Scientific Evidence Points to Positive Impacts of the Federal Travel Promotion Act

When the Travel Promotion Act of 2010 was signed into law by President Barack Obama it was widely regarded as controversial. Two MSU researchers and a Cornell University researcher, coming from different directions regarding the potential impacts of the legislation, worked together to create and implement a scientifically measurable evaluation that addresses the 2010 Act and its impact on the hospitality industry and international tourism in the United States.

Mark Johnson's research focuses on the impact of government regulations on the market value of firms. He teaches about mergers and acquisitions, corporate finance, derivative asset pricing, and the market for corporate control.

His MSU colleague, A.J. Singh, is a leader in developing solutions for issues and problems related to international lodging operations and the U.S. lodging industry.

Cornell University assistant professor Qingzhong Ma participated in the study and provided expertise in mergers and acquisitions, divestitures, corporate governance, and their applications in the hospitality industries.

Evaluating the Impact of the Travel Promotion Act of 2010

Early studies indicated that the Act would boost economic growth in the U.S. In 2009, a study by the Congressional Budget Office forecast that the Travel Promotion Act would increase tourism, and the estimated additional travel fees and tax revenues associated with that additional tourism spending would reduce the federal deficit by $425 million over ten years.^[1]

Another 2009 study by Oxford Economics estimated that a successful national promotion would yield $4 billion in new spending annually, create 40,000 new jobs, and generate $321 million in new tax revenue each year.^[2]

During 2010, Dr. Johnson began a series of discussions with Dr. Singh about the types of research they might collaborate on to evaluate the effectiveness of specific pieces of the Travel Promotion Act. They determined that it would be possible to design a scientific, measurable survey of publicly held firms in the lodging industry to study the impacts of the new legislation.

In the study, Johnson and Singh developed four hypotheses about the economic impact of the Travel Promotion Act on hotel firms, and conducted two related analyses. The first was a survey of financial analysts who conduct lodging equity research, asking for their assessment of the importance of government regulation and the Travel Promotion Act. These financial analysts are specialists in the field of the hotel lodging and gaming industry. The second portion of the study examined whether analyst expectations unfolded as anticipated related to events and stock market reactions associated with the enactment of the Travel Promotion Act.

One of the challenges the researchers encountered was how to define the hotel industry. Among the considerations was whether to include firms that owned, or managed, or both owned and managed, hotel assets. They focused on publicly traded firms that owned and/or managed U.S. hotels, a market share that impacts 38 percent of the hotel rooms in the United States. Privately held hotels or hotel firms based outside the U.S. are excluded from the data.

The two-pronged approach provided evidence and critical insight into the merits of the Travel Promotion Act of 2010, taking into consideration investors' expectations as well as indications of the types of firms expected to benefit the most from the legislation. Industry leaders and analysts anticipated benefits for the industry from the Travel Promotion Act, but they were uncertain about the scope of those benefits.

They discovered that, whether assets were owned or managed, there was a positive effect. Owners experienced a more positive impact, because as contracts were renegotiated there was greater cash flow and the owners could capture more assets.

Revenue per room was also investigated, and the research showed that the higher the hotel quality, the greater the positive impact. According to Johnson, the findings indicate that international travelers are potentially wealthier with more disposable income to allot for travel, and they may be more willing to splurge on travel at higher-end hotels because they consider U.S. travel experiences as "once-in-a-lifetime" events.

The research did not find a correlation in increased revenues for major chains with assets both overseas and in the United States."It doesn't seem to induce customer or brand loyalty for major chains (Marriott, Hilton, etc.) in countries such as Malaysia transferring to Las Vegas or New York accommodations within the same brand-owned hotel properties," said Johnson.

Results of the Study

Johnson, Singh, and Ma estimated that the signing of the Travel Promotion Act improved the hotel industry's equity value by two percent, representing an approximately $1 billion increase in the value of publicly traded hotel firms. Higher-end chain hotels and real estate investment trusts benefitted the most, and the study suggests that because of the promising beginning, it would make sense for hotel firms to increase their investment in Brand USA to utilize the full opportunities of the Travel Promotion Act.

In October, Johnson and Singh, along with industry leaders, presented the research at a Green & White Forum in Washington. Jim Kauffman, president of Full Service Hotels at Marriott International, and an MSU School of Hospitality Business Board member, participated in the forum.

The study is featured in an article, The Impact of Authorization of the Travel Promotion Act on Hotel Firm Stock Returns, for Cornell Hospitality Quarterly in November.^[3]

Federal Legislation to Extend the Act

The Travel Promotion Act of 2010 will end on September 30, 2015. The Travel Promotion, Enhancement, and Modernization Act of 2014 extends the provisions of the original bill through 2020, adds new performance and procurement requirements for the Corporation, and extends the authority of U.S. Customs and Border Protection to collect travel promotion fees. The legislation cleared the U.S. House of Representatives on July 22, 2014 and was reported to the Senate Committee on Commerce, Science, and Transportation where it is awaiting further action.

Johnson and Singh have taken next steps to continue research on the impacts of the Travel Promotion Act.

"We want to talk with industry experts, such as CEOs and CFOs about what this means and how it will impact long-term decision making. Further analysis of the Travel Promotion Act should provide indicators about whether this is a short-term or long-term benefit to the industry," said Johnson. "The most valuable contributions we can make involve cross-disciplinary and interdisciplinary collaborations."

Sources

1. Congressional Budget Office. (2009, May 20). Cost estimate S. 1023 Travel Promotion Act 2009 as ordered by the Senate Committee on Commerce, Science and Transportation (pp. 4-6). Back to the article
2. Freeman, G. (2012). Where the Jobs Are: Promoting Tourism to America. Testimony to U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Commerce, Manufacturing, and Trade, https://www.ustravel.org/sites/default/files/Freeman_Testimony_HouseECSubcommittee_Final_5.14.12.pdf Back to the article
3. Johnson, M., Singh, A. J., & Ma, Q. (2014, November 17). The impact of authorization of the Travel Promotion Act on hotel firm stock returns. Cornell Hospitality Quarterly (Online First Edition). Retrieved from http://cqx.sagepub.com/content/early/2014/11/17/1938965514556840 Back to the article