So starts Charles Dickens�s �A Tale of Two Cities.�

I want share my personal views about where we are and where we�re going to be in the next few years.

I�m not going to give you statistics, I�m not going to talk about percentage RevPar declines, I�m not going to say what the absolute dollar RevPar will be in upper upscale segment Manhattan�s lodging industry next June 15th at 3 p.m. � I leave that to the much smarter people than me who make their living through ever-excusable prognostications and who are not accountable for the detritus left in their wake. 

But I have polished my metaphorical crystal ball, and looked deep into it.

I�m sure there is at least one amongst you who is thinking, �He who lives by the crystal ball ends up eating ground glass.�  Well I�ve had to eat my words so many times that I�ve become quite used to the diet!

I�m going to try and give you my thoughts about where our industry will be at the end of this tumultuous year, then at the end of next year and finally by the end of 2005.

Over the past few years, we in the lodging industry have grown complacent, lazy and used to the soporific feeling of ever-rising demand and relatively constrained supply.  Nothing could go wrong, go wrong, go wrong��

Here was the reality pre-Sept 11, 2001.  

We were sliding into a recession.  Our business was hurting, occupancies were slipping, conferences were canceling, costs were going up; contingency plans were being implemented as far as the chains would go without prejudicing their own definitions of standards.  We were nowhere near the heady heights of 2000�s performance.  On the contrary, we were hard pressed to stay level with 1999�s.  We didn�t know if we�d actually have a recession, but if we did it would be a shallow one and then things would be fine. 

Common wisdom (as told us by our industry�s self-anointed wise men) was that by the end of 2002 the days of wine and roses would be starting to come back, given the lack of new supply.

Whether that was right or wrong is now moot.  By midday on September 11th we were plunging into a recession only now, for the first time, the Travel and Tourism Industry was the leading indicator.

Lights are out everywhere.  Airports are darker places, planes are grounded; cancellations for tourism activities are prevalent.  

Consumer confidence, already fragile, is shaken to its core.

Business confidence is low and its leaders, if they weren�t using the previous recessionary environment to cut costs, are now doing it with a passion.  What a great excuse for massive cuts!  Every CEO is jumping on the bandwagon regardless of whether they were impacted or not.  Things are bad everywhere so why the hell not?  Let�s stuff everything bad and some of next year�s costs into this quarter�s earnings.  The stock market analysts won�t notice!  

Today the country is sort of united.  Partisanship is creeping back into the halls of congress as every special interest group tries to feed at our government�s trough.  An airline bail out is in effect; people are flying � albeit braving lengthy security lines.  Airline schedules are cut by 20-30%.  More cuts will surely come.  

Although occupancies started to creep up they have more or less flattened, hotel rooms lie empty, and room rates are plunging down.  Conferences are starting to rebook, mostly for next year, but cancellation penalties and guarantees are hard to negotiate, and now our managers have to revert back to praying they won�t cancel 60 days out.  Americans who travel internationally for pleasure are canceling; corporate travel is being cut back ruthlessly.  International inbound leisure business is virtually non-existent.  Operating hotels profitably before debt service, let alone after, is a challenge yet to be met in all too many cases.

We are told by our President to travel.  But people are consciously and subconsciously worried.  Bombs, special forces, copy cats, lunatics, anthrax, stockpiling of smallpox vaccines combined with plunging profits, business cut backs, endless and vague justice department warnings of impending terrorism and increasing unemployment are a horrible combination for lodging.  

Convention pick-ups are half of what was anticipated.  Conference rooms glare emptily at us through their darkness.  Room nights go wasted; sheets not soiled, mini bars untouched.  Inventories grow dusty on their shelves.  Bellman�s pockets lie empty at shift�s end.  Even chefs� kickbacks are down.  Trained staffs are laid off.  Stories of woe abound and are endless, each one resonating more than the last.

OK, if I�ve thoroughly depressed you, then so be it.  As I said,  �Twas the worst of Times.� 

So here is why history will tell us �Twas the best of Times�.

I told you as an industry we�d become complacent and lazy. More than that, we�d become bloated and arrogant.

Our leading chains had grown into mega companies out of the ashes of recession, Gulf War, over supply and over leverage of the early 90�s.  Their growth was so fast that their much vaunted systems could not keep up with their pace.  Starwood, for example, didn�t exist in 1990!  

Their omnipotence and infallibility quotient had rapidly grown to the highest ebb since the mid eighty�s when, then, nothing could go wrong, go wrong, go wrong���.

Brands, sub brands, new niche products, boutiques and six star luxury hotels proliferated.  I could go on, but suffice it to say with developers panting to do deals because money was available, and the stock market worshipping at the altar of rooms growth then the chains naturally found ways to grow.  

�Not quite enough money, Mr. Prospective Owner?  No problem, we�ll lend it to you.  Of course in exchange we�ll need a �NO-cut� management contract that survives Armageddon; but don�t worry, we�re in it with you!  Not behind you, but ahead of you as our money is more valuable than yours because without it you can�t build.�  They often forgot to mention that they would get an acceptable return on their investment from their profit on their fees even if their investment proved worthless.

I�m perhaps being over cynical and facetious to make a point.  The fact is that much of the new supply was induced based on the promises of never ending GDP growth, corporate blindness, the need to please the stock market and the misguided belief that the mega chains could do no wrong, no wrong, no wrong���  

All of that came to an end by midday on the 11th.    When the mega-chains were forced to react with swiftness and boldness.  

Previously untouched and completely unquestioned brand standards are being challenged by themselves.  Amenities and services, whose growth had almost gone unnoticed, built upon each other often without justifiable reason, rationale or thought, are being suspended.  

Staffing standards are being reversed with a new appreciation of reality.  Layers of management are disappearing.  Everything is being rightly challenged.

All struggle with the question of how low occupancy, rates and revenues can drop to break even and not lose money at the operating level.  

This is great news.  Truly great news!  

Why?

As we emerge from this downturn, and emerge we will, then the operators and owners will have a significantly lower cost basis upon which to reap the benefits of increased demand as it gradually happens.  

But woe betides the chains that don�t react this way, as they will shudder under the harsh unrelenting glare of competitive comparisons and publicity.

There�s more good news.  

As in the hotels, the corporate offices of the chains have grown as new program were piled on expanded old ones with no real thought of cutting out the less cost-effective ones.

Prior to the Sept. 11th, I complained to one chief executive that if all his organization�s programs really delivered what they said, our hotels would have 146% occupancy and a 75% GOP margin.

So what?  What�s that got to do with the profitability of hotels?

You see the costs of these corporate-driven programs are mostly passed on to the hotels themselves in one way or another.  So if there are less costs to pass on, then guess what?  The hotel makes more profit.  Marketing, accounting, technology, promotions and other programs, grown up for whatever reason, whim or fancy, are finally facing the corporate CEO�s scalpel!

This is right and should have been tackled much earlier.  However, shattering the myth of corporate infallibility is at last being shattered, which is good news for owners, as the hotels will make more money or perhaps lose less today.  More importantly, when times gradually get back to a new definition of normal, then more money will drop to the bottom line � at long last!  

It all seems so obvious today, but the nagging question is: why has it taken so long to be acted on?  It�s a shame it�s taken a catastrophe to bring this issue to a head, but in the end it�ll be great news for the chains themselves.  They will cut out some non-chargeable costs but, more importantly, they will have more profitable hotels than ever before, incentive fees will be higher too!  That in itself should promote growth and warm the cold hearts of Wall Street�s lodging analysts, if indeed they have them!

For once there is even good news from our government. For the first time, I truly believe the President and members of his cabinet are beginning to vaguely understand the importance of tourism to our nation.  They�ve always understood the importance of airlines and their passengers� votes and have always stepped in to keep them flying.  Today, thanks to an active campaign by many leaders in our industry, they know how much the country is dependent on tourism as a whole and lodging in particular.  

How long they�ll remember this in light of vote-getting political expediency� I don�t know; but I live in eternal hope, and try to ignore the traditional fickleness of fund- raising, poll-watching politicians.

See Charles Dickens was right � We will look back and say, �Twas the best of times, Twas the worst of times.�

By year-end we will be where we are today.  Few deals will be done to buy and sell hotels, as pricing will be hard to figure out other than on a sheer bargain. The al-Qaeda will still be trying to frighten us; bio-terrorism will loom over us like a dark cloud.  Airlines will be cutting back and weaker ones will be planning bankruptcy protection. Cruise ship companies will dry dock; ship, tour and travel companies will be searching for new avenues of business or will disappear.  However, for lodging specifically, we will see bank debts fall into default.

We will see shock on the faces of owners when they see next year�s budget and realize that there may be inadequate profits not only to pay debt service, but to pay for capital needed to upgrade or maintain the hotel, so fresh capital will have to be put in.  

It will not be a Merry Christmas for our industry.

Which leads us to the end of next year.

As of today, I believe business will be worse next year than this year, particularly in the full service sector � why?

We had a comparatively good first quarter this year although it really only looked good after that lousy first quarter which started with the deflated bubble on Jan. 1, 2001.  Business was gradually trailing down before the 11th, but it was more gradual than dropping off a cliff.  

Regretfully, there is no quick fix, no magic bullet that will get us out of the recession in the first quarter or even the second.

There�s more bad news.  Insurance costs may double; property taxes may soar to cover the costs of public security; security costs will increase; health and benefits may be more expensive; energy prices can and will fluctuate dependent on the politics of the Middle East at anytime and the ever-increasing fragility of the house of Sand.  So under any circumstances it�s almost unforeseeable that business will be better next year than the first 8 months of this.  

Why?  Simply put, neither business nor the consumer�s confidence levels will strengthen quickly enough to lift us out of a recession.  As we sink into our malaise so will the rest of the world.  

But, 2002 will be a pivotal year on our road to health.  You see, the United States is a restless and creative nation, one that encourages, stimulates and rewards risk-taking and growth.  Even now, from coast to coast, ideas are being formulated for new businesses; ways to profit from a changing environment such as this are being sought.  New technology is being developed to address our new needs.

New industries will be spawned, new services promised.  Brilliant entrepreneurialism, two hundred million consumers, boundless energy and above all, the �CAN DO� attitude that differentiates us from all others will pull this nation out of its recession and malaise.  That is the strength of the U.S.  That is the very best of our untapped natural resources.

As GDP starts to slowly increase next year (absent an event such as a repeat of the cynical Arab Oil Embargo of 73/74), things will get better for us.  I suspect this country would not patiently absorb such an act today.

I told you the first 8 months of next year will be worse than this, but they will still be better than the last 3 months of 2001.  

Assuming GDP picks up then, although we as an industry lag by between 3 and 6 months behind, we will start to almost imperceptibly recover, and the last four months of 2002 will see year on year improvement.  Meetings and conferences, which were cancelled for the early part of the year, will start to return albeit in smaller numbers and with less people, but booking pace will be up.  

Hotels will be bought and sold at prices much lower then we�ve seen recently.  Smart financial players will seize the opportunity to raise funds and buy distressed properties from those that can�t pay their debts or afford to put in needed capital to upgrade.  

Smaller and weaker public companies both here and in Europe will be bought by financial players or the bigger chains.  Lesser brands will disappear.

This is good.  It is healthy.  It puts properties and companies in safer, well-capitalized hands.  You see lenders will not finance as much next year as they did this year, but lend money they will.  It is their business to lend money.  However, they will lend only to those with a proven track record in OUR industry and who are strong, professional and well capitalized.

A byproduct of the swing to higher quality borrowers will be a slow down, if not stopping in new construction of full service hotels.  This is very good for our industry where traditionally the availability of money rather than the reality of absolute demand generates new supply.  

However, in 2002, the hotel companies that induced demand by lending, investing, and guaranteeing their capital�s return on new developments largely based on fees, will see their money gravely at risk as demand falls and rates plummet.  They will stop this practice � at least for the time being as the �B� word (bankruptcy) comes back into our vernacular.
 
Wall Street analysts will see business and consumer confidence returning slowly but surely; and they will see prices of lodging stocks lowering and will say �Ah � Huh!  Demand is growing, the weak players are disappearing, and supply is limited.  Yes! The stars are in alignment and the opportunity for high profits are great � let�s buy!�

As 2002 draws to an end, our hotels will have Christmas parties that cancelled last year; there will be a trend towards improvement throughout the country.

Budgets for 2003 will show sharp increases in profits; Randy Smith will show colored graphs with the lines pointed diagonally upwards towards the heavens and Bjorn Hanson will prognosticate in the Wall Street Journal that all is well in the lodging universe, and we will all say �Amen�. 

Lodging industry conferences will have record bookings and will be abuzz with people talking about how good things will be; brokers will be hyping deals on inflated numbers and confidence will be clearly returning.  Thank heavens for the famed choir of lodging industry Lemmings!

But, before you feel too comfortable, let me remind you that the reality is 2002 will have been a lousy year and that owners and shareholders will be left licking their wounds and worrying about all the money they had to sink in to support their hotels that they will never see back again.  Balance sheets will be weaker and thinking people will worry that RevPar will not get back to where it was for many reasons, including the hangover of all the cheaper conferences, conventions and meeting business booked during 2002.

Nonetheless as people (albeit fewer) return to their Christmas vacation plans � at cheaper room rates - the chains will breath a sigh of relief at the same time their CEO�s fervently pray that all the cost cutting at the hotel and corporate levels that they endured during late 2001 and 2002 will work out as hoped and, at last, profits will return in 2003 to satisfy the voracious and endless demands of their shareholders.

Fast forward to 2005, this is where my crystal ball really comes into its own!  What an interesting time that will be.  

The 2004 Presidential elections will have come and gone and the newly elected or re-elected President will be presiding over a growing and healthy economy leading the way to a global recovery.  

The stock market will be strong, but investors will be investing in safer funds with only a small part of their portfolios in high-risk stocks.  Strong, reconfigured technology industries will be in vogue.  Although people will still be smarting over the �Tech Wreck,� they will be saying, �that bubble can never happen again�...  forgetting that bubble economies have been occurring since the South Sea Bubble almost 300 years ago.

Security will still be an issue, but an accepted one.  Travelers will have heightened awareness of their own safety.  

Marketing campaigns will still stress safety and security, however the world of up market and self-indulgent travel will have returned.

There will be fewer cruise lines although the ones that remain will be strong.  Fewer new mega vessels will be built.  Fewer new airplanes will fly and the weaker airlines will have been absorbed into the stronger ones.  At long last, governments throughout the world will be forced to �open their skies,� and national airlines will get into even further financial trouble.

We will finally see the creation of truly multi-national global airlines.  The alliances of today will be forged into mega-corporations one way or another.  

Airline prices will inevitably go up as the ugly reality of oligopoly takes hold. Despite hollow promises to the contrary, only the cheekiness of the startups and the radicals will keep prices in line!  New security measures will be commonplace and a new definition of traveling normalcy will be accepted.  Consolidation will be in the air amongst travel and tour operators and wholesalers will merge.  We will see powerful mega travel vendors who will absorb incentive, travel specialists, meeting planners and operators.  Bookings on the internet will grow as new engines and programs make it faster and easier to price shop.

Where will lodging be?  Occupancy will be strong as the beneficial effects of diminished supply come into play.  Rates will have increased and will be at last back to the �frothy� days of 2000 levels.  Frequent traveler programs will be the predominant method of marketing for chain hotels followed by travel agent programs and aggressive national sales teams.

Regretfully, some of the peripheral and costly marketing programs dreamed up during the 90�s in the seemingly endless lines of bland cubicles in the chains corporate offices, which disappeared during 2001 and 2002, will have reappeared as the chains risk reverting back to their old habits of building RevPar at any cost, in their ill- informed belief that RevPar premiums are the key measure of their success.

Although memories will be fading, some of our Wall Street analysts, in addition to those CEOs who may still be in their jobs at the time, may remember the 01-02 bloodbath and will ask more piercing and realistic questions of the ever-glib corporate marketing executives that this industry is so prone to produce.

Insurance prices will still be high as the occasional earthquake, hurricane, cruise ship disaster, airline crash and building fire disrupt their profits.  Labor costs will be rising as unemployment drops and never-ending new social programs increase our costs.  

Yet profits and margins will be stronger, although perhaps not at inflation-adjusted 2000 levels but on an absolute dollar basis.  

But profits will have to be earned the hard way -  penny by penny.  A new generation of cost sensitive, technologically adept, labor systems managers and executives will be taking hold of our industry.

Costly brand standards will be creeping in again as experiential rather than honest consumer research-led initiatives pop into the mind of corporate executives desperate to be a �first mover� and to differentiate their product if only for a fleeting minute.  

There will be fewer chains, but few of the brands will disappear.  The mega chains that remain will have a variety of brands, many competing with themselves in their belief that owning as much of the super market shelf, as breakfast cereal manufacturers do, is the key to market share growth and to profit nirvana.  

Yet, there will at last be a realization that there are DIS-ECONOMIES of scale, and there will be uncomfortable conversations around the corporate conference table that big is not necessarily beautiful.  

Hotel owners and their asset managers emboldened by history will be prodding and challenging the chains, vociferously objecting to paying for any bureaucracy and programs that bring only limited benefits to their bottom lines.  

Yes, by the end of that year the realization will have occurred that RevPar and RevPar premium do not represent the Holy Grail, but net profit per room in both dollars and percentages is what really matters.  

The mega hotel owners and the few financial owners who bought branded hotels and added them to their stables will be able to compare one hotel brand against the other.  There will be such increased transparency that puff, hype and hyperbole will no longer cover up the realities of comparative profit per room delivery.  

The smaller niche chains will be subject to more scrutiny by their shareholders and prospective owners as a result of the transparency.  They will be under greater stress to stay independent.  Many won�t.

The three or four mega chains that remain will be on the prowl for these niche brands, much as Marriott was when it devoured Ritz Carlton.

Supply will be increasing as everyone wants to jump on the bandwagon without working out if any individual deal makes economic sense. Growth will again be the watchword amongst the mega chains in their need to show quarter on quarter percentage growth.  Once again they will find sophisticated variations on the same theme of risking minimum dollars for maximum long-term fees to induce growth even if it only makes vague sense and, then, only in an ever-growing hockey stick economy where nothing can go wrong, go wrong, go wrong�..  

New brands and sub brands will be induced by the brands even if there is NO REAL CONSUMER DEMAND except the need to convince a new generation of Wall Street analysts that the major chains are supercharged engines of perpetual growth.

A new generation of lenders will be soliciting developers� business to make profits for the increasingly large consolidated banking and investment banking organizations that this era will bring.  They will be aggressive and naïve enough to believe that a confluence of events, such as recession and a global disaster, couldn�t happen again.  By the way, that was the buzzword after �91.  No way could oversupply, a recession and a Gulf War happen again!  History repeats itself.  To ignore it is to fall prey to its inevitable results.  

As June 2005 comes, the NYU conference will have nearly 3,000 participants all preening for having turned around our industry all by themselves.  They will choose to disbelieve or ignore the reality that we will be earning less in real dollars per room than in 2000.  Nonetheless the panelists will sagely predict only good tidings ahead as they introduce plans for yet another unnecessary product for their ever hungry incentive driven franchise sales force to sell to the delight of Wall Street.  They will ignore the fact that to do so is like feeding the alligator in the hope that it will eat you last!  

As Christmas draws on and budgets get completed there will be vague memories of 2001 and 2002, and, quietly, contingency plans for crisis will get updated and thought about.  Parties will happen at Christmas and New Years and celebrations will rightly occur. The industry will be truly healthier than ever before and well poised to prosper and weather the inevitable shocks and set backs that lie ahead.
If you think I�m a cynic, well you�re right.  Despite it, I know for certain this is a wonderful, strong, growth-oriented, global industry with the doors for its youth wide open.  

We need to reach out and attract the brightest and best from undergraduates and graduate schools.  We need to pay them enough not to be attracted to law and investment banking as a career.  This is the time to recruit them fearlessly and to convince them and ourselves that they are tomorrow�s leaders.

We need to change our attitudes and allow fast track, young superstars to rise meteorically through corporate ranks.  Let them try, fail, learn and try again.  Let�s not have them subdued by the gray-haired veterans of another era. 

We need to better respect all levels of our employees.  As David Emil of Windows On The World Restaurant will tell you, everyone�s blood ran equally and their lives were snuffed out equally as prematurely, whether they were kitchen porters or managers on September 11th.

Let us open our minds, let us examine our industry, let us think for ourselves and cast aside once and for all the lemming-like mentality that brings us, time and again, to the brink.

Let our leading corporate CEOs keep pushing our industry issues and not abrogate them to others, even if it means dirtying their hands with problems they deem beneath their own perception of their status.  

Let us open our arms wide to embrace radical thinking and new technology.  

Let us always question everything that we do in our hotels and not allow experiential feelings and tradition to intimidate us in any way and prevent us from reaching our potential.

Let us seize this moment to change the very ways in which we have done business in the past.

Let us fight the comforting tendency to shift backwards to the outmoded practices and attitudes of yesterday.

Above all, let us learn from this awful and gut-wrenching experience not only about ourselves, but about what we did when our backs were against the wall and we had to work and think smarter than ever before.  Let us not forget the pain, pressure and stress of this period.

It may not seem so, but I am reminded of a conversation between Winston Churchill and his wife when he learned that the British people had thrown him out of the office of Prime Minister in 1945.  �Winston� she said, �This may be a blessing in disguise�.  �If so,� he mournfully replied, �it is very effectively disguised.�

Remember this is the time to show our wisdom, maturity, calmness and our strength.  

This is the time to plan for a great future, not to wring our hands and moan, �oh, woe is me.�

As Manhattan rebuilds so will our industry.  The same energy that inspires the irrepressible New Yorkers must and will inspire us.  

Our industry is bruised, it is battered, but it is NOT seriously wounded.  Memories of pain are short. We�ve weathered a lot before and prospered.

Let�s keep doing the smart, practical things.  Don�t panic about empty beds.  As we struggle mightily to fill them we must remember that the fundamentals of our economy are strong, as is the very core of the lodging industry.  The path lies clearly ahead for us to grow, prosper and to flourish!

Let�s not look for quick fixes.  Let�s take the time to think deeply and honestly and strengthen ourselves not for the quarterly fix demanded by the stock market, but truly for the long term.

It is up to us and no one else to turn ourselves around.  Our minds must be open wide and fixated on the future, not the past.

With the creativity, enthusiasm, professionalism, energy and entrepreneurialism that I know with certainty this industry possesses, let me assure you that the broad sunlit uplands of a wonderful future lie surely and certainly ahead for our industry and for us all.