Budget cuts ripple beyond defense to travel, tech

By Karen Jacobs

(Reuters) - The rustic, 316-room Cheyenne Mountain Resort hotel in Colorado Springs is usually booked solid this time of year, just days before a major national space conference rolls into town.

But business is off by about a third this season as NASA has withdrawn from the conference, one of many government agencies cutting spending to meet $85 billion in budget cuts that must be made by September 30 known as "sequestration."

"We're still taking reservations," said the Cheyenne Mountain Resort's general manager, Todd Felsen, who has 100 vacant rooms. "Last year at this time, we were over booked."

As the U.S. travel industry nears its summer upswing, airlines and hotels are joining other companies in warning about lost revenue due to federal budget cuts that started in March -- and fear they'll lose much more.

This week, Delta Air Lines and US Airways Group said reduced last-minute bookings by government workers cut their unit revenue in March, sparking a selloff in airline stocks.

Shares of F5 Networks Inc plunged 18 percent on Friday, after the network equipment maker partly blamed lower government sales for its profit warning - news that also pressured shares of rivals Juniper Networks Inc and Cisco Systems Inc.

Last month, Britain's Smiths Group Plc, an engineering concern whose products range from explosive detectors to surgical needles, warned of lower revenue due to U.S. government spending cuts.

"The outlook for summer earnings is dropping daily," as sequester cuts get factored into the economy, said Jim Brown, editor at options analytics firm optioninvestor.com. With Europe and China in decline, he sees a risk that the United States could slip back recession.

COST-CUTTING GROWS

The travel industry offers a window into the domino effect of government cutbacks. Federal, state and local governments spent about $30 billion a year on travel in 2011, according to the U.S. Travel Association, and the effect of reduced travel on the movement of goods and people, business meetings, leisure industries and tax revenue is significant. The Federal Aviation Administration estimates that commercial aviation helps generate $1.3 trillion in annual economic activity in the United States.

U.S. budget officials could not say how much federal travel was being cut in the current fiscal year, but historical tallies provide a clue. In fiscal 2012, federal agencies cut travel spending by about $2 billion from fiscal 2010, a budget official told lawmakers in late February.

Recent anecdotal evidence suggests government agencies are scaling back travel even more this year. The National Aeronautics and Space Administration announced last month that it would not attend the National Space Symposium, the annual space conference set for April 8-11 in Colorado Springs. NASA Administrator Charles Bolden, who typically addresses the conference, also will not be attending.

Travel cost-cutting will help save NASA an estimated $10 million in the current fiscal year, the agency said, noting it already trimmed conference and travel spending aggressively in the past. "With sequestration in place, we are further curtailing these types of non-mission critical activities," NASA spokesman Allard Beutel said in an email.

Those cuts ripple through the broader economy. The nonprofit foundation that hosts the space conference estimated government attendance this year was down by about 200 people. The meeting brings millions of dollars to the Colorado Springs economy, and allows the community to showcase its picturesque mountain views.

"This is our Super Bowl," said Felsen, of the Cheyenne Mountain Resort.

AIR TRAVEL CONCERNS

The effects of sequestration come as hotels and airlines are recovering from the 2008-09 downturn. Many U.S. airlines marked their third straight year of profitability in 2012 despite high oil prices. U.S. hotels have posted three years of gains in occupancy and average daily rates after declines in both measures in 2009, according to data from Smith Travel Research.

As the budget tightening continues, the travel industry is growing increasingly concerned that plans to furlough air traffic controllers and trim spending on customs and border patrol will cause long delays at major airports that could keep business and leisure flyers away, and slow cargo shipments.

While those factors have not affected travel so far, some travel agents says customers are voicing fears about flight delays and long security lines at airports this summer.

Julia Jacobo, an executive assistant with Cook Travel in New York, said some customers are hesitant to book international flights, which are most profitable for carriers.

"For now, people are still flying," Jacobo said. "But due to our clients' concerns and hesitation, we are worried about what this will mean for bookings in the future."

Airport officials say it's still unclear what will happen when controller furloughs begin April 21. They warn disruptions are possible, and say travelers should arrive early for flights and be prepared for delays.

At Hartsfield-Jackson Atlanta International Airport, controller furloughs could close one of five runways, which could lead to flight delays or cancellations.

"We're planning for the worst case scenario," said Louis Miller, the airport's general manager. "We're hoping that Congress and the Administration can get something worked out" before the furloughs start.

DC AREA HOTELS TAKE HIT

For hotels, government belt-tightening poses challenges mainly for the Washington, D.C., area, which is seeing soft bookings.

"At least 30 percent of (that market's) business is government related, if not more," said Patrick Scholes, a New York-based hotel analyst with SunTrust Robinson Humphrey.

Outside of Washington, effects of sequestration don't appear to be showing up in a major way, he said.

But hotels had been feeling reduced government spending even before sequestration took effect. Budget uncertainties led to cancellations of several air shows, including Virginia's Langley air show and the 2013 Wings Over Wayne Open House and Air Show at Seymour Johnson Air Force Base near Goldsboro, North Carolina, both of which had been scheduled for May.

Mark Carrier, president of B.F. Saul Company Hospitality Group, a Bethesda, Maryland-based operator of 20 hotels, said there has been a noticeable drop in business since January tied to sequestration. Sixteen of his company's hotels are in the Washington area.

"It's everything from the agencies saying 'we're not going to have meetings or do the training that we planned' to situations where the normal demand just isn't showing up," Carrier said. "It's really a significant thing here regionally."

As government business decreased, spending by defense contractors such as Boeing Co and Northrop Grumman Corp have also dropped off, Carrier said. At B.F. Saul hotels in the Washington region, 20 to 25 percent of business is directly dependent on the federal government, while another 20 to 25 percent is related to contractors, he added.

As a result, B.F. Saul expects a significant drop in hotel revenues this year from 2012, Carrier said. That follows flat revenue the past two years, he said.

"We just have no way to offset the demand change in government and the contractors," Carrier said.

Scholes said the D.C.-area hotel weakness is likely to have a minimal effect on globally diverse hoteliers such as Marriott International and Starwood Hotels and Resorts Worldwide, which are benefiting from strength in other U.S. markets such as San Francisco and Texas.

But, he said, sequestration "definitely makes it a challenging business environment for those companies that have a lot of DC exposure."

(Reporting by Karen Jacobs in Atlanta.; Additional reporting by Susan Heavey and Valerie Volcovici in Washington and Doris Frankel in New York.; Editing by Alwyn Scott, Tiffany Wu and Leslie Gevirtz)

Source: http://news.yahoo.com/budget-cuts-ripple-beyond-defense-travel-tech-sectors-172652375--finance.html

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