ArnieWeissmannThe good news at a recent meeting of the Association of Travel Marketing Executives sounded almost eccentric: Domestic visitors are down 5% to 6%, but Brazilians are flocking to Orlando. The booking curve for cruises is painfully short, but people are "anxious to get their deposits in" for the Oasis of the Seas, which won't be launched until late 2010. And though a slump has forced Hertz to lay off 4,000 staff, customers will still pay a premium for "green" cars.

But for every silver lining mentioned -- and there were others -- thunderheads rumbled, threatening to blot out the sun.

Among the rumblings were forecasts of industrywide consolidation. But as I listened to a panel of leading marketers, it occurred to me that with credit so tight, that might not occur.

Money might not be available to pick up weak competitors. And even if a stronger company could find capital, would anyone have the appetite for taking on more supply, given the current overcapacity in almost every segment? In this recession, might we see substantial companies simply die rather than being absorbed by competitors?

And where might funding for innovation come from?

Among those in attendance was Mims Wright of Chimney Rock Capital Partners, an investment firm focused on middle-market travel industry transactions. When I posed those questions to him, Wright made it clear that the source of past financing might determine a company's potential for survival.

"Venture capital firms don't have the capital they did before," he said, "and companies in their portfolios are competing with one another for very limited funds. The VCs are doing triage: Let this one go; give this one money. The likelihood of some of these companies going away is high."

There are exceptions, he noted, and a venture-funded enterprise such as the vacation-rental listing company HomeAway, whose strategy from the start was to consolidate its space, will likely still be buying competitors.

After analyzing funding sources for a client, Wright concluded that while public and venture markets are lousy, private equity still has capital available.

"Those funded by private equity are in a little better shape but will also be subject to much lower valuations and much higher requirements for further investment," he said. "A private equity firm will support companies in its portfolio that have a history of positive EBITDA and profits and that have good, solid management. And they will not sell a good company when valuations are low. They will exit when the market is right."

Private equity, he noted, is a major source of funding in travel. "But these firms ... are making smaller investments and will have higher expectations. They may add a company that has strategic importance if it's a bargain, but most will limit investments to companies already in their portfolio."

When looking at the industry in general, Wright sees problems with certain sectors and opportunities for others.

"Tour operators are especially struggling," he said, and most of the industry's consolidation may occur in that sector. "The ones that have been run as a lifestyle business for their owners are the ones being caught and squeezed."

Wright said that high-value hospitality properties with good distribution, "something like Aqua," are "hot." Online travel-related media will continue to do well, as will travel aggregators and agents who offer value and control their supply chain.

What's not hot, he said, are three-star and high-cost luxury properties. Likewise, "Me-too travel websites are in trouble," he said. "You're either TripAdvisor or you're not."

I have been comforting myself with the thought that bad times spur innovation, but Wright was ready to disabuse me of that idea.

"This is not a time to be investing in neat ideas," he said. "Innovation needs oxygen and blood. It needs funding, it needs nurturing and patience, and there's no nurturing and no patience right now. "

It's important to note that Wright was talking about innovation in large-scale businesses. As someone who started a small business during a recession, I'd add that certain recessionary attributes can be helpful. Higher unemployment offers an increased talent pool willing to work for wages they might not consider in good times. Rents are lower, and it's possible to outfit offices with distressed merchandise at a fraction of retail costs. Suppliers are more flexible in negotiations. All of this reduces start-up costs.

As Wright points out, all new ideas need patience, and revenue does not flow easily in tough times. But when we look back at this period five years from now, we might find it was the smallest enterprises in 2009 that set the pace for innovation and growth.

Email Arnie Weissmann at [email protected].


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