Robust fundamentals and strong diversification should enable the European hotel sector to weather the economic downturn, rating agency Moody's said yesterday in an industry outlook report which rated the sector as stable.

"Despite the low occupancy rates and the repercussions of 11th September, 2001, the underlying health of the European hotel industry is robust - with large hotel operators fundamentally more profitable and better managed than a decade ago - and well diversified. We therefore believe that the European hotel companies are in a good position to weather what Moody's believes is a downturn in the cycle," said Mr Carlos Winzer, senior vice-president at Moody's and author of the report.

But he warned that event risk in the industry remained high because the European hotel industry was still very fragmented compared to the US and mergers and acquisitions in Europe could, given the relatively low value of some hotels, trigger a deterioration in the financial ratios of some companies, depending on funding strategies.

And despite improvements in occupancy rates in the first quarter of 2001, Moody's said that a recovery to activity levels of early 2001 would be slow.

"Moody's does not expect a full recovery until at least 2003," the report said.

The rating agency said it was taking a cautious view on market conditions as well as the potential impact on companies' operating cash flow.

"The problem of revenue volatility is particularly relevant to those hotel companies active in the upscale segment of the main European 'city hubs', which are more reliant on visitors from the US and have been hardest hit by the events of September 11th and the economic downturn," it said.

But the economy's hotel sector had escaped relatively unscathed and was likely to continue to grow, it added.