(FORTUNE Magazine) – ''RUNNING this company the past three years has taken ten years off my life,'' says Darryl Hartley-Leonard, president of Hyatt Hotels. ''But I hope to get rejuvenated during the next three.'' It's not hard to see why Hartley-Leonard, 49, is upbeat. After a long, bleak downturn, the outlook for the hotel industry appears a lot more hospitable. Occupancy is on the rise after sliding for ten years. Hotel earnings are also climbing. Bjorn Hanson, hospitality industry analyst at Coopers & Lybrand, predicts a $500-million-plus profit for the industry in 1993, its first since 1980. What's more, Hanson expects business to be healthy enough by 1995 for hoteliers to raise room rates at about the pace of inflation, something they have not managed to do since 1989. Business travelers, who got hooked on a slew of giveaways, like deep discounts and room upgrades, need not panic. Good deals will not disappear overnight. ''The hotel business is just like any other type of retailing in the 1990s,'' says New York City hotel consultant Stephen W. Brener. ''Price is the main attraction.'' Listen to hoteliers as they discuss rate increases: ''There will be selected opportunities for us to get a little kiss within the next year or so, but be assured that it will not be a big smooch,'' says Robert I. Small, CEO of Fairmont Hotels. ''I will not risk the friendship of my clients over a couple of bucks.'' Echoes Carl T. Mottek, president of the Hilton Hotels Division: ''Our No. 1 priority is still to fill beds. It is better to sell at a discount than not to fill rooms at all.'' If a company does decide to raise rates, it will be market by market, not across the board. Like the U.S. economy's recovery, the hotel industry's rebound is fragile and geographically uneven. The corporate vice president may continue to get a 30% discount at the Hilton in Philadelphia, where demand is sluggish, but may have a harder time snaring a similar deal in Salt Lake City, where business is brisk. Hotel executives have little choice but to proceed cautiously with rate increases. In addition to difficulties caused by price-resistant consumers, the limp economy, and corporate America's downsizing, hoteliers are still coping with the industry's construction binge of the 1980s. While it is true that the proportion of hotels making a profit rose from 40% in 1991 to 52% last year, 48% are still losing money. Every night 36% of U.S. hotel beds remain empty. The biggest trouble is in the highest-priced tier of the industry, where rooms start at about $90 per night in small cities and go into the thousands in places like New York City. During the 1980s hoteliers seemed intent on building palaces, not rooms for weary travelers. Marble and gold outshone Sheetrock and Formica. But now growth has stalled in the upper tier, and bankruptcy filings are exceeded only by FOR SALE signs. Most first-class hotel companies have already slashed expenses in a frantic effort to contain costs. But they must do more to be profitable. To understand how hotels make money, it is necessary to sort out the distinctions among managers, owners, developers, and franchisers. Well-known companies like Ritz-Carlton and Hyatt are mainly managers that make their money collecting a fee to operate hotels that someone else owns. The owner, often a group with a lead partner like Ira Lubert of Wayne, Pennsylvania, is a risk taker that provides the equity financing to build or buy hotels. Developers like William Zeckendorf Jr. and Tishman Realty are dealmakers that frequently bring the owners and managers together, oversee the construction of a project, and even help owners secure some of the capital needed to build a new property. Franchisers, which include big companies like Hilton, lend their names to independent operators eager to associate with better-known brands. The franchising company can grab up to 9% of room revenues for doing little more than giving the small fry the right to use its name and reservation system. Through much of the past decade, industry leader Marriott thought it had a sure-fire strategy for success. It would build hotels, sell them to investors, then collect fees to manage them -- in other words, play both developer and manager. But when the go-go went out of the Eighties, Marriott got stuck with a heap of unsold hotels and $3.6 billion in debt that it had borrowed to build them. To escape, Marriott split the company into two parts, one a profitable hotel and food service business, the other a debt-laden owner of depressed real estate. In addition, Marriott expanded the franchising part of its business. THE FAT MANAGEMENT fees that Marriott and other chains collected from owners during the 1980s have been nearly halved, from between 9% and 12% of total revenues to between 4% and 7%. The managers are suffering because the owners . of hotels, many of which are now banks and insurance companies that have foreclosed on mortgages, cannot or will not dole out as big a share of the proceeds. Some 60% of hotel owners have been, will be, or are in the process of renegotiating their loans. Thus the emphasis on franchising. It's a lot less glamorous than building or managing hotels but about 25% more profitable, according to Hanson of Coopers & Lybrand. Travelers typically have benefited from the industry's woes. Take the sumptuous Four Seasons Hotel in New York City, which was designed by I.M. Pei. It was built at a cost of $1 million per room. Applying the old rule of thumb that a hotel should charge $1 for every $1,000 spent on construction, the price of a room should be $1,000 per night. When the Four Seasons opened in June, rooms during a three-month opening special went for $225. Non-negotiated corporate rates currently start at $285. Resorts, which thrived during the Eighties, are hurting badly. Hawaii has been pummeled by the economic slides in California and Japan, which together account for nearly 30% of its tourist activity. Occupancy of Hawaii's hotel rooms has declined for five straight years through 1992, according to a report by the accounting firm Kenneth Leventhal. Oceanfront rooms go vacant even at distressed rates, and some hotels, like the lush 800-acre Westin resort on Kauai, sit totally empty. This white elephant features a zoological garden filled with exotic monkeys and pink flamingos, and a golf course designed by Jack Nicklaus. The Bank of America has repossessed the $350 million resort, and the U.S. arm of Westin International is up for sale. Resorts may be struggling now, but Hilton is betting they will recover soon. It is concentrating on two fast-growing niches, golf resorts and time-sharing condos. According to a survey of corporate executives conducted by competitor Hyatt, 77% said they played golf on vacation. Hilton reckons that corporate types will check in for business conferences at its new resorts in Florida and Arizona, then stay on to steal some time on the golf course. As for time sharing, Hilton is so enthusiastic about the business that it is using its own money to build condos at its golf resorts. Investors typically pay between $9,000 and $12,000 for the right to spend a week every year for 30 years in a two- or three-bedroom resort condo. Buyers who get bored with their location can trade with someone who has bought a Hilton condo somewhere else. Time sharing can be extremely profitable. When the marketer sells all 50-week intervals in a condo -- two weeks are held aside for maintenance -- the return is often three times the original investment. Hyatt, too, has time on its mind, but it is concentrating on the upscale hotel of the future. ''The hotel business is generally not profitable, so our goal is to redefine what a first-class operation is,'' says Hartley-Leonard. Hyatt has already set up an experimental hotel in Schaumburg, Illinois, to test Hartley-Leonard's concepts. Part of the drill is ''silo busting,'' or the cross-training of employees. Eventually all Hyatt staffers might wear Dick Tracy watches with wireless technology, allowing them to punch in the information needed to do any number of tasks. For example, they could register guests who preferred not to check in themselves. Hartley-Leonard is also promoting what he calls virtual reality, which is how he envisions hotel rooms will be sold in the future. Prospective customers will be sent a helmet with a built-in screen. When they put it on, they will be able to see and hear descriptions of several hotels and resorts to help them decide which one to book.

WHILE HIGH-END chains scurry to find ways to grow, low-end hoteliers, including Comfort Inns, Red Roof Inns, and Marriott's Fairfield Inn chain, are doing well, mainly because they have lower labor costs. The rooms at limited- service hotels, as the group prefers to be called, are generally priced under $60. The budget establishments do not have restaurants or same-day laundry service, and shoes left in the hallway will not be shined. That's just fine with thrifty tourists, senior citizens, and business travelers operating on tight budgets. Extra conveniences like room service and valet parking add so much to the cost of doing business that the expenses incurred by budget hotels run about half those of their fancier counterparts. The king of budget is Henry R. Silverman, 52, head of Hospitality Franchise Systems. He operates five chains, including Ramada, Days Inn, and Howard Johnson, all debt-strapped franchisers when Silverman purchased them for considerably below book value. He acquired Days Inn out of bankruptcy for $269 million in 1991, about half what Saul Steinberg's Reliance group paid in 1984. Interestingly, it was Silverman, then working for Steinberg, who orchestrated the 1984 purchase, as well as the sale of Days Inn five years later to another lodging group, a deal in which Reliance reaped a $155 million profit. After Silverman buys a company he slashes expenses and hits the road to sign up independent operators and to entice franchisees of other chains to switch flags. Then he sits back to collect royalties of between 6% and 8.8% of room revenues. Industry watchers criticize him for running schlocky, unsafe hotels. ''Just show him a door, and he'll give you a franchise,'' carps one critic. Silverman dismisses such charges as jealous backbiting, and Wall Street clearly sides with him. Hospitality's stock has more than doubled, to $34 a share, since the company went public nine months ago. Despite the scarcity of equity capital, some investors are getting financing to build new limited-service hotels, much to the annoyance of the luxury operators. ''They're just building more mousetraps, but there are no more mice,'' complains Hartley-Leonard of Hyatt. Instead, existing mice are seeking out less luxurious digs when they go on the road. A demand-supply equilibrium in hotel rooms will be reached around 1995 or 1996 -- unless the industry goes back to its overbuilding ways of the 1980s. In the meantime, enjoy bargains like the ones Bob Diener offers through his Hotel Reservations Network in Dallas: The four-star Chesterfield in London, which usually charges $250, is $139, including taxes and breakfast. The St. Francis in San Francisco can be booked at a 40% discount. And the Maui Coast, a new beachfront hotel in Hawaii, is going for $99 a night.

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