Tourist no-shows, half-empty hotels: the capital fears terrorists will cost it £4bn

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London's hotels could be left half empty this summer, contributing to a £4bn slump in revenues, as tourists steer clear of the city in the wake of July's attacks.

Tourism is worth a total of £12bn a year in the UK but around a third of that would be lost should potential visitors stay away from the capital. Experts have warned that hotel occupancy rates, which before last Thursday were holding at around 75 per cent, could slump to below 50 per cent over the coming weeks if visitors are deterred. Each year, around 30 million people come to London, spending some £9bn in total.

Alex Kyriakidis, global head of tourism, hospitality and leisure at accountants Deloitte, said the terrorist situation meant the industry was entering "uncharted waters", making it difficult to predict the affects. But occupancy could fall to 50 per cent - and, in the worse case, even further, he said.

"With the second attack in London, both business and leisure tourist confidence will weaken, and it is confidence that determines choice of destination. A period of stability is now critical to stave off a crisis," added Mr Kyriakidis.

A fall in tourist numbers would also hit retailers, as around 17 per cent of visitors to London come primarily to shop. After the first attacks, shoppers proved more resilient than expected. However, footfall dropped away after Thursday's bombs, with SPSL - a company which specialises in measuring retail traffic - reporting a 26.9 per cent slump on the day.

"The most fundamental question we must now ask is whether shoppers will no longer consider the 7 July attacks as a one-off event but as part of an ongoing threat," said Tim Denison, SPSL's director of knowledge management. "If they do, then it is likely that the consumer recovery will be much slower as a result."

The attacks come at a critical time for the leisure industries. After December, July is the most important month in the retail calendar, while hotels rely more heavily on tourists as corporate visits tail off. In addition, the sector has already been having a tough time in 2005 as consumers rein in spending.

Said one City analyst, who tracks tourism stocks but asked not to be named: "[Last Thursday] is going to make for a more prolonged slowdown. It will only be a matter of months, but still, that's months rather than weeks.

"Certainly with the people I speak to, who don't live in London, there's a reluctance. If someone is going to have a short break, and is trying to decide whether to go to London or another city, it will swing the balance. You shouldn't forget domestic tourism either: people going to London for anniversary weekends, theatre breaks - they will switch."

The Centre for Economics and Business Research, an independent think-tank, predicted a 0.3 per cent loss to UK GDP after the first attack, and warned that the second compounded matters. "Clearly, the terrorists' game here is to make London look like an uncomfortable city. And given its dependence on immigrant workers and foreign companies, that's a worry," said a spokesman.

The City will get its first update on how the sector is coping when hotel group Millennium & Copthorne presents its interim results on 4 August. It has various London hotels and analysts will be watching for any signs of tough trading.

"Until a month ago, the London market was doing well and analysts were slapping 'buy' recommendations on hotels with big exposure," said the analyst. "But the chance that earnings will be upgraded has evaporated."

However, not all tourist players will be hit to the same degree. "I doubt tour operators will suffer," added the analyst. "The Tube is a soft target but airports are much harder. If anything, it might push people who want to get away from it all overseas."

A British Airways spokesman said it was too early to say what the impact would be. "On 7 July we did see a dip in bookings, but the levels got back to normal after a few days. On Thursday, we did not see any increase of no-shows at Heathrow."