourth quarter. “Next year does not look good — maybe a 2 to 4 percent drop on the year,” he says.
San Diego normally gets almost 70 percent of its tourists from the so-called drive market. People bring their cars here. In an economic downturn or a period of high gas prices, Californians and Arizonans cancel longer vacations and drive to San Diego. “We’ll get a little more in-state Southern California travel,” says Hull. San Diego gets 43 percent of its overnight visitors from California and 13 percent from Arizona, and both states are in tough recessions, notes Cunningham. “The person coming down from L.A. may be driving down for the day but not staying in hotels. The price of gas has come down, but that factor is being overwhelmed by the economic downturn,” says Alan Gin, economist at the University of San Diego. Gin agrees with the others: “Given the bad economic news we have had, I would expect tourism fallout — people are more gloomy.”
One big question is whether or not the hotels and motels will cut prices in this sinking environment. “At some point, the pricing would have to be affected,” says Hull. “Restaurants have already seen a drop in demand,” and some have dropped prices.
Rate-cutting “is what always happens,” says Morrison. “Today there are young, inexperienced managers who haven’t seen an economic downturn before. Nobody remembers the crises of the 1980s and the early 1990s. So the first thing they do is drop rates.”
“At my hotels, that is a last resort,” says Giacomini, “but if the competition starts to cut prices drastically, then we have no recourse but to follow suit. I think we will see spot discounting. It won’t be across the board. Hotel operators will have unique valleys and will try to fill rooms with discounted room rates. It will be a bit of a poker match [among hotel operators].”
“Most of us will have rate integrity,” says Rauch, “but there will be some price-cutting. I am expecting flat rates for the next three years.” In days of yore, hoteliers figured that if occupancy dropped below 65 percent, the facility went into the red. Now that cutoff is between 55 and 60 percent, says Rauch, because owners have found ways to economize.
With lower attendance will come rate-cutting, and that will be followed by cost-cutting, and that will result in jobs being slashed.