Heartbreak Hotel? The terrorist attacks hit Marriott hard. Now the industry giant is trying to lure back its guests.
By Eryn Brown Reporter Associate Jessica Sung

(FORTUNE Magazine) – Just before 9:00 A.M. on Sept. 11, Marriott International CEO Bill Marriott was holding a meeting in his Bethesda, Md., office. Hearing that a jet had crashed into one of the World Trade Center towers, he ran to the nearest TV; he was watching when the next hijacked plane hit its mark. When he saw the second tower fall, Marriott figured that his Marriott World Trade Center Hotel had been crushed. By noon, he knew that the Marriott at the nearby World Financial Center had sustained serious damage. By day's end, the CEO had learned that two of his managers were missing; they had died trying to evacuate hotel guests. "It was the most difficult thing I'd experienced in 45 years of business," he says.

There are more difficult times ahead. Hotels are in much better shape than the airlines, but they've been in a serious downturn for months, and Sept. 11 only made things worse. As the nation's largest full-service lodging company (it has a market cap of $8.3 billion, vs. $4.9 billion for Starwood and $3.3 billion for Hilton), Marriott International provides a telling example of what the $110 billion industry is facing. Occupancy rates at Marriott-affiliated hotels have revived somewhat since plummeting to previously unseen lows--between Sept. 15 and Sept. 21, Ritz-Carlton filled only 29% of its rooms; Renaissance Hotels, 32%; Marriott Hotels, 41%--but they are still well below last year's 78.2% average. Marriott's RevPAR--revenues per available room, a standard measure of income for the industry--was $89.32 for the third quarter, nearly 10% lower than the year before. Its stock recently closed at $34.80, 31% off its 52-week high. At an age when most CEOs are planning their exit, 69-year-old Bill Marriott is facing one of the biggest challenges of his career.

The hotel industry has been souring since the spring, when businesses began tightening their belts. "On April 1, it was almost like there was a conspiracy--everyone who planned business travel stopped," says Bjorn Hanson, who heads up the global hotel practice at PricewaterhouseCoopers in New York. For a while hoteliers thought leisure travel would keep them afloat. "The consumer was still going strong," says Patrick Ford, president of Lodging Econometrics, a research outfit in Portsmouth, N.H. But the typical summer leisure-travel boom never came. The Sept. 11 attacks sped up the decline--and forced hoteliers to lower room rates by 30% to 40% on average, according to Smith Travel Research, in a desperate attempt to stimulate traffic. PricewaterhouseCooper's Hanson says that the third quarter of 2001 was the industry's worst ever.

Marriott has taken the hit along with everyone else, but its particular mix of hotels compounds its recession-related problems. More than half of the company's rooms--214,535 out of 425,900 worldwide--are high end, many in urban centers and resorts. (The company runs not only Marriott hotels but also the Ritz-Carlton and Renaissance chains, among others.) Those are the sectors that are suffering most. Moderately priced hotels in suburbia and next to highway exits have held up better. But while Marriott's moderately and low-priced brands, including Courtyard, Residence Inn, and Fairfield Inn, account for nearly half its rooms, they account for much less than half of revenues.

Marriott has other vulnerabilities too. For one thing, it has more new hotel rooms in the pipeline than anyone else: 60,000, vs. about 32,000 for Hilton. And then there's Bill Marriott himself. The son of the company's Mormon founders and the CEO since 1972, he's a legend in the industry--a famously detail-oriented man who visits more than 200 of his 2,342 hotels every year, shaking hands with employees and checking for dust in the corners. "This company is Bill Marriott's personality," says Hanson. But given that Marriott is almost 70 and has had two heart attacks, some can't help but wonder how long he'll be able to stay. (His most likely successor: COO Bill Shaw, 56.) Insists Marriott: "I'm not going anywhere. This is my life."

He is trying to fight back by stimulating demand, encouraging promotions that lower room rates as much as 40% and lobbying Congress for tax breaks for travelers. He is also frantically looking for ways to cut costs. The company has not had across-the-board layoffs, but it has cut 10% of its work force in the Bethesda corporate offices. In addition, Marriott has put a third of its hourly workers on part-time schedules. It is canceling conferences it runs, suspending print publication of the in-house magazine Marriott World, and trimming postage and telephone costs. The company hopes such cuts will reduce its total corporate expenses by 20%.

Marriott is beginning to make some changes in its hotels too. Thanks to Bill's influence, the company has become infamous for its obsessively detailed standard operating procedures ("SOPs"), which result in hotels that travelers either love for their consistent good quality or hate for their bland uniformity. "This is a company that has more controls, more systems, and more procedural manuals than anyone--except the government," one industry veteran says. "And they actually comply with them." Housekeepers at Marriott-run hotels work with a 114-point checklist, for example. One SOP: "Server knocks three times. After knocking, the associate should immediately identify themselves in a clear voice, saying, 'Room service!' The guest's name is never mentioned outside the door." People love to make fun of such rules. Bill Marriott devotes an entire chapter of his 1997 management book, The Spirit to Serve, to a lighthearted defense of the SOPs. But they're a serious part of his business. By setting a strict standard, SOPs are designed to protect Marriott's brand.

Now, however, to save money, he is taking the startling step of letting some SOPs fall by the wayside for the time being. "Maybe the shoe mitt doesn't need to be in the room right now," says Steve Sharple, senior vice president of Marriott's northeast region. The company is giving guests only one notepad, one pen, and one laundry bag per room, when it used to supply two. In another highly unusual move, Marriott International has also liberated owners of the hotels it manages, who sometimes struggle with the often rigid guidelines, to make some of their own decisions on little details. Says Laurence Geller, CEO of Strategic Hotel Capital in Chicago: "To their credit, they removed some standards that frankly I thought were only there because management liked them."

Besides its willingness to aggressively cut costs, Marriott has something else going for it: The company doesn't own any hotels--it brings in money only through franchise and management fees. In 1992, to help save his then-struggling company, Bill Marriott decided to spin off its real estate holdings into an independent real estate ownership company (now known as a real estate investment trust, or REIT) called Host Marriott, installing his brother Richard as chairman. The move freed the management company, now called Marriott International, from the burden of financing property, letting it instead become a franchiser and hotel operator that could use its cash to build the brand and expand. That decision fueled a decade of blockbuster growth, including the acquisition of the Ritz-Carlton and Renaissance chains. Marriott operated 653 hotels in 1990; by 1999 it operated 1,880.

As a service company, Marriott International gets the vast majority of its revenues from fees paid by hotel owners, including Host Marriott, other REITs, and private investor groups. Management fees have two components. First there's a base fee, which is a fixed percentage of a hotel's revenues (Marriott won't specify the range here, but offers 3% as a "ballpark figure"). The second portion is an incentive fee, a highly variable percentage of a hotel's profits--sometimes hitting 50%--that dries up if the hotel is a money loser. If the owners prefer to handle operations themselves, they pay Marriott a smaller franchising fee for the rights to use its name, its marketing resources, and its reservations system.

Marriott's fee-based structure can help cushion the company from the downturn's harsher effects. Last year incentive fees accounted for 28% of total profits for Marriott International. This year, with hotel profits expected to be down sharply or nonexistent, the company's incentive fees will be a whole lot lower. But it will still collect its base fee. Hotel owners like Starwood, on the other hand, will have to suck up any losses. "If things get much worse," says Steve Kent, a lodging analyst at Goldman Sachs, "Marriott will just make less. Starwood and Hilton will lose." Add in the fact that Marriott has few fixed costs and virtually no debt to service, and its finances seem positioned well for the downturn.

Some critics point out that the revenue structure limits Marriott International's upside. When hotels are booming, the added revenue goes right to the owners' bottom line. "When we get through this, we'll be pounding the table on companies like Starwood and Hilton," says Bear Stearns analyst Jason Ader. "And Marriott should get left in the dust." Despite that argument, Marriott International's stock price did, in fact, manage to outperform the industry average over the past few boom years. Why? Simple: Marriott is well run, and it's a great brand. "Some people say it's the Tiffany of the lodging industry," says Goldman Sachs' Kent.

The industry could be poised for recovery more quickly than you think. If the recession lifts sometime next year, and if there isn't another Sept. 11, many analysts say that hotels could be back on track by 2003. Because the companies have streamlined their operations, diversified their holdings, and reduced their debt, most are actually in much better shape these days than they were in the early 1990s. "We will have the worst year in RevPAR this year, but we won't have the worst year in profits," says PricewaterhouseCoopers' Hanson.

When the upswing does happen, Bill Marriott will be ready. He is moving forward with expansion plans, including managing 27 hotels being built abroad, most of which should be ready for business by 2003. COO Shaw insists there's plenty of room to grow. "We only have 8% market share in the U.S.," he says, "and less than 1% outside the U.S. We see tremendous growth opportunities."

Still, the travel industry has a long way to go before it is out of the woods. It is conceivable that Sept. 11--and any future terrorist attacks--could so deeply scar the U.S. psyche that Americans will never again travel the way they have in recent years. If that happens, the economics of the whole industry will change for the worse. "When someone's scared to travel," says Paul Whetsell, CEO of Meristar, a Washington, D.C.-based REIT and independent hotel-management company, "you can't give your product away."

Bill Marriott worries about that every day. He knows that his main battle these days is a psychological one. "The most important thing is to stimulate demand. This country has to learn how to live with a certain level of concern," he says.

In the meantime, while he tries to get people to travel again, Marriott makes do with the cards he's been dealt. One day in October, he runs off to a "tasting panel," where he and his top executives try out recipes that some hotel kitchens will whip up for Thanksgiving. The dinners--bourbon-marinated turkey, stuffing, green beans, cranberry sauce--are going to be individually packaged, emblazoned with the slogan "Cooked for you: our chef, your table," and sold as carry-out meals, priced somewhere around $120 for eight people.

It would be better, of course, if people were eating Marriott food because they were staying in Marriott hotels. But for the time being, if he can make a few dollars selling pumpkin pie, Bill Marriott is more than willing to give it a try.

FEEDBACK: ebrown@fortunemail.com

REPORTER ASSOCIATE Jessica Sung