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Forecast:
Gloomy sky.
City of Phoenix has $100 million
budget shortfall |
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The
Great Depression (1929-1939). |
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PHOENIX (By Jon Garrido, The Jon Garrido News
Network) October 6,
2008 ― At 3:30 yesterday afternoon, the Standard & Poor 500-stock index was
trading around 1,050. That left it 46 percent below its inflation-adjusted high
which it hit in the summer of 2000. If shares keep falling and the index hits
967, it will be a remarkable 50 percent below its peak. That has happened only
two other times since 1929 — during the Great Depression and during the 1970s.
PHOENIX (By Jon Garrido) June 5, 2008 —
Today's headline at the U.S. Times (published by Jon Garrido News
Network) is
Global Fears of Recession Grows.
When
the White House brought out its $700 billion rescue
plan two weeks ago, its sheer size was meant to
soothe the global financial system, restoring trust
and confidence. Three days after the plan was
approved, it looks like a pebble tossed into a
churning sea.
The
crisis that began as a made-in-America subprime
lending problem and radiated across the world is now
circling back home, where it pummeled stock and
credit markets on Monday.
It is easy to overlook just how steep the decline in
stocks has been in the last eight years. Stock
prices and indexes tend to be described in nominal
terms, rather than inflation-adjusted terms. But it
makes much more sense to adjust share prices for
inflation, just as it makes sense to adjust the
price of just about anything — food, houses, incomes
— for inflation.
As Mayor Phil Johnson and Councilman Michael Johnson appeared to be
oblivious to financial markets crumbling around the world, the red
ribbon was cut opening the Phoenix Sheraton funded with taxpayer
funds. Mayor Phil Gordon and former Vice Mayor Michael Johnson
(representing District 8) for the past 8 years of decadence have
given away the store putting taxpayers at risk for debt all in the
name of "Downtown Phoenix."
When no
hotel developer dared to take risk in using their own capital, the City of
Phoenix at the urging of Gordon and Johnson substituted public funds for private
funds by obligating the use of city revenue bonds to fund development of the
Downtown Phoenix Sheraton Hotel putting the City at risk by funding
the $350 million tab for the
Downtown Phoenix Sheraton Hotel. The $350 million includes $197 million for
construction costs with the balance of the money
being for early debt interest, design fees, permits and furnishings.
The city bankrolled the hotel project with revenue bonds which
uses income from the hotel for debt service. The City
contributed $13 million to cover some upfront costs and land
acquisition. The average annual debt payment will be more than
$20 million assuming a straight amortization. This means in the
first year of operation, $20 million from hotel income and each
year thereafter until the revenue bonds are retired will be used
to amortize the City's revenue bonds.
In the event, $20 million is not
available from hotel revenue, the City of Phoenix will responsible for any
deficit and will have to use general revenue funds to subsidize debt because
failing to service this debt service will have an adverse impact on the the
ability to tap credit markets for future Phoenix projects because the City's
ability to pay will be downgraded by the bond rating companies.
Considering a looming global
recession, 2009 will be a dismal year in attracting visitors to Phoenix and the
recession according to most economists will be as great or greater that the 1929
depression that collapsed global economies around the world and was particularly
devastating in the United States.
All of this will have a significant
adverse impact on City of Phoenix sales tax revenues. With less available funds
to fund Phoenix services and projects, something has to give forcing a reduction
in city expenses of services, projects. Financial obligations promoted and
approved by Gordon and Johnson are paid by debt service locked in for the term
of the revenue bonds or other financial instruments used by the City of Phoenix
and the City of Phoenix will have these obligations until bonds are retired.
Since debt service will always have first position, the only way to achieve a
balanced budget as required by state law is services and/or cut city personnel.
It is not only City of Phoenix
issued bonds that has an impact on the City of Phoenix budget but the City of
Phoenix is facing a 100 million dollar shortfall brought about by cash
outlays including the annual $7 million given to the Phoenix Visitors'
Convention Bureau and the $13 million contribution including land cost to the
Phoenix Sheraton Hotel.
With debt service obligations
during the past 10 years requiring city funds if fewer city funds are available
then the only items to reduce are city services and a reduction in personnel.
"All animals are equal but some
animals are more equal than others." A proclamation by the pigs who control the
government in the novel Animal Farm, by George Orwell. The sentence is a
comment on the hypocrisy of governments that proclaim the absolute equality of
their citizens but give power and privileges to a small elite. City services are
equal but some services are more equal than others. At the top of the list of
sacred cows is the $7 million annual contribution to the Phoenix Visitor
Convention Bureau. Not a priority category are programs and services provided at
Senior Centers and on the backs of seniors, the City of Phoenix has begun
charging seniors 25 cents for a cup of coffee with their lunches.
Even with no risk, the City of
Phoenix has stepped over the line and undertaken to finance a hotel where no
hotel developer dare thread because of risk in an uncertain market. What a
sweetheart deal Gordon and Johnson gave the Phoenix Sheraton. The City
finances land acquisition, hotel construction then provides the Sheraton a
management contract which includes management profit with no risk.
Hotel developers are assumed to
have expertise in risk analysis and are always analyzing development
opportunities. Considering no hotel in Downtown Phoenix has been built in 32
years, hotel developers concluded the risk of building a Downtown Phoenix hotel
was too great. This is a safe assumption because if risk had been determined to
be minimized, a hotel would have been built.
Then a former cop and a aerial
service operator neither with private sector development expertise took upon
themselves to showboat the development of a downtown hotel using someone else's
money namely taxpayer funds that they had sworn to protect with a fiduciary
responsibility. Gordon and Johnson failed to undertake risk analysis of a
downtown hotel and even if they had, they would not have understood the
investment analysis. So with out an understanding of risk, Gordon and Johnson
promoted and had approved using City of Phoenix money to finance the expenditure
of $350 million to build the $350 million Downtown Phoenix Sheraton Hotel.
On the very day, the Phoenix
Sheraton was opened,
Wall Street collapsed tumbling world markets into a global recession forecasted
to be worse than the great depression of The Great Depression (1929-1939).
Although the United States has
experienced several depressions before the stock market crash on October 27,
1929, none had been as severe nor as long lasting before "Black Thursday"
struck Wall Street. At first, economists and leaders thought this was a mild
bump, perhaps merely a correction of the market, or in any case, no worse
than the recession the nation suffered after World War I.
Numbers soon proved the
optimists incorrect. The depression steadily worsened. By spring of 1933,
when FDR took the oath of office, unemployment had risen from 8 to 15
million, roughly 1/3 of the non-farmer workforce, and the gross national
product had decreased from $103.8 billion to $55.7 billion. Forty percent of
the farms in Mississippi were on the auction block on FDR's inauguration
day. Although the depression was world wide, no other country reached so
high a percentage of unemployed. The poor were hit the hardest. By 1932,
Harlem had an unemployment rate of 50 percent and property owned or managed
by blacks fell from 30 percent to 5 percent in 1935. Farmers in the Midwest
were doubly hit by economic downturns and the Dust Bowl. Schools, with
budgets shrinking, shortened both the school day and the school year.
Déjà vu to the 2008
Wall Street collapse
tumbling world markets into a global recession forecasted to be worse than the
great depression of The Great Depression (1929-1939) and on
the very day as the red ribbon was cut with great fanfare opening the Downtown Phoenix Sheraton, Gordon and Johnson oblivious to the collapse of Wall
Street and reminiscent of Nero playing the fiddle while
Rome burned, City
Councilman Michael Johnson, a longtime supporter of the project, and oblivious
to the 2008 Wall Street crisis, said the hotel is "gorgeous" and "actually more
than what I had expected."
"The more nights people stay, the more money they actually
spend," said the councilman, whose district includes the hotel.
"It all impacts our economy, which is all really important to us
at this time."
A commercial
real-estate expert, however, warned the failing economy and the financial
nightmare on Wall Street could make it difficult for developers to finance
future hotels.
Hotel forecast puts skids on area's
tourism
With downtown hotel
occupancy questionable because of declining tourism, hotel occupancy will
primarily depend on conventioneers coming to Phoenix to attend a convention.
Yet this market was dubious at best.
The 1987 crash was minimal
compared to the present Wall Street crisis but yet took 11 years to recover.
The weakening economy and mess on
Wall Street are darkening an outlook for hotels and resorts that is already
gloomy. Now with global recession forthcoming, all of yesterday's forecasts
identified below are outdated making for real forecasts of tomorrow a
hundred times more gloomy.
Is it an
end to the decades of decadence on Wall Street?
“It’s the beginning of the end
of the era of infatuation with the free market,” said Steve Fraser, author
of “Wall Street: America’s Dream Palace,” and a historian. “It’s the end of
the era where Wall Street carries high degrees of power and prestige. And
it’s the end of the era of conspicuous displays of wealth. We are entering a
new chapter in our history.”
In all likelihood, the real
estate market could be frozen for the next 24 to 48 months or so as buyers
and sellers struggle to reach agreement on prices, Ms. Corcoran said.
Adoration of riches is hardly
new, however. In the mid- to late 19th century, the Gilded Age — a term Mark
Twain coined in 1873 — offered equally ostentatious displays of wealth and a
broadening gulf between rich and poor.
“In the Gilded Age, they built
great, enormous palazzos in Newport that they lived in for six weeks a
year,” said the historian John Steele Gordon, whose book, “An Empire of
Wealth,” chronicles that era. “During the last 25 years, it’s certainly been
a gilded age in the sense that enormous fortunes have been built up in an
unprecedented way.”
“If the economic system shuts
down and we go in for a deep recession, it probably is the end of an era,”
he said. This will be the consequence in Downtown Phoenix.
The Phoenix Downtown
Con: Instant Gratification
In fact, one does not need
to visit other cities to see quality development success. A drive to the
corner of 24th Street and Camelback will be a visit to a first class
showcase development. Hard to imagine but all done without public subsidies
during the time Gordon and Johnson were freely opening the City of Phoenix
coffers to make Downtown Phoenix into a showcase, a showcase built on a
house of cards that has begun to crumble out of control.
Instant gratification is
no answer to Downtown Phoenix development that in the end will bring demise
to what was a golden opportunity to make Phoenix one of America's premier
cities. Instant gratification makes for headlines and great sound bites but
the only way to develop downtown is to look long term at quality destination
projects that add synergy to additional development thereby increasing
property and sales tax revenue.
The
crux of the problem is public officials without development experience are
responsible for Phoenix downtown development.
If
anyone thinks city staff will provide balance then you do not know how a
city functions.
No one
on staff is going to go against the grain and voice another direction
because no one bites the hand that feeds them. Witness John Chan, Phoenix's
downtown development director exceeding stupidity said, "For the first six
months of the year, there has been significant interest in developing hotels
because of those booking numbers."
This
of course assumes city staff has private sector development expertise. No
Phoenix staff person has this depth of expertise. No one has "risk"
experience for all are to quick to use "public" money that has no risk.
All private development
professionals strive to maximize development opportunities by placing the
highest and best use for each property. It is highest and best use that
drives development at 24th Street and Camelback. It is the market place that
determines highest and best use also known as laissez-faire that the free
market is best left to its own devices, and that it will dispense with
inefficiencies in a more deliberate and quick manner than the Phoenix mayor
and city council ever could. Particularly because Phil Gordon and the city
council members are clueless and lack development experience.
The market drives 24th
Street and Camelback; consequently, there is no need for public subsidy.
Which begs the question why is public subsidy always a requirement for
developers in the Downtown Phoenix area? It is only because developers know
the City of Phoenix is an easy touch on downtown development.
It appears public
subsidy in Downtown Phoenix is the equity contribution of the Phoenix mayor
and city council who have no risk development experience other than maybe
not winning in the next election. Yet, if no one questions, then all public
subsidies freely flow.
It is when private
developers know public subsidies are readily available, developers approach
the mayor and council for free hands outs for projects that could never get
off the ground supposedly unless they receive "gap" financing to make the
numbers work. The more public money that is available, the greater need for
subsidy that is requested.
The payoff for city
officials without development experience, the public recognition of
spearheading less than highest and best use development to win elections.
The
recently approved Phoenix CityScape is not a destination. It will provide
for those that work in the downtown area and to the few that live in
downtown. It is not a River Walk. It is not a Faneuil Hall or Baltimore
Harbor Place. No one working and living in Scottsdale will ever drive to
Downtown Phoenix to shop at Phoenix CityScape. Neither will anyone living in
Superior or Globe drive to Downtown Phoenix to shop at Phoenix CityScape.
This should illustrate Phoenix CityScape is not a destination and the
premise made in this writing: a destination is absolutely required to take
Phoenix into the realm of great cities.
Maybe
in the short term, the downtown area will go from empty blighted parcels but
eventually, Downtown Phoenix instead of high rise office and a destination
project that would have attracted housing and then retail is not going to
happen.
Greed is Good
Thinking back upon screenplay
of "Wall Street," I never could have imagined that this persona and his
battle cry would become part of the public consciousness, and that the core
message of "Wall Street" -- remember, he goes to jail in the end -- would be
so misunderstood by so many.
At the very least if jail
is not an option, the least acceptable option is for Gordon and Johnson
to leave the City of Phoenix either by being termed out or loosing a
city election.
"Two investment
partners get involved in shady financial dealings, they're using each
other and eventually are tailed by a drab prosecutor, like the character
in 'Crime and Punishment.'"
In developing the character of Gordon Gekko, I formed an amalgam of
disgraced arbitrageur Ivan Boesky, corporate raider Carl Icahn, and his
lesser-known art-collecting compatriot Asher Edelman. Add a dash of
Michael Ovitz and a heaping portion of, yes, my good friend and esteemed
colleague Stone and there you have the rough draft of 'Gekko the Great.'
Now that is certainly not the case with everyone, but if you want to
become a master of the universe, bodies and souls must be trampled upon.
As rival raider Larry Wildman tells Gekko after he has been duped by
him: "Not only would you sell your own mother to make a deal, you'd ship
her C.O.D."
Phoenix has become a 'corporate socialist
city
The economy teeters more every day. Yes, the system is responsible, as
are the lack of government regulations. But what about the culprits who
devised and sold all the dubious, newfangled collateralized debt to the
public? Is the devised and using of taxpayer money any different? The
difficulty in distinguishing the delusional and the venal from the
dishonest and fraudulent is why prosecutors would be hard-pressed to
indict half the investment bankers on Wall Street or pubic officials who
knowingly or should have known used a gimmick to sell taxpayers a bill
of goods?
Witness: The Phoenix ASU
buildings were only built because of the availability to tap into $220
million of Phoenix tax payer money to finance the ASU Downtown Phoenix
buildings.
And what would Gordon Gekko make of all this? He would be shocked.
"Utterly shocked." No, of course not. He'd remind everyone how he warned
us of this very lack of corporate and public accountability years ago;
how it came home to roost. And with the bailout pushed through, Gekko is
shaking his head in disgust: "We won the Cold War. And now we lost the
Cold War. America has become a 'corporate socialist nation.' " Phoenix
has become a 'corporate socialist city.'"
Have We Learned Nothing?
Post-Enron regulations were
supposed to hold companies and markets accountable. Author Bethany
McLean explains what went wrong — again.
Eight years after the Enron
debacle, Wall Street was supposed to have learned its lesson about
creative accounting, excessive risk-taking and corporate or public
greed. Government regulators and ratings agencies were supposed to be
chastened, too. Instead, the rules never really changed, and we are now
facing far deeper crises, according to financial author Bethany McLean.
What's worse, she says, is that regulators are now encouraging
accounting practices similar to those that contributed to Enron's fall.
McLean first reported on the shady dealings of the Texas-based energy
giant and later coauthored a best-selling exposé about the firm, "The
Smartest Guys in the Room."
Kathy Jones asked McLean to
weigh in on the fury and fog permeating the economic mess.
NEWSWEEK:
Congressional leaders say the bailout bill the Senate passed has more
transparency about how the industry will spend taxpayers' $700 billion.
But at the same time, it appears the government may be acting to reduce
transparency, by banning short-selling and relaxing some accounting
rules regarding how banks value their mortgage assets. It seems "
Alice in Wonderland
" -like.
Bethany McLean:
I think it's exactly "Alice in Wonderland." The notion that short
sellers are to blame: it's a total reversal of cause and effect. They
short a stock because they suspect the company is unsound — they do not
cause the company to be unsound. Show me the gun that short sellers held
to Wall Street executives that made them buy bad mortgages. And there's
probably an argument to be made the [Dow’s 777.68-point] decline
would have been less if short sellers had been in the market because
they step in and buy stocks when they cover their short positions.
Some members of
Congress say the debt we're buying is basically worthless. But banks say
it'll go up in value in the future. On Oct. 1, the SEC and Financial
Accounting Standards Board sided with the banks, saying they can value
this debt at what they think it'll be in the future —
so they don't have to "mark-to-market." Institutional investors
and auditors say this will "deprive investors of critical financial
information when it is needed most." What do you think?
I haven't been on the
inside of any of these transactions, obviously, but when they claim
"mark-to-market" is forcing you to value assets at unfairly low prices,
I haven't seen any anecdotal evidence that that's the case. If firms
like Lehman and AIG were being forced to mark these securities at
ridiculously low levels, potential buyers would have said, "Wow, there's
a bargain here" ... There are no buyers because firms aren't willing to
sell at a low-enough price.
Who do you trust
to value this stuff more: the banks who have been wrong all along or
potential buyers?
The problem is not too
much pessimism but too much optimism. I don't think this is deliberate
obfuscation, but because they are hard to value, there's an element of
wishful thinking. If you wanted to know what the price of IBM is, you
could look it up. There's no way to do that with these securities. They
trade privately ... there's no real sense of what these things are worth
because they are tied to home prices, and no one knows where home prices
are going.
So how can the
government make a wise decision about how much money it should spend on
these assets?
Good question. Bill Gross, chief investment officer of PIMCO, the world's largest bond fund, had
an argument for why taxpayers can make money on the bailout. He
knows far more than I do, but I have trouble understanding it. If the
government buys these securities at prices where they can make money,
chances are they are going to be buying at a lower price than Wall
Street has on their books. The firm that sells will face a giant capital
hole, and that continues the problem. The only way to really bail out
these firms is to buy them at a price equivalent or higher. So I don't
understand how the taxpayer is going to make any money.
A commenter on one
financial blog reacted to the accounting change this way: "I know I'm
going to be chomping at the bit to buy stock in companies whose balance
sheets are incomprehensible by design. Look how well it worked with
Enron!" Do you think investor confidence overall will be hurt by this?
If you're a
financial-services firm, one of the most important things you can do is
manage your risk. If you're not telling investors where you are marking
these mortgage-related assets, there are two possibilities. One is that
you are keeping two sets of books. I don't think any investor likes that
possibility. The other is you are not doing any internal analysis, and
that's not very good news for investors either. Everything that has
happened, from the banning of short sellers to altering mark-to-market
is a move away from the free market and transparency. Maybe some could
say that's a good thing, and all these things we cherished in the past
are not right. But suffice it to say, it's been in the span of three
months that people have dropped all these principles that they've held
dear. Either we weren't doing the right thing when we celebrated the
free market and transparency, or we're doing the wrong things now. You
can't have it both ways.
How much money was put up
front to initiate projects. If we had not done this then we would not be
facing a 100 million budget shortfall.
Does this feel
like Enron d é
j à vu ?
On the subject of
mark-to-market, Enron was castigated, and rightfully so, for using this
method of accounting to make up its numbers. But allowing financial
institutions to pretend that mortgage-backed securities haven't declined
in value isn't any better. In essence, you have the government saying,
"It's OK! Make up your numbers with our blessing!" And then it's funny
looking at the rating agencies: They had Enron rated investment-grade
until four days before its collapse, and Congress held hearings about
the problems with the ratings agencies. Here we are — however many years
later — and the rating agencies stamped their AAA ratings on these
financial instruments and then they blew up, and now Congress again held
hearings on the problems with the rating agencies. Does that qualify as
progress? It's déjà vu in a very scary way.
How do you compare
the scale of what's happening now to Enron?
A good ruler is Enron's
market capitalization at its peak — around $65 billion. If you compare
that to losses that will be taken on mortgage-related securities, some
say it might be in the trillions. It's just a totally different order of
magnitude. With Enron, the employees lost their jobs, and investors lost
money. A lot of people were relatively unscathed, but this is going to
hit everybody. There are going to be layoffs, and the economy is going
to shrink, I don't see how we avoid having higher taxes eventually. It's
everybody's problem.
Other hotels?
As
early as 2010, CityScape developers had planned to open Palomar,
a 250-room boutique hotel that would be run by Kimpton Hotels
and Restaurants. The hotel would be built on the same block as
the 27-story office building that is rising near Washington and
First streets.
The three-block development includes plans for a 150-room hotel
operated by Twelve Hotel and Residences, but a construction date
hasn't been set.
Other projects have been announced, but they probably are not
going to be built:
•
Copper Pointe 2 Development LLP has plans to put a 107-room
boutique hotel on a vacant city lot on the southeastern corner
of Central Avenue and Adams Street.
•
Hansji Urban, a firm affiliated with an Irvine, Calif., hotel
developer, bought the block that includes the 1920s-era Luhrs
Tower and the Luhrs Building last year. There are long-term
plans to build a hotel on the block, just south of the
landmarks.
•
There is renewed interest in adding a 700-room hotel near the
23-story Collier Center, according to Opus West Corp., the firm
that owns the site near Third and Jefferson streets.
When the Collier Center went up in the 1990s, the builder
included 500 spaces for future hotel parking and support pillars
for the high-rise, said Jeff Roberts, vice president of
real-estate development for Opus.
"If the Sheraton can have a good, successful year under its
belt, I think that would be a good time to get the next project
going," Roberts said.
Market troubles
Flagging tourism and a global recession will ice many of these
plans.
"We must be careful not to start multiple hotel-construction
projects," said Anthony Sanders, a finance and real-estate
professor at Arizona State University's W.P. Carey School of
Business.
The lending crisis already has claimed one high-profile victim.
The $100 million Hotel Monroe was supposed to open this week in
a refurbished vintage building.
The luxury boutique hotel was forced to shut down after its
construction funding became mired in lender Mortgages Ltd.'s
collapse. It could be at least a year before the project could
open, the developer has said.
Hotels Impacted by Rising Airfares
Weeks before the Wall Street crisis
consumers were already cutting back on
air travel, whether for business or
pleasure. Passenger volume is dwindling
even faster than airlines can sideline
planes and cut poorly performing routes.
At American Airlines, domestic
passengers flew 11.7 percent fewer miles
in September, while the airline cut 9.4
percent of domestic seats.
Airfare sticker shock is a growing refrain in corporate America,
forcing hotels and resorts to rewrite their marketing playbooks
amid already weak travel demand. They are courting more regional
business, zeroing in on loyal repeat customers and touting a
flurry of deals to offset higher travel costs.
The stakes are especially high in Greater Phoenix, where group
meetings and conventions account for at least 60 percent of
business in the upcoming peak season.
"That's all we hear about now is the cost of travel, the cost of
gas," said Rachel Sacco, chief executive officer of the
Scottsdale Convention and Visitors Bureau. "It's an important
consideration, much more so than it ever was before."
Airline-ticket prices have been on the march all year because of
high fuel prices, with business airfares rising 10 percent this
spring, to a seven-year high, according to American Express.
Early indications this fall are that prices have headed sharply
higher following dramatic flight cutbacks by airlines. Tickets
booked from Phoenix on online travel agency Orbitz.com cost 34
percent more than a year ago for October trips.
Underscoring the new normal: Tempe-based US Airways last week
was advertising a sale fare of $628 roundtrip to Boston, when
$300 and under used to be common.
"We are aggressively trying to raise our prices as much as we
can," US Airways CEO Doug Parker said this summer.
Domino effect
In
addition to losing potential clients, hoteliers and tourism
officials worry that higher ticket prices will cut into spending
on the meetings that are held here. Companies and groups may
have shorter meetings or bring fewer people. They might cut back
on meals and on extras from golf outings to jeep tours.
Airfare traditionally has been the third-highest expense of a
corporate meeting, behind hotels and meals, eating up about 16
percent of the budget, according to Meetings
and Conventions magazine. That figure will no doubt rise,
decreasing others' share of what, in this economy at least, is a
fixed-budget pie.
"The airfare eats up more, so the hotel spending needs to go
down," said Jan Freitag, vice president of hotel tracker Smith
Travel Research. "You may not stay at Four Seasons Troon North;
you may stay at Marriott. You may not stay at Marriott; you may
stay at Marriott Courtyard."
Fewer spouses
Big conventions, such as the American Legion and others that
will fill the newly expanded Phoenix Convention Center and
soon-to-open Sheraton Phoenix Downtown Hotel, are seen as less
susceptible because they are booked years in advance and tend to
go on no matter the economic climate.
"Your association meeting market is a slam dunk," said Bruce
Lange, general manager of the Westin Kierland Resort and Spa in
northeast Phoenix.
But that doesn't mean the double whammy of high airfares and the
weak economy won't affect attendance at the big-dollar
gatherings.
A
big concern: spouses and families might stay behind.
"Those costs are completely out of their own pocket," said
Steve Moore, chief executive officer of the Greater Phoenix
Convention and Visitors Bureau. "That's going to impact how many
people come in early and stay late for vacations."
Nearly one in five corporate and association meetings include
attendees' guests, according to Meetings and
Conventions magazine.
In
popular resort destinations such as Phoenix and Scottsdale, the
figures are even higher. Sacco of the Scottsdale Convention and
Visitors Bureau said pre- and post meeting vacations have become
"huge" in the past several years, a bonus to the core meetings
business.
If
the numbers drop, that will impact spas, retailers and other
attractions that compete for the guests' dollars while the
meetings are going on.
"The ripple effect is really big," Sacco said. "We will be
watching that."
Airline Woes Pinch Arizona Tourism
Fewer flights, higher
fares making Phoenix less inviting. Airline flight cuts and
higher airfares this fall will bring fewer visitors to Arizona,
delivering a punishing one-two punch to the state's limping
economy.
In
Phoenix, more than 1 of 10 flights are gone from a year ago.
Nearly 70 daily departures have disappeared from Sky Harbor
International Airport's schedule, the equivalent of losing
service from almost every major airline except US Airways and
Southwest.
Fewer seats for sale means airlines can charge more. Tickets for
Phoenix flights departing in October are up an average 28
percent from a year ago, according to Farecast.live.com. Flights
to Boston and Chicago are each up 50 percent.
In
a tourism hotbed where the majority of visitors arrive by plane,
fewer flights and higher fares mean fewer customers for hotels,
restaurants, spas and golf courses.
At
risk: A substantial slice of $19 billion in annual visitor
spending in Arizona.
This comes after months of reduced numbers in hotel occupancy
and airport traffic as people struggle with a plunging stock
market, the housing meltdown and other economic woes.
The fuel factor
Airlines are trying to find their footing against soaring fuel
prices. When oil was near its peak of $147 a barrel this summer,
US Airways said its fuel bill was running $2 billion a year
higher.
The flight cutbacks, which began after Labor Day, are designed
to cut airlines costs and force fares higher. The size of the
cuts vary by airline and airport, with a handful of carriers
slashing 10 percent or more of their U.S. seats this fall.
The cutbacks after the Sept. 11 terrorist attacks were deeper
but temporary. Most airlines' flight schedules returned to
normal within months.
US
Airways CEO Doug Parker said these flight reductions are
permanent as the industry adjusts to the likely reality of
permanently higher oil prices. Prices have retreated below $100
since summer, but the airline's fuel bill is still running $1.6
billion higher than a year ago.
The fallout for Phoenix, where US Airways is the busiest
carrier: 11 percent fewer seats overall, slightly above the
national average for airports.
The city is losing non-stop service to a handful of
destinations, including Birmingham, Ala.; Little Rock, Ark.;
Eugene, Ore.; and Cedar City, Utah.
The bulk of the cuts are in the frequency of flights between
cities. It will still be possible to fly to most places, but
with fewer choices and higher fares.
US
Airways dropped six daily flights to Las Vegas, four to San
Diego and three to Tucson. Southwest, whose cutbacks are about
half the norm in Phoenix, also trimmed flights to Vegas and
other cities in addition to dropping Birmingham and Little Rock.
Airport impact
Sky Harbor traffic, already down each month this year but one,
is projected to sink.
By
the end of 2009, airport officials see passenger totals down 10
to 15 percent from last year's peak of 21 million round-trip
passengers.
Ripple effects
The impact of fewer visitors, or visitors who stay for shorter
periods, can cascade across the economy. Grand Canyon
attractions, resorts and
Phoenix still has nearly 550 daily departures, frequent flights
to top destinations and healthy fare competition between US
Airways and Southwest that could help keep fare increases down.
Still, Phoenix is more vulnerable than many cities to
airline-service cutbacks because it's a tourist and convention
destination reached primarily by air. Unlike New York City,
Boston, Chicago and other big cities, most visitors do not drive
or take a train to Phoenix.
PKF Hospitality Research listed Phoenix, Miami, Orlando and
Denver among the cities that have seen the most significant
relationship between flight cuts and hotel demand.
It's not unlike after 9/11, when Arizona was one of just a dozen
states pegged as sustaining a negative blow because of its
above-average dependence on tourism.
That dependence has inched up since then, according to Moody's
Economy.com.
Tourism matters here, accounting for 4.23 percent of the state's
economic output, compared with 3.56 percent for the United
States. In Greater Phoenix, the total is even higher: 4.37
percent.
Construction, real estate and high tech may represent larger
pieces of the state economy, but drops in tourism will be felt.
That's why the unfolding airline changes are a big concern.
"I
think everybody's now just getting their arms around it," said
Robert Hayward of Phoenix hospitality consulting firm Warnick &
Co. "The industry as a whole is going to be watching that very
closely over the next several months as the cuts start to take
place."
Already this year, several negative trends have been detected:
• Hotel occupancy in Greater Phoenix is down 9 percent year to
date through July, the worst performance of a major market in
the country, according to Smith Travel Research. Demand is down
6.3 percent while room supply is up 3.2 percent.
• Taxable sales at hotels and motels in Arizona were down 3
percent from January to July, and car rental revenue is flat,
according to the Arizona Department of Revenue.
• Airport traffic has fallen every month this year but February,
the month in which Glendale hosted the NFL's Super Bowl. The
declines accelerated in June and July, with traffic down 6.2
percent and 6.4 percent, respectively, from the previous year.
Travel Slump Costing Sky Harbor Millions
Phoenix Sky Harbor International Airport is facing a steep
decline in passengers and revenue this year, a trend that could
mean cutbacks in everything from a new automated train to how
often terminal windows are cleaned.
Nearly 800,000 fewer passengers used the airport through July of
this year compared with the first seven months of last year,
according to figures the airport released Friday.
Phoenix operates Sky Harbor, the nation's eighth-busiest
airport, but the airport uses its own revenue to survive.
Passengers are a key part of that cash flow. The airport takes a
small slice of airline-ticket sales and makes money from parking
fees and airport shops.
The decline in passengers could mean higher parking prices, cuts
in staffing and possibly tabling the 12-year, $1.1 billion
automated-train project that would carry fliers among terminals
and to the Valley's new light-rail line.
It's the first time since the post-9/11 slump that Sky Harbor
has lost a large wave of passengers. Airports around the country
are facing similar declines as airfares rise and consumers
tighten their travel budgets in a declining economy.
Gas prices and airline fees have curbed Kennetta Cockhearn's
wanderlust.
The 39-year-old Phoenix resident used to think of herself as a
frequent flier. These days, she and her family of eight are
frequent drivers, she says.
"We used to fly out every month or so for family or church
events," Cockhearn said. Not anymore, she added. "Paying for all
those tickets and all those additional bags? Uh-uh."
Deeper cuts
With fewer fliers, the airport expects to lose $26 million in
revenue this year, airport officials say. The airport has
already trimmed $8 million from its $214 million operating
budget and plans to delay spending $200 million to $300 million
in building projects over the next five years, airport officials
say. That includes a $15 million taxiway repaving project and
terminal upgrades.
More than 120 positions have gone unfilled since last year,
airport Director Danny Murphy said.
Murphy predicted that the travel slump would bottom out in 2009,
but it could be 2013 or later before Sky Harbor sees the 42
million-passenger mark it hit in 2007. Airport officials expect
2009 to post a 10 to 15 percent drop in passengers. Some city
leaders say that Phoenix should start bracing for even darker
times.
This week, two City Council members said that the city should
consider delaying all or part of the automated-train
construction project, which began this spring and is not part of
the current cost-cutting plan.
Phoenix should also start planning what to do if the city loses
an airline, said Thelda Williams, one of the council members who
want to re-examine the automated train.
"Sky Harbor is not just important for the city but for the
entire state," said Williams, a former aviation-board member. "I
want to know what the worst scenario is."
The numbers at Sky Harbor are dramatic.
In
July, the latest figures available, Sky Harbor had 3,486,964
passengers, 6.4 percent or 238,836 fewer passengers than it had
during this same month last year. With the exception of
February, the airport has seen a dip in passengers every month
this year over last year.
Consumers are not only choosing to fly less, but airlines
nationwide are cutting flights to deal with the soaring cost of
fuel.
Tempe-based US Airways has announced plans to cut 10 percent of
its Phoenix flights, and Sky Harbor officials estimate that the
airport may lose up to three dozen flights by the end of the
year.
In
most cases, the changes will mean that fewer flights are going
to some destinations. But in a few cases, some smaller markets
have lost service to Sky Harbor, said Paul Blue an assistant
aviation director.
Phoenix Looks to Trim
General Fund
Two months
after its largest cuts in history went into effect, Phoenix is preparing for
a new round of cuts that could threaten library hours, bus routes and other
city services.
City Manager
Frank Fairbanks has asked each department to suggest cuts totaling 30
percent of the $1.2 billion general fund.
Fairbanks
won't know for several months how much they need to trim and hopes the
number is much lower than 30 percent. What is certain is that Phoenix is
poised to make its sixth round of cutbacks in eight years, which have
already reduced the general fund by about 15 percent.
The general
fund pays for most city services, including police, fire protection,
libraries and parks.
In the past
year, Phoenix has reduced maintenance at city parks, eliminated city funding
for festivals and parades and instituted fees to use community centers.
A continued
decline in sales-tax revenues, which make up the largest single source of
Phoenix's revenues, has led city officials to begin their budget process
more than six months earlier than usual. Combined state and city sales-tax
collections were down 7.7 percent in July, or $3.9 million.
"Although it's
too early to make predictions, the budget this year could be worse than the
budget last year," Fairbanks said. "The early numbers are very dire indeed."
"I expect it
to be even tougher" than last year, Councilwoman Peggy Neely said. "We are
looking at a very tough year, maybe two."
Phoenix's
decade of budget cuts began after 9/11, when the collapse of the tourism
industry forced the city to trim about $23 million from the general fund.
Aside from one flat year, in 2002-03, the city has reduced services every
year since.
Phoenix has
cut $206 million from the general fund since its peak, including an $89
million cut earlier this year. More than 1,000 positions have been
eliminated in the past five years.
As they worked
on this year's budget, city officials worked to preserve library hours and
keep community pools open. They used $2 million in block-watch funds to pay
for park rangers and neighborhood specialists, whose duties include graffiti
cleanup.
Those funds
will be gone next year, and the pressure on departments to cut up to 30
percent of their budgets will almost certainly mean that those programs and
positions go back on the chopping block. Fairbanks said the city will also
look at reducing bus service.
Any new cuts
wouldn't go into effect until March 2. First, city officials have to decide
what to cut.
The
departments must submit their proposed cuts by Oct. 7. The proposals will be
unveiled Jan. 6, followed by two weeks of community meetings on the
proposals.
A sk for all funds to be identified
that are obligations of the City of Phoenix.
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