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New baseline lodging scenario for the effect of hurricane Katrina and higher gasoline prices
During early Monday morning on August 29, 2005 the worst natural disaster to ever hit the continental U.S. devastated the Gulf Coast area flooding and causing other major damage to metropolitan areas in coastal areas of Louisiana, Alabama, Mississippi and other U.S. Gulf Coast areas.

We received numerous requests from our research subscribers and clients for our econometrically based forecasts and overall guidance. The value of forecasting, even under conditions of uncertainty and profound loss, is to provide a baseline estimate under stated assumptions so users can understand the distinct implications of the ongoing events.

Limitations and Assumptions

The following scenario is based on limited information and specific assumptions. We have analyzed the immediate effects on the existing hotel supply in the affected area, as provided to us by selected local Convention and Visitors Bureaus. In addition, we examined evidence from the loss of room inventory from the hurricanes in Florida in 2004 as well as the timing of its return to operational status. We anticipate that preliminary data from Smith Travel Research (STR) over the first few weeks will be affected by reporting conditions from the participating properties. With respect to the macroeconomic assumptions, the scenario assumes macroeconomic data from the August 2005 outlook of the Macroeconomic Advisers that does not include any effects from the hurricane disaster.

While data are limited, we believe that a scenario provides a useful base for analyzing the short-term effects of the hurricane Katrina on U.S. lodging trends. We anticipate that a revised scenario will be released with our regular September issue of PricewaterhouseCoopers Hospitality Directions in late September. Further scenarios will be issued as appropriate following revised macroeconomic assumptions to reflect recent oil price increases.

Scenario

Just prior to hurricane Katrina our team of economists and lodging specialists had completed the September 2005 lodging forecast anticipating a continuation of the current robust growth trends through the end of 2005 and into 2006-2007. In particular, our original forecast called for RevPAR growth of 7.8 percent in 2005, a combination of ADR growth of 5.0 percent and occupancy of 63.0 percent.

Following the devastation inflicted on the Gulf Coast region and based on preliminary reports from the New Orleans Convention and Visitors Bureau as well as from other sources, we have effectively removed from the 2005Q4 inventory between 30,000 to 40,000 rooms, under various assumptions. Please note that hotels in the area that remain operational are not allowed to accept reservations until further notice following mandatory evacuation orders from the local authorities. Many conventions and tours will be cancelled or postponed.

To reflect the loss of leisure and business demand, including group and contract business, our scenario reflects reduced demand for 2005Q4 between 15,000 to 20,000 occupied rooms, under various scenarios. The loss of overall demand will be in part compensated by occupied rooms from federal & state government workers, insurance representatives, engineers, architects, contractors, and others involved in the relief, recovery, and reconstruction activities. In addition, under this scenario room rates have been revised down to reflect anticipated discounting to stimulate travel and lodging demand as well as lower rates for per diem government employees.

Overall, demand growth is expected at 3.1 percent in 2005 compared to 3.5 in the original forecast, while occupancy is expected at 62.8 percent down from 63.0 percent.

The Effect of Gasoline Prices

According to the Department of Energy from August 1 through August 29 nominal gasoline prices have increased by 13.9 percent. With the disruption 1of oil supplies following the Gulf area hurricane, oil prices are expected to continue rising, even though the Administration`s release of strategic oil reserves will help alleviate price increases in the short run. Oil prices remain a fundamental demand and supply issue with significant implications for the strength of the U.S. economy.

According to PwC`s analysis a 10 percent increase in real gasoline prices leads to a 0.7 percent decline in U.S. room demand. For the fourth quarter of 2005, PwC`s analysis indicates that room demand will grow by 2.7 percent compared to 3.4 percent that would have been achieved without the unanticipated gasoline price increases. Occupancy in the fourth quarter is expected at 57.5 percent compared to 58.1 percent without the unanticipated gasoline price increases and Katrina. Rania Deimezi - Tuesday, September 13, 2005