Looking at Some Hard Truths – and Silver Linings – in Today’s Tenuous Economic Climate

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March 27, 2009 by   - () Leave a Comment

Each day, the economic news becomes more and more alarming. Today it’s the largest quarterly loss in the history of a US company – a $62 billion 4Q setback for AIG. Then former industry leader Monaco Coach Corp. is notifying its remaining workers in Oregon and Indiana of their terminations while the stock market closes not just below 7000, but well below that benchmark, at a number not seen since 1997.

And yet the summer season campgrounds are actually bursting with enthusiasm and high expectations for the coming season. And RV show promoters continue to talk about large show turnouts, busy exhibits and, sporadically, strong dealers’ sales.

Meanwhile, the travel industry slump grows as the government repeatedly pressures companies receiving federal support or other companies spending large amounts on what formerly was considered valuable travel to meetings and conferences, leading to drastic losses for airlines and hotels. Yet, as the winter season in the southern tier of the country winds down, many parks have experienced strong rental seasons with RVers enjoying warm winters as opposed to the frigid cold and high costs of heating at home.

Is There a Viable Future for

Class A Motorhome Resorts?

One of the hottest segments of the park industry in recent years has been the dramatic increase in the development of new, high end Class A motorhome-only RV resorts. From Michigan to the Florida Keys, from Idaho to Arizona, developers have responded to the surge in sales in large motorhomes in the first years of this decade with new, elaborate and expensive motorcoach resorts.

And now, with sales of Class A motorhomes dropping like a rock throughout 2008 and into this year — wholesale shipments of Class A motorhomes declined 54% in 2008 — and with real estate prices declining across the nation, wherein lies the future of the Class A motorcoach resort? Richard Curtin of the University of Michigan, the RVIA’s chief forecaster, predicts the industry will ship just 7,400 Class A motorhomes in 2009, down from about 40,000 units as recently as 2006. And the high end RVs on the used market are commanding deep discounts. Is there a market for RV sites in the $200,000-plus range when the high end RV market is in such bad shape? Do you buy a $200,000 site for a $75,000 RV?

With companies like National RV and Western RV already gone — and others like Monaco and Country Coach on the brink — it looks as if Thor Industries Inc. and Forest River Inc. may stand the best chance to emerge as big winners. But with the current mess that the RV manufacturing industry finds itself in today, it’s hard to say who ultimately will emerge and how it will all affect the accommodations sector that services the owners of these companies’ products.

The Ongoing Shift To Seasonal

Units for the Sedentary Crowd

In the last weeks of January and the early weeks of February, reported on the following new RV innovations: “Keystone Unveils Residence Destination Trailer,” “Heartland Debuts Extended-Stay Cedar Ridge,” ”Forest River Rolls Out Wildwood Lodge Trailer.” ”Jayco Bungalow Targets 'Destination Campers.” Then, of course, destination-style trailers were featured on the front page of last month’s issue of Woodall’s Campground Management, the sister publication of RV Business. So, now the battle between park models, cabin manufacturers and destination-style travel trailers begins as the RV industry apparently is now jumping on the destination or seasonal camping business model. Travel trailers that behave like park models, park models that behave like mobile homes, cabins that are essentially motel rooms and suites — what’s next?

No doubt, seasonal and destination camping opens up a huge new market, especially when the units go into the rental arena. No longer do you need to own an RV to visit an RV park.

Who shall emerge a winner in this competition for the minds, hearts and dollars of consumers? Clearly, at least in my mind, the winners will be the resort and park operators who offer a first class, affordable, quality outdoor experience, regardless of the exact nature of the accommodations in which their guests spend the night.

Dynamic RV Industry Again

Adapting to Changing Times

In addition to the move to destination travel trailers, many manufacturers are also introducing an array of other new products that they hope will find consumer acceptance in these evolving times. Another look at RV Business news pages tells the story:

  • Ten-month-old Fiber-Lite Corp., Elkhart, Ind., aims to reach consumers looking for higher fuel mileage with the entry-level, 20-foot Crystal Creek travel trailer weighing in at under 3,300 pounds.
  • Active Sport Vehicles Inc. (ASV), a new northern Indiana towable manufacturer, has introduced two travel trailers for 2009 – the ASV Aereon and ASV Sport SURV. The fiberglass-and-aluminum Aereon, with an egg-shaped molded fiberglass front end, is available in three 21- and 24-foot floorplans without slideouts. "It's got a very aerodynamic front end, and is easy for small vehicles to tow,” said Al DeKock, president of the Bristol, Ind., RV builder.
  • Coachmen's Swift Targets Lightweight Market
  • Composites Lighten Airstream's Scout Trailer
  • Fleetwood Shows Concept Hybrid in LouisvilleIt is certainly encouraging from my perspective to see resilient manufacturers responding aggressively to this tough new environment.

    Understanding the Frustrating

    And Ongoing Bailout of AIG

    Ever wonder why AIG is so critical to the nation’s economy and why they are losing such incredible amounts of money. It seems that AIG is the world’s largest insurer of commercial real estate, the largest insurer of banks and bank business and the largest insurer of big business, insuring risks from bank loans to ships to railroads to office buildings, shopping centers, single family homes, apartments and condo developments, manufacturing plants and more.

    AIG, like all insurance companies, invests the premiums it receives in everything from government bonds and Treasury bills, stocks, corporate bonds, real estate, mortgages, and so forth. These investments and the income they generate are the company’s reserves that are used to pay claims. As many of the businesses insured by AIG experience difficulties and sometimes fail, and as banks incur huge real estate and mortgage related losses, AIG is the insurer that has to pay the claims filed by these failing companies. Whether they should or should not have insured these risks is open to question, but if AIG fails to pay claims, consider the impact of the failed businesses and losses it will leave uncovered and exposed?

    To pay the claims, AIG goes to its reserves. Since the value of the investments AIG has made with its reserve funds falls – stock prices decline, real estate values plunge, interest rates drop drastically – the company does not have the resources to pay the claims to its customers.

    To bring it close to home, an AIG company insures a campground clubhouse that is destroyed in a tornado. Typically, the insurer pays the claim and the campground rebuilds. If the insurance company can’t pay the claim, there’s no rebuilding and no campground business. That about says it. Or look at it this way: the bank that finances your campground purchase buys AIG insurance to protect its investment in your campground or you are required to purchase mortgage insurance to protect the bank in the event the business fails to repay the mortgage.

    The bank (and you) expect that if your business fails, AIG will cover your loss and pay the bank. Well, your business doesn’t fail, but hundreds of others do. And on top of that, as real estate values plummet, bank mortgages are not being repaid as owners walk away from their loans. The banks file claims with their insurer to cover their losses and so it goes.

    When you consider the risks AIG covers, it becomes easier to understand these bailout efforts. In fact, federal bailout money is essential to allow AIG to pay its claims to folks like you and I.

    As Everyone Had Expected:

    Here Comes Higher Taxes

    The president has proposed reinstating in 2011 the two top rates for individuals when the 2001 tax rate cuts expire. In 2009, married taxpayers with income over $208,850 but not over $372,950 will pay $46,741.50 plus 33% of the excess over $208,850; and married taxpayers with income over $372,950 will pay $100,894.50 plus 35% of the excess over $372,950.

    In his Fiscal Year 2010 proposed budget, the President has recommended to Congress that they reinstate the 36% and 39.6% rates for those taxpayers earning over 250,000 (married) and $200,000 (single).

    How does this impact the park industry? Since a majority of park businesses are either sole proprietorships, partnerships, LLCs or S corporations, the income from these businesses generally flows directly on to the tax returns of the park owners.

    How will higher taxes affect parks? The way it looks is that there will be less available capital for upgrading and business investment. It could also lead to a need to increase camping rates, thereby possibly making it more difficult for the industry’s bread-and-butter consumers – Middle America – to enjoy an extra night or two at the park.

    And One More Thing: Again,

    Estate Tax Comes to the Table

    The president’s budget request does contemplate that the estate tax exemption would be “frozen” at the 2009 level of $3.5 million and the top rate would be “frozen” at 45%. It does not appear to contemplate “indexing for inflation.” Not perfect, but likely this will address the needs of most small businesses, although the excessively high tax rate is not anything a successful small business person would like to see and is likely to necessitate continued expensive legal and accounting gyrations to try to keep as much of the estate as possible out of the hands of the government and in the hands of the family and heirs of the business owner.

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