##### 



Exhibit C 
 Managements Discussion and Analysis Table of Contents 18
    
    Our Company19
    
    Strategies for Growth21
    
    The Industry in 200322
    
    Financial
HighlightsResults of Operations:22
    
    2003 vs. 200228
    
    2002 vs. 200131
    
    Quarterly Results32
    
    Liquidity and Capital
Resources36
    
    Common Share Data37
    
    Transactions with Legacy37
    
    Transactions with Other
Related Parties38
    
    Critical Accounting Policies
and Estimates40
    
    Changes in Accounting
Policies40
    
    Pending Accounting Policy
Changes41
    
    Risks and Uncertainties
 Managements discussion and analysis (the MD&A) should be read
in conjunction with the consolidated financial statements and
notes, which begin on page 48. The financial statements of
Fairmont Hotels & Resorts Inc. (FHR or the Company) are
prepared in accordance with Canadian generally accepted accounting
principles (GAAP). A summary of the differences between Canadian
GAAP and U.S. GAAP is found in note 25 of the consolidated
financial statements. The financial statements and the MD&A are
presented in United States dollars unless otherwise indicated.
This MD&A is based on the segmented financial information of our
operations presented in note 3 of the consolidated financial
statements on page 57. We use non-GAAP measures to assess our operating performance.
Securities regulators require that companies caution readers that
earnings and other measures adjusted to a basis other than GAAP do
not have standardized meanings and are unlikely to be comparable to
similar measures used by other companies. We consider income before
interest, taxes, amortization, other (income) expenses and
reorganization and corporate expenses (EBITDA) to be a meaningful
indicator of operations and use it as our primary measure to assess
the operating performance of our business segments. It is likely
that our calculation of EBITDA is different than the calculations
used by other entities. EBITDA is represented on the consolidated
statements of income as Operating income before undernoted items. This document contains forward-looking information based on
our best estimates of the current operating environment. These
forward-looking statements are related to, but not limited to,
our operations, anticipated financial performance, business
prospects and strategies. Forward-looking information typically
contains statements with words such as anticipate, believe,
expect, plan or similar words suggesting future outcomes.
Such forward-looking statements are subject to risks,
uncertainties and other factors, which could cause actual results
to differ materially from future results expressed, projected or
implied by such forward-looking statements. Such factors include,
but are not limited to, economic, competitive and lodging
industry conditions. A detailed description of these factors can
be found in the section contained herein entitled Risks and
Uncertainties. There is significant risk that our predictions
and other forward-looking statements will not prove to be
accurate. Readers are cautioned not to place undue reliance on
our forward-looking statements as a number of factors could cause
actual future results to differ materially from our expectations.
We disclaim any intention or obligation to update or revise any
such forward-looking statements, whether as a result of new
information, future events or otherwise. February 13, 2004   Managements Discussion and Analysis  17




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##### 



Our Company We have owned and managed hotels and resorts for over 116 years. The Company
has evolved from a Canadian-based hotel operator and owner to become the
largest North American luxury hotel management company as measured by rooms
under management. (FAIRMONT HOTELS CORP. STRUCTURE CHART) Hotel Ownership Operations We hold real estate ownership interests
ranging from approximately 20% to 100% in
23 properties, including well-known hotel
destinations such as The Fairmont Banff
Springs, The Fairmont Kea Lani Maui and
The Fairmont Scottsdale Princess. Fairmont
manages our 20 luxury hotels and Delta
manages our three first-class properties.
Approximately 75% of our EBITDA is
generated by our hotel ownership
operations through room occupancy, food
and beverage sales and other amenities
such as spa, golf and retail operations. Investment in Legacy We own an approximate 35% interest in
Legacy, a publicly-traded Canadian hotel
real estate investment trust, which holds
a portfolio of 24 luxury and first-class
hotels across Canada and the United
States, consisting of over 10,000 rooms.
Fairmont manages Legacys 13 luxury
properties and Delta manages its 11
first-class hotels. We account for our
ownership interest in Legacy on an equity
basis. Real Estate Activities We also hold other real estate assets,
which consist primarily of the Southtown
lands located in the core of downtown
Toronto between the financial district
and Lake Ontario. These lands are zoned
for the development of 4.9 million square
feet of commercial and residential space. The first Fairmont Heritage Place
(FHP), our vacation ownership product,
is currently under construction in
Acapulco, Mexico. Future vacation
ownership opportunities exist in
Scottsdale, Bermuda and Barbados. FHP will
allow us to improve our return on new
build investments, use excess real estate
and further leverage our existing hotel
infrastructure. In addition, by developing
an expertise in this business we will be better able to
compete for new management contracts
since many new hotel projects contain a
vacation ownership component. Management Operations We manage hotels under two subsidiaries,
Fairmont and Delta, each with their own
distinct brand identity. Fairmont is North
Americas largest luxury hotel management
company as measured by rooms under
management. Currently, Fairmont manages 44
properties with more than 21,000 rooms in
major city centers and resort destinations
throughout the United States, Canada,
Mexico, Bermuda, Barbados and the United
Arab Emirates. Fairmonts incentive-based
management contracts have an average
remaining term of more than 40 years,
which are among the longest in the
industry. Delta is Canadas largest first-class
hotel management company with over 11,000
rooms at 39 managed and franchised
properties across Canada. Deltas
incentive-based management contracts have
an average remaining term of more than 10
years. Under their respective management
contracts, Fairmont and Delta generally
oversee all aspects of the day-to-day
operations of each property on behalf of
the owner. For these services, Fairmont
and Delta earn a base fee, which is
typically in the range of 2.5% to 3.5% of
a propertys gross revenues and can earn
an incentive fee based on the property
achieving certain operating performance
targets. Additional information relating to
the Company, including our Annual
Information Form, can be found on the
Canadian Securities Administrators
System for Electronic Document Analysis
and Retrieval (SEDAR) located at
www.sedar.com. We also file form 40-F in
the United States, which can be found on:
www.sec.gov/edgar.shtml.   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   18




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Strategies for Growth Our focus over the next three to five years is to continue our expansion of the
Fairmont management portfolio with an overall goal of increasing the Fairmont
portfolio by two to four hotels per year. We target properties reflecting Fairmonts luxury brand
requirements of:  
    
    high quality assets with strong cash flow potential  
    
    sufficient meeting space to capitalize on our strong presence in the group segment  
    
    located in primary city center markets or resort destinations with high barriers to entry Expand Management Operations  
    
    increase brand recognition and loyalty
thereby increasing brand appeal to owners  
    
    leverage our strong presence in the
luxury resort segment  
    
    focus on the
United States where Fairmont has an
established infrastructure and growing
brand awareness but is located in only 12
of the top 25 U.S. markets. We will continue to develop and
leverage the Fairmont brand by seeking new
management opportunities. Our goal is to
increase the proportion of revenues and
EBITDA generated by management activities,
through the addition of single and
multiple incentive-based management
contract opportunities as it is
considerably less capital intensive than
hotel ownership operations. To accomplish
this goal, we may acquire small equity
investments in or make long-term loans to
the managed hotels. In the luxury hotel market, brand
perception and loyalty are critical to a
brands success as they position the
owners assets for maximum value and
maximum return. We believe the key to
further enhancing the desirability of the
Fairmont brand is to provide the customer
with a truly personalized service that
exceeds their expectations. To help
achieve this goal, Fairmont has
implemented several initiatives including:  
    
    Fairmont Presidents Club, which is
designed to provide enhanced service
delivery and recognition to our most
frequent and valued customers; and  
    
    Fairmont Gold, our hotel within a
hotel product featuring private
check-in, exclusive concierge
services and other amenities. This
product is designed to provide
individual leisure and business
travelers with a more intimate
service offering for which Fairmont
charges premium rates. Strategic Relationships We seek out strategic relationships with
equity partners that will ultimately
enhance our global presence. Prince Alwaleed His Royal Highness Prince Alwaleed Bin
Talal Bin Abdulaziz Al Saud is both an
owner of a number of Fairmont properties
and an investor in the Company. Given his
expressed desire to expand his hotel
portfolio as well as the Fairmont brand,
Prince Alwaleed is actively seeking growth
opportunities in the U.S. and abroad. Crown Prince of Abu Dhabi His Highness Dr. Sheikh Sultan bin
Khalifa Al Nahyan of Abu Dhabi is our
partner in The Fairmont Dubai and the new
development in Abu Dhabi. He and his
affiliates are also eager to grow their
hotel portfolio and are working with us
to find expansion opportunities overseas. Legacy We are party to a strategic alliance
agreement with Legacy that provides us
with additional management contract
opportunities. This agreement allows
Legacy to participate in any new
investments made by us in Canadian hotel
properties and provides us with a
potential buyer for our hotels with
stabilized cash flows. In the event that a
hotel is sold to Legacy, we participate in
a significant portion of the future
profitability of the property through
management fees and our ownership interest
in Legacy. Expand Hotel Ownership Operations
Through Selective Acquisitions Our strategy for hotel ownership
operations growth consists of using our
strong balance sheet and effective
management capabilities to make
selective acquisitions in the following
target markets:  
    
    key North American
gateway cities  
    
    exclusive resort
destinations  
    
    strategic international
markets Seeking opportunities to maximize
value creation, we typically focus on
acquiring and repositioning
under-performing luxury properties. Our
strategy is executed through the process
of branding the hotel, improving
management and investing capital in the
property. Once operating performance is
stabilized, the hotel is a potential
candidate for sale.   Managements Discussion and Analysis  19
    
    2003 ANNUAL REPORT




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Strategies for Growth(contd) (STRATEGIES FOR GROWTH CHART) Through this process, we are able to
realize asset appreciation, reinvest
the capital for future growth and
retain long-term management contracts
on the properties sold. We may acquire
a stabilized property if it is in a
strategic location or is an
opportunistic purchase. Maximize Existing Portfolio Performance We are pursuing opportunities for growth
that represent consistent and productive
extensions of the Fairmont brand. These
include incremental investments such as
spas and golf courses as well as vacation
ownership and retail opportunities. Developing an expertise in vacation
ownership will allow us to more
effectively compete for potential hotel
acquisitions and development projects. In
addition, we feel that this will allow us
to further leverage our existing hotel
infrastructure and increase our overall
profitability. We are initially targeting
excess real estate located close to our
existing hotels where the best use appears
to be a vacation ownership product. Expanding Our Brands (FAIRMONT LOGO) January 2004
    
    The Fairmont Turnberry Isle Resort
& Club, Miami
    
    
    long-term management agreementAugust 2003
    
    The Fairmont Olympic Hotel, Seattle
    
    
    long-term management
agreement$11 million participation in the mortgageacquired by Legacy, a strategic partnerFebruary 2003
    
    The Fairmont Copley Plaza Boston
    
    
    strategic acquisition of property in downtown core of
key U.S. gateway city (original 50% acquired in 2001)December 2002
    
    The Fairmont Washington, D.C.
    
    
long-term management agreementacquired by Legacy, a strategic partnerDecember 2002
    
    The Fairmont Orchid, Hawaii
    
    
acquisition of resort in high barrier to entry marketSeptember 2002
    
    The Fairmont Sonoma Mission Inn & Spa
    
    
long-term management agreementminority equity investmentFebruary 2002
    
    The Fairmont Dubai
    
    
long-term management agreementowned by a strategic partnerFebruary 2001
    
    The Fairmont Kea Lani Maui
    
    
acquisition of unbranded resort in high barrier to
entry market
 (DELTA LOGO) December 2003
    
    Delta Fredericton
    
     franchise agreementJune 2003
    
    Delta Quebec
    
     franchise agreementOctober 2002
    
    Delta Sun Peaks Resort
    
     long-term management agreement
 minority equity investmentSeptember 2001
    
    Delta Ocean Pointe Resort
and Spa, Victoria, B.C.
    
     long-term management agreement
 FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   20




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The Industry in 2003 The North American hotel industry has been in a downturn that began in 2000 and
was fuelled by a series of economic and geopolitical events. There is no doubt
that 2003 was one of the most difficult years for the hotel industry. Declines
in corporate travel, the war in Iraq, continued security concerns and, most
predominately, the impact of SARS on worldwide travel created a very difficult
operating environment in 2003. (GROWTH GRAPH) Declines in Corporate Travel The weak
North American economy continued into 2003
with U.S. upper upscale RevPAR (room
revenue per available room) declining for
the third consecutive year. Signs that an
economic recovery is underway started to
appear in the third and fourth quarters
with U.S. real gross domestic product
increasing by 8.2% and 4.1%, respectively
on a year-over-year basis. Travel volumes
generally increase about six months after
the beginning of an economic recovery. In
addition, luxury hotels typically enjoy a
larger rebound in demand than the hotel
industry as a whole. The War In Iraq In January, uncertainty
related to military action in Iraq caused
consumers and businesses to postpone
significant expenditures, including
spending on travel. Specifically, the
North American hotel industry realized
year-over-year declines in both occupancy
and average daily rates (ADR) from
February through the duration of the
military action in Iraq. Consumer
confidence rebounded and travel patterns
quickly normalized in April when the U.S.
government declared that major combat in
Iraq had ceased. (REVPAR GRAPH) SARS Originating in China, this virus
created worldwide panic. Although the
Canadian impact was isolated to about 250
cases primarily in Toronto, global public
perception of this outbreak in Canada was
greatly exaggerated by worldwide media
attention. This had a devastating impact
on the Canadian lodging industry. The SARS
outbreak was contained by late spring,
however, the impact on travel volumes
continued throughout the peak summer
season. The majority of summer vacations
are booked in the spring and fears
surrounding SARS at that time resulted in
many travelers excluding Canada from their
list of potential vacation destinations.
Travel volumes did not return to normal
levels until very late in 2003. Hurricanes In early September, Hurricane
Fabian pounded the island of Bermuda and
caused tremendous damage. Several hotels
were damaged, including both of our owned
properties. This was considered to be the
worst tropical storm to hit Bermuda in 50
years and was the first storm ever to
cause substantial damage to the hotels
located there. The Fairmont Southampton
will remain closed for repairs until
spring 2004. Other Factors Several other factors were
also encountered in 2003 that impacted
travel demand, including the mad cow
disease scare, reductions in the frequency
and capacity of flights caused by Air
Canadas financial difficulties, the east
coast blackout in August and forest fires
in the Canadian Rockies. Although these
factors were not individually material,
their combined impact with the events
listed above served to further hinder hotel
operations.   Managements Discussion and Analysis  21
    
    2003 ANNUAL REPORT




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Financial Highlights (in millions, except per share data)
    
    2003
    
    2002
    
    2001Revenues
    
    $
    691.4
    
    
    $
    618.3
    
    
    $
    566.7EBITDA
    
    
    142.4
    
    
    
    198.3
    
    
    
    163.1Income (loss) from continuing operations
    
    
    50.7
    
    
    
    92.5
    
    
    
    (28.2
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    923.9Net income
    
    
    50.7
    
    
    
    92.5
    
    
    
    895.7Basic earnings (loss) per shareIncome (loss) from continuing operations
    
    $
    0.64
    
    
    $
    1.18
    
    
    $
    (0.43
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    11.71Net income
    
    
    0.64
    
    
    
    1.18
    
    
    
    11.28Diluted earnings (loss) per shareIncome (loss) from continuing operations
    
    $
    0.63
    
    
    $
    1.16
    
    
    $
    (0.43
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    11.70Net income
    
    
    0.63
    
    
    
    1.16
    
    
    
    11.27Dividends declaredper common share
    
    $
    0.07
    
    
    $
    0.05
    
    
    $
    1.12per preferred share
    
    
    
    
    
    
    
    
    
    
    0.8426Total assets
    
    $
    2,503.0
    
    
    $
    2,223.0
    
    
    $
    1,921.4Total debt
    
    
    657.6
    
    
    
    535.5
    
    
    
    339.7Shareholders equity
    
    
    1,545.9
    
    
    
    1,399.3
    
    
    
    1,305.4
 Results of Operations 2003 vs. 2002 The past year was an extremely difficult
one for our Company as the combined impact
of SARS, the war in Iraq and continued
economic weakness had a significant impact
on our financial performance. With about
half our EBITDA coming from Canada, the
impact of these issues as well as the
fires in Western Canada, mad cow disease
and Air Canadas financial problems were
devastating. Our operations were further
exacerbated by the worst hurricane to hit
Bermuda in 50 years, which has left The
Fairmont Southampton closed for repairs
until the spring of 2004. Despite these
challenges, cash provided by operating
activities was $109 million during 2003. Hotel Ownership Operations Revenues from hotel ownership operations
were $585 million in 2003, up $68 million,
or 13.2% from the prior year. In the first
quarter of 2003, revenues were comparable
with 2002 as demand from the leisure
segment remained strong and favorable
exchange rate fluctuations improved
revenues. However, by the second quarter,
the combined impact of the war in Iraq,
SARS and an already weak U.S. economy
started to impact revenues. The extremely
challenging operating environment
continued throughout the third quarter as
the impact of SARS caused a precipitous
decline in tour group business. Operations
started to return to more normal levels in the fourth
quarter as the North American economy
showed signs of recovery. By December,
most of our owned hotels were generating
revenues similar to 2002 levels. Revenues from U.S. and International
hotels were up 19.1%, with the recent
acquisitions of The Fairmont Orchid,
Hawaii and The Fairmont Copley Plaza
Boston and a 14% improvement in revenues
at The Fairmont Kea Lani Maui
contributing the majority of this
increase. (HOTEL REVENUES BAR GRAPH) Approximately 55% of gross revenue from
hotel ownership is generated from room
revenue and 30% from food and beverage
services. Other revenue streams such as
spa facilities, golf courses, retail
operations, parking and laundry
contribute the remainder of revenues
earned by the owned properties.   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   22




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Ownership Highlights Banff, Lake Louise & Jasper The tour group segment was particularly
hard hit by the impact of SARS. This
segment, which typically generates about
40% of hotel occupancy, produced 25%
fewer rooms in 2003. The Fairmont
Chateau Lake Louise suffered the
greatest losses as over 50% of its
business is generated through tour
groups. Despite the challenging
operating environment, revenues from the
group meetings segment were up
considerably over 2002. Strength in this
segment allowed The Fairmont Banff
Springs to maintain Canadian dollar
RevPAR at levels consistent with 2002.
With a return to more normal operating
conditions, management expects that
these properties will produce
significant improvements in EBITDA in
2004. In addition, the meeting facility
currently under construction at The
Fairmont Chateau Lake Louise will lessen
this resorts dependence on tour groups
and should provide more stable earnings
in future years. Whistler Demand from the group meeting segment
was significantly lower as SARS-related
cancellations and a weak U.S. economy
reduced occupancy levels at the resort.
In addition, the resort suffered from
the perception of poor skiing
conditions, which resulted in weaker
leisure demand. We expect this resort to
enjoy a rebound in demand during 2004 as
group meeting bookings for the year are
strong and a recovering U.S. economy
should further increase demand in
Whistler. Bermuda In September 2003, Hurricane Fabian
caused considerable damage to both
Bermudian hotels. The Fairmont Hamilton
Princess remained operational for the
remainder of 2003, albeit at reduced
capacity. The Fairmont Southampton will
be closed until spring 2004 to complete
necessary repairs. We have extensive
insurance coverage for both property
damage and business interruption. Acapulco Our Mexican properties continued to
perform at an adequate level in 2003,
despite the impact of the war in Iraq
and the weak U.S. economy on occupancy
levels. Recent capital expenditures
appear to be paying dividends as our
group room night bookings for 2004 are
up 11% over last year. Scottsdale The Fairmont Scottsdale Princess
outperformed our expectations in 2003
despite the impact of three new
upper-upscale hotels adding 2,200
guestrooms into the Scottsdale market.
Although this resort experienced
moderate declines in both ADR and
occupancy, it performed well relative to
its peers. The Scottsdale market appears
to have fully absorbed the new supply
and we expect that financial performance
from both the business and leisure
segments will continue to improve
throughout 2004. Hawaii The Fairmont Kea Lani Maui recorded its
best annual performance ever in 2003.
The resort benefits from an affluent
leisure clientele, who were not as
affected by the general economic
downturn, as well as strong demand for
luxury hotels in Maui. This resort also
benefited from strength in the group
meeting segment, which was one of our
main re-branding initiatives for this
property. We are expecting another
strong year in 2004, as demand from
both the leisure and business segments
remains sound. Results from The Fairmont Orchid,
Hawaii were disappointing in 2003.
Demand from the group meeting segment
was projected to be low, however,
individual leisure bookings were
considerably weaker than anticipated.
The timing of this acquisition in late
December did not allow enough time to
get this resort into our distribution
channels for its 2003 peak season. The
impact of our renovation programs also
affected operating performance in 2003.
The resort has emerged from its
transition year with strong group
meeting bookings for 2004. We are also
experiencing a steady build in leisure
and tour group bookings and therefore
expect a significant improvement in
operating performance in 2004. Boston In February 2003, we acquired the
remaining 50% ownership interest in The
Fairmont Copley Plaza Boston and started
major renovations shortly thereafter.
The Boston market suffered its worst
year in 30 years during 2003 and was one
of the worst performing major markets in
the United States. During 2004, we
expect demand to improve in conjunction
with an economic recovery in the United
States. When combined with the recent
renovations to guestrooms and meeting
facilities, we expect this hotel to
generate a significant improvement in
EBITDA in 2004.   Managements Discussion and Analysis  23
    
    2003 ANNUAL REPORT




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Results of Operations(contd) (CHART) Revenues generated by Canadian properties
increased 4.5% in 2003 primarily due to a
significant appreciation in the Canadian
dollar. When measured in local currency,
Canadian dollar revenues declined by
6.7%. Most of our owned properties are
resorts. As a result, leisure travel is
our most important source of demand,
generating approximately 60% of revenues
at our owned hotels. Business travel,
which accounts for 65% to 70% of hotel
industry revenues, generates
approximately 40% of revenues at our
owned hotels. The combined impact of SARS and the
war in Iraq reduced overall booking
activity and also led to a significant
number of cancellations in the second and
third quarters of 2003, the period in
which we typically generate the vast
majority of our revenues from leisure
travel. Revenues from the tour group
segment were significantly lower,
particularly at our Canadian resorts. In 2003, there was little new supply
in markets in which we operate since many
of our hotels are located in high barrier
to entry markets. The Fairmont Scottsdale
Princess is our only owned hotel located
in a market that experienced a
significant increase in supply over 2002. Comparable Owned Hotels Year Ended December 31
    
    2003
    
    2002
    
    VarianceWorldwideRevPAR(1)
    
    $
    114.78
    
    
    $
    111.53
    
    
    
    2.9
    %ADR(2)
    
    
    197.43
    
    
    
    182.44
    
    
    
    8.2
    %Occupancy
    
    
    58.1
    %
    
    
    61.1
    %
    
    -3.0 pointsCanadaRevPAR
    
    $
    99.67
    
    
    $
    95.14
    
    
    
    4.8
    %ADR
    
    
    163.44
    
    
    
    145.16
    
    
    
    12.6
    %Occupancy
    
    
    61.0
    %
    
    
    65.5
    %
    
    -4.5 pointsU.S. and InternationalRevPAR
    
    $
    131.12
    
    
    $
    129.33
    
    
    
    1.4
    %ADR
    
    
    238.17
    
    
    
    229.53
    
    
    
    3.8
    %Occupancy
    
    
    55.1
    %
    
    
    56.3
    %
    
    -1.2 points
   (1)
    
    RevPAR is defined as room revenue per available room(2)
    
    ADR (average daily rate) is defined as room revenue per occupied roomComparable Hotels are considered to be properties that were fully open under FHR management for at least the entire current and prior fiscal
year. Comparable Hotel statistics exclude properties where renovations have had a significant adverse effect on the properties primary operations.Exclusions: The Fairmont Southampton (renovation); The Fairmont Orchid, Hawaii; The Fairmont Copley Plaza Boston FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   24




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RevPAR at the Comparable Hotels
increased 2.9% to $114.78 in 2003 from
$111.53 in 2002. Strong ADR growth of
3.8% at our U.S. and International
properties was driven primarily by higher
rates from tour group and leisure travel.
At our Canadian hotels, strength in the
Canadian dollar helped to offset
occupancy declines experienced in the
tour group segment. EBITDA from FHRs hotel ownership
operations of $107 million in 2003 was
down $36 million, or 25.1%, from $143
million in 2002. Despite a slight increase in
comparable RevPAR, EBITDA at the U.S. and
International properties was down 2.7%.
Uninsured costs of $9 million related to
the hurricane damage in Bermuda,
inflationary increases in direct costs as
well as higher administrative wages,
energy, property tax and insurance
expenses negatively impacted EBITDA at
these properties. EBITDA at the Canadian hotels and
resorts dropped by $25 million. This
decline was characterized by lower ADR
(when measured in Canadian dollars) and
occupancy, higher energy and insurance
costs as well as cost reductions in 2002
totaling $4 million that were not likely
to repeat. Margin pressures at our owned
hotels are expected to linger through
2004 as pricing pressure remains, while
costs are expected to rise consistent
with overall inflationary increases. Investment in Legacy Our approximate 35% investment in Legacy
generated a $9 million equity loss
compared to equity income of $6 million
in 2002. The Legacy portfolio was
severely impacted by SARS and other world
events in 2003. This loss was magnified
by the appreciation in the Canadian
dollar and includes $3 million in
prepayment premiums relating to Legacy
refinancing its unsecured debentures in
December 2003. (CHART) Real Estate Activities During 2003, we disposed of one block of
our Southtown lands in Toronto and two
blocks of land at our Coal Harbour site in
Vancouver. In addition, we disposed of
several smaller pieces of real estate
during the fourth quarter. These lands are
primarily located next to rail lines and
were not part of our core real estate
activities. We also started to recognize
revenues from vacation ownership in 2003.
Real estate activities generated EBITDA of
$13 million, up from $12 million in 2002
and net cash proceeds generated by real
estate activities were $27 million, up
from $18 million in 2002. The remaining Southtown lands are
zoned for the development of 4.9 million
square feet of commercial and residential
space. The remaining Coal Harbour lands,
located directly across from the future
convention center, are zoned for the
development of 1.1 million square feet of
commercial and residential space. Within
each landholding, zoning permits a hotel
development, however, there are no formal
plans in place to build new hotels at
these locations. In 2004, we expect to
dispose of the remaining block of the Coal
Harbour lands that is zoned for
residential purposes and will continue to
actively pursue opportunities to dispose
of the Southtown lands. We expect to sell
the remaining lands over the next four
years. Vacation ownership generated
revenues of $2 million in 2003, however,
its EBITDA contribution in 2003 was
minimal. The future recognition of
earnings from this project may be
impacted by the new accounting
recommendations surrounding variable
interest entities (see Pending Accounting
Policy Changes). Management Operations Fairmont Recognition of the Fairmont brand has
grown considerably over the past five
years. In a recent survey conducted by an
independent market research firm, unaided
brand recognition has grown dramatically
since 1998. Unfortunately, the weak operating
environment did not allow us to capitalize
on these improvements during 2003. Revenues under management in
2003 were $1.4 billion, up $108
million or 8.2% from 2002. New
management contracts and the
appreciation in the Canadian dollar
contributed to this increase. Fairmont earned fee revenues of $44
million in 2003, a 7.0% improvement over
2002. Total fee revenues included $18
million from our owned properties, up $1
million   Managements Discussion and Analysis  25
    
    2003 ANNUAL REPORT




---



##### 



Results of Operations(contd) (CHART) from 2002. Base revenues were $5 million
higher, however reduced incentive fees
offset this improvement. Incentive fees
were $2 million in 2003 and accounted for
3.4% of Fairmonts total management fee
revenues, versus 9.0% in 2002. Weaker
performance at many city center hotels in
2003 caused Fairmont to miss several
incentive fee thresholds that it typically
achieves. In 2004, we expect about 30% of
Fairmonts management contracts to earn
incentive fees compared to 20% in 2003.
Within the next two to three years, the
majority of current contracts are expected
to earn incentive fees. Most of these
contracts have set thresholds that do not
change over the life of the contract
unless significant renovations are made to
the managed hotel. Fairmont participates in up to 30% of
earnings above the threshold on most of
its management contracts. For the Fairmont portfolio of
Comparable Hotels, RevPAR decreased 1.4%
to $103.85. The greatest component of the
decline in RevPAR occurred at the Canadian
hotels, due to a precipitous decline in
occupancy during the second and third
quarters. RevPAR at the U.S. and
International properties was down 2.3%
from 2002 as rate pressures and lower
demand from the business transient segment
impacted most of these hotels. Fairmont reported EBITDA of $25
million in 2003, down $5 million from
the prior year. EBITDA margin decreased
to 56.1% from 73.1% in 2002. In addition
to reduced incentive fee revenues,
increased marketing expenditures and
pension expenses reduced EBITDA. We do
not expect these expenses to recur and
anticipate margins in 2004 to improve
considerably. Continued growth in brand recognition
and brand loyalty will help the growth of
revenues under management through the
addition of new management contracts and
improved performance at the existing
managed portfolio. Going forward, we
expect Fairmonts EBITDA margin to improve
as the incremental costs of adding new
management contracts are relatively small. Fairmont Managed Hotels Year Ended December 31
    
    2003
    
    2002
    
    VarianceWorldwideRevPAR
    
    $
    103.85
    
    
    $
    105.28
    
    
    
    -1.4
    %ADR
    
    
    171.43
    
    
    
    163.18
    
    
    
    5.1
    %Occupancy
    
    
    60.6
    %
    
    
    64.5
    %
    -3.9 pointsCanadaRevPAR
    
    $
    86.39
    
    
    $
    86.63
    
    
    
    -0.3
    %ADR
    
    
    140.38
    
    
    
    127.41
    
    
    
    10.2
    %Occupancy
    
    
    61.5
    %
    
    
    68.0
    %
    -6.5 pointsU.S. and InternationalRevPAR
    
    $
    124.96
    
    
    $
    127.95
    
    
    
    -2.3
    %ADR
    
    
    210.31
    
    
    
    212.22
    
    
    
    -0.9
    %Occupancy
    
    
    59.4
    %
    
    
    60.3
    %
    -0.9 points
   Exclusions: The Fairmont Southampton (renovations); The Fairmont Dubai; The Fairmont Sonoma Mission Inn & Spa; The Fairmont Orchid, Hawaii;
The Fairmont Washington, D.C.; The Fairmont Olympic Hotel, Seattle FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   26




---



##### 



Delta Managed
Hotels
 Year Ended December 31
    
    2003
    
    2002
    
    VarianceRevPAR
    
    $
    56.40
    
    
    $
    54.18
    
    
    
    4.1
    %ADR
    
    
    91.83
    
    
    
    84.93
    
    
    
    8.1
    %Occupancy
    
    
    61.4
    %
    
    
    63.8
    %
    
    -2.4 points
  Exclusions: Delta Sun Peaks Resort; Delta St. Eugene Mission Resort Delta Revenues under management increased to
$322 million, a 3.0% increase from 2002
while management fee revenues of $12
million were up 2.6%. These improvements
relate primarily to the appreciation of
the Canadian dollar, which masked the
impact of declines in revenues and
management fees caused by the events of
2003. Incentive fees were $1 million in
2003 and accounted for 6.0% of Deltas
total management fee revenues, down from
12.3% in 2002. In 2004, approximately
one-third of Deltas managed hotels are
expected to earn incentive fees. Delta
participates in up to 30% of earnings
above the incentive fee threshold amount
on some of its management contracts. Deltas Comparable Hotels RevPAR of
$56.40 was up 4.1% from 2002 due to the
appreciation in the Canadian dollar. SARS
had a tremendous impact on Deltas
results in 2003, particularly at its
hotels located in Toronto and Montreal.
When measured in Canadian dollars, RevPAR
was down approximately 7% from 2002. EBITDA from Deltas management
operations was $9 million in 2002, up
7.4% from 2002. Stringent cost controls
in 2003 resulted in EBITDA margins
improving to 74.1% compared to 71.1% in
2002. The Delta Fredericton, which opened
in December 2003, and the Delta Quebec,
which opened in July 2003, will further
increase Deltas revenues and presence in
Canada. As Delta is now established in
most major Canadian markets, we are
focused on expanding Deltas presence in
the resort sector and select secondary
markets. Other Items Revenues and Expenses from Managed and
Franchised Properties Other revenues and expenses from managed
and franchised properties represent the
expenditure and recovery of central
marketing, reservations and other services
that we provide on a cost recovery basis
under the terms of our management and
franchise agreements. The net difference
represents the portion of amounts spent in
excess of recoveries from managed hotels
that are owned by third parties. In 2003, we recognized a $2
million deficit on these programs. In
order to continue our strategy of
increasing brand awareness, we made a
decision to maintain our marketing
efforts during 2003 despite the
knowledge that these amounts would not
be recovered. Assuming normal operating
conditions, any deficit incurred in 2004
is expected to be considerably smaller
than what was realized in 2003. Amortization Amortization expense was $68 million in
2003 compared to $52 million in 2002.
This increase was consistent with the
recent acquisitions of The Fairmont
Orchid, Hawaii and The Fairmont Copley
Plaza Boston. Other (Income) Expenses Other expenses in 2003 consist
primarily of amounts related to the
repayment of debt that occurred in
December following the convertible
senior note issue. Reorganization and Corporate Expenses Reorganization costs relate to the
reorganization of Canadian Pacific Limited
(CPL) into five separate public companies
pursuant to the plan of arrangement (the
Arrangement) on October 1, 2001.
Corporate expenses were costs associated
with the corporate activities performed by
CPL for all subsidiaries, including the
hotel operations, prior to October 1, 2001.
The majority of these corporate activities
have since been eliminated. Interest Expense, Net Net interest expense of $34 million was up
from $19 million in 2002. The majority of
this increase relates to the $136 million
acquisition of The Fairmont Orchid, Hawaii
in late 2002, which was financed through
drawings on our credit facilities.
Additionally, the $65 million in debt
assumed on the acquisition of The Fairmont
Copley Plaza Boston also increased
interest expense in the year. Income Tax Expense (Recovery) We experienced a net income tax recovery
of $12 million in 2003 compared to an
income tax expense of $36 million in 2002.
During the second quarter of 2003, we
reached a favorable settlement regarding
pre-reorganization tax   Managements Discussion and Analysis  27
    
    2003 ANNUAL REPORT




---



##### 



Results of Operations(contd) issues. As a result of this settlement, a
$24 million tax liability that had been
previously accrued was no longer required.
Excluding the impact of this recovery and
the $9 million of uninsured costs related
to hurricane damage in Bermuda, a
non-taxable jurisdiction, our 2003
effective tax rate was 26.8% compared to
27.2% in 2002. Foreign Exchange Average Canadian dollar exchange rates
appreciated approximately 12% over 2002
and at the end of 2003, were approximately
22% higher than at the end of 2002.
Although this appreciation had little
impact on net income, it did have a
significant impact on some of our reported
financial results as a significant portion
of our operations are conducted in Canada. The appreciation of the Canadian dollar
impacts us in several ways:  
    
    A significant portion of revenues
and EBITDA from hotel ownership
operations are generated by our
Canadian operations thereby improving
operating results  
    
    A significant portion of our
management and corporate expenses are
incurred in Canadian dollars reducing
EBITDA and EBITDA margins  
    
    Potential for lower demand at
hotels in Canada due to increased
prices for foreign travelers and the
potential for Canadian travelers to
travel outside the country Impact of Canadian Dollar Appreciation in 2003 (in millions, except per share data)Operating revenues
    
    $
    30.2EBITDA
    
    $
    4.2Interest
    
    
    (1.0
    )Amortization
    
    
    (3.0
    )Income taxes
    
    
    Net income impact
    
    $
    0.2EPS impact
    
    $
    0.00
 2002 vs. 2001 The year 2002 was also challenging for the
hospitality industry. The effects of
September 11 slowly dissipated, however,
the realities of a weak world economy
continued to suppress lodging demand.
Despite these challenges, our geographical
diversity and balanced customer mix helped
us to overcome the effects of a weak U.S.
economy better than most of our
competitors. In particular, strength in
the leisure segment and having several of
our owned hotels located in areas that are
considered to be safe travel destinations
minimized the impact of prolonged weakness
in corporate demand. Although weakness
persisted in the U.S. city center markets,
we manage but do not own the majority of
these properties. As such, they generate a
very small portion of our overall
revenues. Hotel Ownership Operations Revenues from hotel ownership operations
were $517 million in 2002, up $27 million,
or 5.5% from the prior year. Despite a
sluggish global economy, continued demand
from the leisure segment boosted results.
Revenues from this segment were up
approximately 8% over 2001 on a same store
basis, excluding recent acquisitions.
Revenues from U.S. and International
hotels were $308 million in 2002, an
increase of $26 million, or 8.9% compared
to 2001. This increase was due in large
part to improved
results at the recently renovated Bermuda
hotels as well as a full years results
from The Fairmont Kea Lani Maui, which was
acquired in February 2001. The renovation
program in Bermuda allowed The Fairmont
Southampton and The Fairmont Hamilton
Princess to increase ADR from both leisure
and business travelers, while also
improving occupancy. Revenues at the
Canadian properties were up $1 million from
2001 to $209 million as strong results from
The Fairmont Banff Springs and The Fairmont
Jasper Park Lodge offset a decline in
revenues following the disposition of The
Fairmont Empress and Fairmont Le Château
Frontenac to Legacy in February 2001. RevPAR at the Comparable Hotels
declined 1.3% in 2002, primarily from a
lower ADR generated at the U.S. and
International hotels. Although demand for
leisure travel was strong, demand for
corporate travel was soft during the year,
which lead to price competition. This
impacted ADR and the desired business mix
at some of our resorts. EBITDA from our
hotel ownership operations of $143 million
in 2002 was up $17 million, or 13.7%, from
$126 million in 2001. Hotel ownership
expenses were impacted by significantly
higher insurance premiums as well as higher
property tax and energy costs. These
increases were offset by the impact of
approximately $4 million in cost savings
that were not expected to repeat. The U.S.
and International properties generated
EBITDA   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   28




---



##### 



Owned Hotels & Resorts Year Ended December 31
    
    2002
    
    2001
    
    VarianceWorldwideRevPAR
    
    $
    112.69
    
    
    $
    114.14
    
    
    
    -1.3
    %ADR
    
    
    180.93
    
    
    
    185.11
    
    
    
    -2.3
    %Occupancy
    
    
    62.3
    %
    
    
    61.7
    %
    
    0.6 pointsCanadaRevPAR
    
    $
    95.14
    
    
    $
    94.15
    
    
    
    1.1
    %ADR
    
    
    145.16
    
    
    
    145.77
    
    
    
    -0.4
    %Occupancy
    
    
    65.5
    %
    
    
    64.6
    %
    
    0.9 pointsU.S. and InternationalRevPAR
    
    $
    138.02
    
    
    $
    143.07
    
    
    
    -3.5
    %ADR
    
    
    239.69
    
    
    
    249.17
    
    
    
    -3.8
    %Occupancy
    
    
    57.6
    %
    
    
    57.4
    %
    
    0.2 points
   Exclusions: The Fairmont Hamilton Princess (renovations); The Fairmont Southampton (renovations); The Fairmont Pierre Marques (renovations);
The Fairmont Orchid, HawaiiGiven the strategic importance of the acquisition of The Fairmont Kea Lani Maui, it has been included in FHRs operating statistics on a
pro forma basis as if owned since January 1, 2001. of $69 million in 2002, up 9.3% from 2001.
This increase was due in large part to a
$9 million increase in EBITDA generated by
the recently renovated Bermuda resorts.
The EBITDA margin at the U.S. and
International properties increased to
22.5% from 22.2% in 2001. EBITDA at the
Canadian hotels and resorts was $63
million during 2002, an increase of $11
million from 2001. This increase was
mainly the result of strong performance at
the properties located in Banff and Jasper
National Parks as well as one-time cost
reductions that have not repeated. EBITDA from hotel ownership
operations also included $11 million of
income from investments, unchanged from
2001. The equity investment in Legacy
contributed $6 million of EBITDA in 2002
versus $7 million in 2001. Real Estate Activities During 2002, we disposed of a real estate
interest in Bermuda, two blocks of land
at the Coal Harbour site in Vancouver and
completed our first disposition of the
Toronto Southtown lands. Real estate
activities generated EBITDA of $12
million in 2002, up from a loss of $2
million in 2001. Total cash proceeds
generated by the sale of land in 2002
were $35 million. Management Operations Fairmont In 2002, revenues under management of $1.3
billion were up 5.1% from 2001. Revenue
improvements at the U.S. and International
resort destinations as well as the
addition of several new management
contracts outpaced declines at some of the
U.S. city center markets. Fairmont earned fee revenues of $41
million in 2002 versus $40 million in
2001, a 3.5% increase. Fee revenues
included $17 million from our owned
properties in 2002 versus $16 million in
2001. Base revenues were $2 million
higher, however, reduced incentive fees
offset this improvement. Incentive fees
were $4 million in 2002 and accounted for
9.0% of Fairmonts total management fee
revenues, versus 10.8% in 2001. Lower
revenues under management at many U.S.
city center hotels resulted in incentive
fee thresholds not being met in 2002 that
had been reached in the past. For the Fairmont portfolio of
Comparable Hotels, RevPAR decreased 2.0%
in 2002. The greatest component of the
decline in RevPAR occurred at the U.S. and
International hotels, where RevPAR was
down 6.7%. Although occupancy at these
hotels was only slightly lower than 2001,
ADR suffered as a result of rate pressures
caused by shorter booking lead times as
well as temporary   Managements Discussion and Analysis  29
    
    2003 ANNUAL REPORT




---



##### 



Results of Operations(contd) Fairmont Managed Hotels Year Ended December 31
    
    2002
    
    2001
    
    VarianceWorldwideRevPAR
    
    $
    105.37
    
    
    $
    107.48
    
    
    
    -2.0
    %ADR
    
    
    162.04
    
    
    
    167.55
    
    
    
    -3.3
    %Occupancy
    
    
    65.0
    %
    
    
    64.1
    %
    
    0.9 pointsCanadaRevPAR
    
    $
    86.63
    
    
    $
    84.15
    
    
    
    2.9
    %ADR
    
    
    127.41
    
    
    
    128.43
    
    
    
    -0.8
    %Occupancy
    
    
    68.0
    %
    
    
    65.5
    %
    
    2.5 pointsU.S. and InternationalRevPAR
    
    $
    130.45
    
    
    $
    139.78
    
    
    
    -6.7
    %ADR
    
    
    213.64
    
    
    
    224.57
    
    
    
    -4.9
    %Occupancy
    
    
    61.1
    %
    
    
    62.2
    %
    
    -1.1 points
   Exclusions: The Fairmont Hamilton Princess (renovations); The Fairmont Southampton (renovations); The
Fairmont Pierre Marques (renovations);
The Fairmont Dubai; The Fairmont Sonoma Mission Inn & Spa; The Fairmont
Orchid, Hawaii; The Fairmont Washington, D.C.Given the strategic importance of the acquisition of The Fairmont Kea Lani Maui, it has been included in
FHRs operating statistics on a pro forma
basis as if owned since January 1, 2001. adjustments to the business mix in order
to maximize operating results. RevPAR at
the Canadian properties was up 2.9%.
Increased occupancy levels drove this
improvement in large part on the strength
of the leisure segment. ADR was slightly
lower than 2001, however, when measured in
Canadian dollars, ADR increased by 0.9%. Fairmont reported EBITDA of $30
million in 2002, up 14.4% from $26 million
earned in 2001. As a result, EBITDA margin
increased to 72.8% from 65.9% in 2001. Delta Revenues under management decreased to
$312 million in 2002, down $6 million or
1.8% from 2001, however, management fee
revenues of $11 million in 2002, were up
9.6% from 2001. This improvement relates
primarily to increased incentive management
fees and a one-time payout from a managed
property. Incentive fees were $1 million in
2002 and accounted for 11.8% of total
management fee revenues, up from 9.6% of
total management fee revenues in 2001. Comparable Hotel RevPAR was down
1.2% almost exclusively due to currency
fluctuations. When measured in Canadian
dollars, Deltas RevPAR was up 0.5% over
2001. EBITDA from Deltas management
operations was $8 million in 2002, up
6.6% from 2001. EBITDA margin remained
relatively constant at 71.1% versus
73.1% in 2001. Delta Managed Hotels Year Ended December 31
    
    2002
    
    2001
    
    VarianceRevPAR
    
    $
    53.84
    
    
    $
    54.49
    
    
    
    -1.2
    %ADR
    
    
    85.23
    
    
    
    84.08
    
    
    
    1.4
    %Occupancy
    
    
    63.2
    %
    
    
    64.8
    %
    
    -1.6 points
   Exclusions: Delta Sun Peaks Resort; Delta St. Eugene Mission Resort FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   30




---



##### 



Other Items Revenues and Expenses from Managed and
Franchised Properties Revenues from managed and franchised
properties were $28 million and $29
million in 2002 and 2001, respectively,
while other expenses from managed and
franchised properties were $29 million and
$32 million for 2002 and 2001,
respectively. These amounts reflect the
expenditure and recovery of amounts paid
for marketing, reservation and other
services that the Company provides on a
cost recovery basis under the terms of its
management and franchise agreements. The
net difference represents the portion of
amounts spent in excess of recoveries from
managed hotels that are owned by third
parties. Amortization In 2002, amortization was $52 million
compared to $51 million in 2001. The
increase was consistent with the growth of
both management and ownership operations
over the past two years. Other (Income) Expenses Other income in 2002 consists primarily
of the favorable settlement of previously
accrued amounts related to the
Arrangement. Reorganization and Corporate Expenses Reorganization costs related to the
reorganization of CPL while corporate
expenses were costs associated with the
corporate activities performed by CPL for
all subsidiaries, including the hotel
operations, prior to October 1, 2001. Interest Expense, Net The decrease in interest charges during
2002 reflects the repayments of debts as
part of the Arrangement. Discontinued Operations The amounts shown as discontinued
operations in 2001 represent operating
results from the four companies of CPL
until October 1, 2001. As part of the
Arrangement, these companies were
distributed to shareholders on October 1,
2001. Income Tax Expense (Recovery) Income tax expense was $36 million in
2002, versus an income tax recovery of
$100 million in 2001. In 2002, our
marginal tax rate was 27.2%, which was
reflective of our geographic income
composition. One-time items related to
the Arrangement significantly impacted
the tax recovery realized in 2001. Quarterly Results 2003First
    
    Second
    
    Third
    
    Fourth(in millions, except per share data)
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalTotal revenues
    
    $
    174.9
    
    
    $
    181.9
    
    
    $
    188.6
    
    
    $
    146.0
    
    
    $
    691.4EBITDA
    
    
    42.2
    
    
    
    43.4
    
    
    
    46.9
    
    
    
    9.9
    
    
    
    142.4Net income (loss)
    
    
    12.5
    
    
    
    40.1
    
    
    
    11.6
    
    
    
    (13.5
    )
    
    
    50.7Basic earnings (loss) per shareIncome (loss) from continuing operations
    
    
    0.16
    
    
    
    0.51
    
    
    
    0.15
    
    
    
    (0.17
    )
    
    
    0.64Net income (loss)
    
    
    0.16
    
    
    
    0.51
    
    
    
    0.15
    
    
    
    (0.17
    )
    
    
    0.64Diluted earnings (loss) per shareIncome (loss) from continuing operations
    
    
    0.16
    
    
    
    0.50
    
    
    
    0.15
    
    
    
    (0.17
    )
    
    
    0.63Net income (loss)
    
    
    0.16
    
    
    
    0.50
    
    
    
    0.15
    
    
    
    (0.17
    )
    
    
    0.63
 Managements Discussion and Analysis  31
    
    2003 ANNUAL REPORT




---



##### 



Quarterly Results(contd) 2002First
    
    Second
    
    Third
    
    Fourth(in millions, except per share data)
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    TotalTotal revenues
    
    $
    148.9
    
    
    $
    157.6
    
    
    $
    179.5
    
    
    $
    132.3
    
    
    $
    618.3EBITDA
    
    
    38.1
    
    
    
    53.2
    
    
    
    74.2
    
    
    
    32.8
    
    
    
    198.3Net income
    
    
    13.6
    
    
    
    28.9
    
    
    
    39.0
    
    
    
    11.0
    
    
    
    92.5Basic earnings per shareIncome from continuing operations
    
    
    0.17
    
    
    
    0.37
    
    
    
    0.50
    
    
    
    0.14
    
    
    
    1.18Net income
    
    
    0.17
    
    
    
    0.37
    
    
    
    0.50
    
    
    
    0.14
    
    
    
    1.18Diluted earnings per shareIncome from continuing operations
    
    
    0.17
    
    
    
    0.36
    
    
    
    0.49
    
    
    
    0.14
    
    
    
    1.16Net income
    
    
    0.17
    
    
    
    0.36
    
    
    
    0.49
    
    
    
    0.14
    
    
    
    1.16
 Due to the seasonal nature of the hotel
business, results are not expected to be
consistent throughout the year. Revenues
are typically higher in the second and
third quarters versus the first and fourth
quarters of the year in contrast to fixed
costs such as amortization and interest,
which are not significantly impacted by
seasonal or short-term variations. Due to
the impact of world events
including SARS, demand during the second
and third quarters of 2003 was lower than
historical levels, particularly at our
Canadian resort properties. As it is
impossible to predict such events, we
believe that quarter-to-quarter
comparisons of our results of past
operations are not necessarily meaningful
and should not be relied upon as any
indication of future performance. Liquidity and Capital Resources Capitalization 2003
    
    2002Cash
    
    $
    31.7
    
    
    $
    49.0Current
debt(1)
    
    $
    117.8
    
    
    $
    72.3Long-term debt
    
    
    539.8
    
    
    
    463.2657.6
    
    
    
    535.5Shareholders equityConvertible notes(2)
    
    
    19.2
    
    
    
    Common share
equity(3)
    
    
    1,526.7
    
    
    
    1,399.31,545.9
    
    
    
    1,399.3Total capitalization
    
    $
    2,203.5
    
    
    $
    1,934.8Debt to total capitalization ratio
    
    
    29.8
    %
    
    
    27.7
    %Debt to total asset ratio
    
    
    26.3
    %
    
    
    24.1
    %Interest
coverage(4)
    
    
    5.2x
    
    
    
    9.7x
   (1)
    
    Includes $69 million related to the put
option held by the minority shareholder of Fairmont(2)
    
    Amount of $270 million convertible notes related to conversion feature(3)
    
    Includes contributed surplus, foreign currency translation adjustments and retained earnings(4)
    
    Calculated as EBITDA divided by annual interest payments on debts outstanding at December 31st FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   32




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##### 



Liquidity and Capital Resources(contd) Capitalization FHRs consolidated net borrowing position
increased to $626 million at December 31,
2003, up $139 million from the beginning
of the year. Net borrowings in 2003 were
relatively unchanged from the prior year,
with the exception of the $65 million
mortgage that was assumed with the
acquisition of the remaining 50% of The
Fairmont Copley Plaza Boston and the
appreciation of Canadian dollar
denominated debts. In 2002, net borrowings
increased to finance the acquisitions of
The Fairmont Orchid, Hawaii, the 20%
minority interest in The Fairmont Sonoma
Mission Inn & Spa, and 6.5 million units
of Legacy. Of our total debt,
approximately 58% is at fixed rates of
interest. Cash Flows Cash generated by operations in 2003 of
$109 million was down from $141 million in
2002 on lower earnings generated by our
hotel ownership and management operations.
Real estate activities generated $27
million in cash during 2003, up from $18
million in 2002. In 2004, we expect this
segment to generate cash flows in the range
of $12 million. Working capital levels were
virtually unchanged from 2002. We
continue to aggressively manage our
accounts receivable balances and feel
that our current levels of working
capital are adequate to fund operations
on an ongoing basis. In 2004, we expect cash generated
from operations to rebound to levels
realized in 2002 and intend on using
these funds to finance capital
expenditures at our owned hotels,
vacation ownership projects, dividends
and, in combination with our debt
facilities, to obtain additional
management contracts or provide equity
for selective investments and
acquisitions. Cash Flows (in millions)
    
    2003
    
    2002
    
    2001InflowsFunds
generated from operations(1)
    
    $
    109.2
    
    
    $
    151.9
    
    
    $
    (166.0
    )Change in working capital
    
    
    (0.3
    )
    
    
    (10.5
    )
    
    
    (23.7
    )Cash generated from (used in) operations
    
    
    108.9
    
    
    
    141.4
    
    
    
    (189.7
    )Sale of investments and properties
    
    
    
    
    
    
    
    
    
    
    202.7Other
    
    
    
    
    
    
    
    
    
    
    44.2Total inflows
    
    $
    108.9
    
    
    $
    141.4
    
    
    $
    57.2OutflowsAdditions to property and equipment
    
    $
    (87.2
    )
    
    $
    (84.3
    )
    
    $
    (121.8
    )Acquisitions and investments
    
    
    (19.7
    )
    
    
    (182.7
    )
    
    
    (291.2
    )Repurchase
(issuance) of common shares, net(2)
    
    
    (15.8
    )
    
    
    (68.5
    )
    
    
    43.6Redemption of preferred shares
    
    
    
    
    
    
    
    
    
    
    (144.8
    )Dividends
    
    
    (4.8
    )
    
    
    (3.2
    )
    
    
    (122.8
    )Other
    
    
    
    
    
    
    (1.0
    )
    
    
    Total outflows
    
    $
    (127.5
    )
    
    $
    (339.7
    )
    
    $
    (637.0
    )Net borrowing (repayment of debt)
    
    
    1.3
    
    
    
    194.5
    
    
    
    (1,049.5
    )Effect of exchange rates on cash balances
    
    
    
    
    
    
    0.1
    
    
    
    (8.1
    )Decrease in
cash(1)
    
    $
    (17.3
    )
    
    $
    (3.7
    )
    
    $
    (1,637.4
    )
   (1)
    
    Excludes discontinued operations(2)
    
    Net share issuance in 2001 relates to the overall reorganization of CPL and
offsets outflows related to the Arrangement Managements Discussion and Analysis  33
    
    2003 ANNUAL REPORT




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##### 



Liquidity and Capital Resources(contd) 2003 Profit-Enhancing Projects The Fairmont Chateau Lake Louise
    
    Construction of an 18,000 square foot meeting facility and 81 new guestrooms
(through April 2004)
Addition of the Fairmont Gold productThe Fairmont Banff Springs
    
    Spa expansion and refurbishmentThe Fairmont Copley Plaza Boston
    
    Guestroom renovations (two-thirds of hotel)The Fairmont Royal Pavilion
    
    Guestroom renovations (resulted in closure of resort for five months during
low season)The Fairmont Kea Lani Maui
    
    Guestroom renovationsThe Fairmont Orchid, Hawaii
    
    Refurbishment and expansion of the spa
Addition of the Fairmont Gold product
Restaurant renovationsThe Fairmont Hamilton Princess
    
    Guestroom renovationsThe Fairmont Acapulco Princess
    
    Guestroom renovationsThe Fairmont Pierre Marques
    
    Redesign of the golf course
 FHRs net expenditures on
profit-enhancing and upgrade capital
expenditures totaled $88 million in 2003,
up $4 million from 2002. These
expenditures were principally directed to
upgrade capital and profit-enhancing
projects at its owned luxury resort
properties. Amounts related to the
reconstruction in Bermuda after Hurricane
Fabian are not included as they are
covered by insurance. Expenditures in 2003 on acquisitions
and investments consisted primarily of the
issuance of notes receivable to third
party owners. These amounts were advanced
under agreements entered into when we
secured management contracts at The
Fairmont Sonoma Mission Inn & Spa and The
Fairmont Olympic Hotel, Seattle. In 2002,
we acquired The Fairmont Orchid, Hawaii to
further expand our presence in the
Hawaiian marketplace. Expenditures in 2001
related to the acquisitions of The
Fairmont Kea Lani Maui, a 50% interest in
The Fairmont Copley Plaza Boston and the
remaining 51% ownership interest in The
Fairmont Royal Pavilion and The Fairmont
Glitter Bay. These acquisitions were
partially financed through the sale of The
Fairmont Empress and Fairmont Le Château
Frontenac to Legacy in February 2001. In October 2002, we obtained
regulatory approval to purchase for
cancellation approximately 7.8 million, or
10% of our common shares, within a
twelve-month period ending October 2,
2003. We purchased 747,100 shares for
cancellation at an average price of $22.55
under this plan in 2003. Since October
2001, we have purchased a total of
4,313,700 shares under various share
buyback programs at an average price of
$23.14. We obtained
regulatory approval to renew this program
for another 12-month period ending October
7, 2004. During this time, we may purchase
for cancellation up to approximately 3.9
million, or 5% of our common shares. As at
December 31, 2003, no additional shares
were repurchased under this program. In December 2003, we issued $270
million of convertible senior notes for
net proceeds of $263 million. The 20-year
notes bear interest at a fixed rate of
3.75% and were used primarily to reduce
borrowings under our credit facility that
paid interest at floating rates of
approximately 5.2% at December 31, 2003.
Based on the terms of these notes, it is
likely that they will either be redeemed
by holders, called by the Company in
January 2009 or converted into common
shares prior to that date. Liquidity We use cash from operations, debt
facilities and equity financing to make
equity investments, obtain or maintain
long-term management contracts, make
selective acquisitions of individual
hotels or portfolios and to fund capital
improvements and operating requirements at
our owned hotels. In the event of a
temporary shortfall in cash, we will draw
on our existing credit facilities. We
believe that cash on hand, available
credit facilities, expected cash flow from
operations and the sale of certain
stabilized assets, when combined with the
access to debt and equity markets, will be
adequate to allow us to finance all normal
operating requirements and additional
funds required to achieve our growth
objectives.   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   34




---



##### 



Contractual Obligations Payments Due by Period(in millions)
    
    Total
    
    <1 Year
    
    1- 3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    657.6
    
    
    $
    117.8
    
    
    $
    181.3
    
    
    $
    70.1
    
    
    $
    288.4Operating leases
    
    
    110.1
    
    
    
    13.8
    
    
    
    24.9
    
    
    
    21.1
    
    
    
    50.3Purchase obligations
    
    
    26.5
    
    
    
    26.5
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations
    
    
    85.1
    
    
    
    12.9
    
    
    
    30.5
    
    
    
    11.7
    
    
    
    30.0Total
    
    $
    879.3
    
    
    $
    171.0
    
    
    $
    236.7
    
    
    $
    102.9
    
    
    $
    368.7
 Our ability to rely on cash generated
by operations was evident in 2003 when,
despite the extremely challenging
operating environment, funds generated
from operations were able to fund our 2003
capital expenditures and the net
repurchase of $16 million in common
shares. At December 31, 2003, our primary
sources of contractual obligations
consisted of amounts drawn on bank
facilities as well as mortgages owing. We
have bank facilities totaling Cdn$453
million consisting of an unsecured
Cdn$400 million three-year revolving
facility and an unsecured Cdn$53 million
term loan. A total of Cdn$53 million was
advanced under these facilities as at
December 31, 2003. At December 31, 2003,
letters of credit totaling $59 million
were also issued against our lines of
credit. These facilities expire in
September 2004. Additionally, Fairmont
has a $100 million, 364-day operating
line, of which $50 million was
outstanding at December 31, 2003. Based upon current plans, we expect
spending on upgrade capital and
profit-enhancing projects to be in the
range of $90  $100 million. We expect to
spend approximately $40 million in upgrade
capital, $45  $55 million on
profit-enhancing projects and the
remainder on corporate and technology
capital. These amounts do not include
costs related to the repairs in Bermuda as
such costs are covered
by insurance. Capital spending in 2004
will be funded primarily from cash flow
from operating activities. In addition, we
have other assets consisting of restricted
cash balances totaling $2 million that are
to be used towards capital expenditures at
certain of our owned hotels. In addition to spending on capital
projects, we may also acquire additional
management contracts and investments in
hotel ownership interests. Depending on
size, these expenditures would be funded
through cash from operations, drawings on
our credit facilities or the issuance of
additional common shares. Capital Resources Cash from operations Our operations typically generate free cash
flow exceeding cash required to fund
capital expenditures. These funds are the
most typical source of financing the
expansion of our operations and paying
dividends to shareholders. Lines of Credit We have various lines of credit
available to finance temporary
shortfalls in cash resulting from
business seasonality and the timing of
large profit-enhancing projects. Such
funds may also be used to provide
short-term bridge financing in the event
of an acquisition. 2004 Profit-Enhancing ProjectsThe Fairmont Chateau Lake Louise
    
    Completion of the 18,000 square foot meeting facility and 81 new guestrooms
(through April 2004)
Addition of the Fairmont Gold productThe Fairmont Copley Plaza Boston
    
    Creation of a Fairmont Gold
lounge
Guestroom renovations (remaining one-third of hotel)
Upgrades to public areasThe Fairmont Kea Lani Maui
    
    Upgrades to villasThe Fairmont Orchid, Hawaii
    
    Phase II of spa refurbishment and expansionThe Fairmont Acapulco Princess
    
    Construction of a new golf clubhouse
 Managements Discussion and Analysis   35
    
    2003 ANNUAL REPORT




---



##### 



Liquidity and Capital Resources(contd) Contractual Commitments Commitment Expiration per Period(in millions)
    
    Total
    
    <1 Year
    
    13 Years
    
    45 Years
    
    After 5 YearsStandby
letters of credit(1)
    
    $
    59.4
    
    
    $
    59.4
    
    
    $
    
    
    
    $
    
    
    
    $
    Guarantees
    
    
    11.9
    
    
    
    11.9
    
    
    
    
    
    
    
    
    
    
    
    Other contractual obligations
    
    
    7.0
    
    
    
    7.0
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    78.3
    
    
    $
    78.3
    
    
    $
    
    
    
    $
    
    
    
    $
    
   (1)
    
    FHR typically issues letters of credit against its lines of credit. At December 31, 2003, we had Cdn$400 million available
under our facilities, however, our ability to utilize the full
amount may be restricted if certain financial covenants are
not achieved. In the first quarter of 2004, we plan on
arranging a new credit facility in the amount of $350 
$400 million to replace our existing credit facility, which
expires in the third quarter of 2004. In addition, at
December 31, 2003, Fairmont had $50 million available
under its credit facility. We do not anticipate that covenants
on our credit facilities will impair our ability to fund our
anticipated requirements. Issuing additional equity securities FHR is listed on both the Toronto Stock Exchange and the
New York Stock Exchange, which gives the Company the
ability to raise additional equity through the issuance of
additional common shares, preferred shares or other such
equity instruments. The ability to raise equity on desirable
terms is dependent on market conditions. Issuing additional debt We typically use new debt financing to
refinance existing debt or to finance
significant acquisitions. We feel that our
conservative debt to total asset ratio of
26.3% affords us the ability to further
leverage our assets at reasonable rates of
financing. This would be accomplished
through mortgaging properties or by
issuing other types of debt instruments,
such as the convertible senior notes
issued in December 2003. The ability to
secure debt financing at reasonable terms
is ultimately dependent on market
conditions and the lenders determination
of our creditworthiness. Tax assets We retained significant tax assets as a
result of the Arrangement, including
substantial operating and capital losses.
At December 31, 2003, we had
approximately $318 million in operating
losses and $396 million in capital losses
available to us. By using these losses,
taxes payable on income generated by our
hotel operations and real estate
activities is lowered significantly. Common Share Data Common Shares Outstanding at December 31 (in thousands)
    
    2003
    
    2002Common shares outstanding
    
    
    79,106.3
    
    
    
    78,779.6Potential issuance of
common shares:Options issued to directors
and employees
    
    
    3,587.8
    
    
    
    3,586.9Conversion of convertible
senior notes
(conversion price $37.73)
    
    
    7,156.1
    
    
    
    
 We issued one million shares in February
2003 for the acquisition of the remaining
50% of The Fairmont Copley Plaza Boston.
In 2002, we entered into a share exchange
with a subsidiary of Kingdom Hotel (USA)
Ltd. (Kingdom) to acquire their 16.5%
share of Fairmont in exchange for
2,875,000 common shares of FHR.   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   36




---



##### 



Transactions with Legacy We manage Legacys hotels and provide
strategic leadership and day-to-day
administrative services to Legacy. All
agreements with Legacy are based on what
is believed to be fair market value and
must be approved by a majority of the
independent trustees of Legacy. A detailed
listing of transactions with Legacy is
found in note 23 of the consolidated
financial statements on page 77. Advisory Agreement Fairmont provides operational and
administrative services to Legacy and
advises its trustees regarding major
decisions. In return for these services,
we are entitled to an advisory fee equal
to 0.4% of a defined asset base, an
acquisition fee of 0.65% of the total
acquisition price of any additional
property acquired by Legacy and a
disposition fee of 0.25% of the aggregate
sale price of any property sold by Legacy.
The acquisition or disposition fees are
waived on any transactions between FHR and
Legacy. This agreement expires in February
2009. Management Agreements We have entered into various long-term
management contracts with Legacy to manage
its hotels. Pursuant to these management
agreements, we are entitled to a base
management fee and an incentive management
fee. Base management fees typically range
from 2.75% to 3.0% of total hotel revenues
and the incentive fee is calculated based
on net operating income from hotel
operations plus depreciation and
amortization less capital replacement
reserve, in excess of a threshold amount.
In addition, the incentive fee for the
hotels transferred to Legacy in 1997 (the
Initial Portfolio) is calculated based
on both the profitability of each of the
hotels as well as the overall
profitability of the Initial Portfolio. We also provide central reservations,
sales and marketing, central procurement,
accounting, management information,
employee training and other services to
Legacy for which we are reimbursed on a
cost recovery basis in accordance with
the management agreements. Strategic Alliance Agreement We have entered into a strategic alliance
agreement with Legacy to co-operate in
certain areas related to the purchase and
sale of hotels, the development of new
hotels that may be considered for
investment by Legacy and other areas
related to the ownership and management of
hotels. This agreement expires in February
2009. Recent Transactions with Legacy In August 2003, we entered into a
long-term, incentive-based management
contract for The Fairmont Olympic Hotel,
Seattle. In connection with Fairmont
securing the management contract on this
property and another under a similar
arrangement relating to The Fairmont
Washington, D.C., we have agreed to pay an
aggregate amount of $18 million over a
three-year period. These transactions were
recorded at the exchange value, which is
the amount established and agreed to with
Legacy. In connection with the above
transactions, we have entered into
reciprocal loan agreements with Legacy
totaling $87 million. These loan
agreements mature between October 2008 and
October 2013 and bear interest at normal
commercial rates payable quarterly in
arrears. In the event that either Legacy
or the Company does not make its required
interest or principal payments, the other
party is not required to make its payment
either. The loans meet all the
requirements for a right of setoff and as
such are not included in our consolidated
financial statements. We have also acquired a 25%
participation in the first mortgage on The
Fairmont Olympic Hotel, Seattle in the
amount of $11 million. This loan is due in
July 2006 and bears interest at the same
rate as the lender. In addition, we have a
note receivable from Legacy totaling $9
million bearing interest at the bankers
acceptance rate plus 2.75%. Legacy must
repay this amount by July 31, 2004. Transactions with Other Related Parties We have entered into management agreements
with other related parties that are
primarily managed hotels in which we own a
minority interest. These managed hotels
include, Fairmont Le Manoir Richelieu, The
Fairmont Hotel Newfoundland, The Fairmont
Sonoma Mission Inn & Spa, Fairmont Tremblant, Delta Vancouver
Suites and Delta Sun Peaks Resort. All of
these management agreements are on normal
commercial terms. Transactions with these
related parties are recorded at the
exchange amount, which reflects fair
market value.   Managements Discussion and Analysis   37
    
    2003 ANNUAL REPORT




---



##### 



Critical Accounting Policies and Estimates Our significant accounting policies are
found in note 2 of the consolidated
financial statements beginning on page 52.
The preparation of financial statements
and related disclosures in conformity with
Canadian GAAP requires management to make
estimates and assumptions that affect the
reported amounts of assets, liabilities,
revenues and expenses, and contingencies.
We base our estimates on historical
experience and on other assumptions that
are believed at the time to be reasonable
under the circumstances. Under different
assumptions or conditions, the actual
results may differ, potentially
materially, from those previously
estimated. Many of the conditions
impacting these assumptions and estimates
are outside of our control. These
estimates and assumptions are evaluated on
a periodic basis. We believe the following
critical accounting policies involve our
more significant judgements and estimates
used in the preparation of its
consolidated financial statements. Property and Equipment Due to the relatively large proportion of
property and equipment relative to total
assets, the selections of the method of
amortization and length of amortization
period could have a material impact on the
amortization expense recorded and the net
book value of property and equipment. We
amortize property and equipment on a
straight-line basis over its estimated
economic life, except for buildings on
leased land, which are amortized over the
lesser of the term of the lease, including
options to extend the lease, and the
economic life of the building. If the
estimated economic lives of all property
and equipment were to be decreased by one
year, amortization expense recorded in 2003
would have increased by approximately $3
million. Such a change in estimate would
have very little impact on FHRs financial
condition since key financial stakeholders
such as lenders do not typically rely on
the historical cost of property and
equipment. We feel that both the straight-line
method and sinking fund method are both
appropriate measures of amortization given
the nature of the underlying assets and
the capital replacement reserve policy,
which requires that approximately 5% of
each hotels annual revenues be directed
towards its capital maintenance. FHR has
selected the straight-line method of
amortization in order to be in compliance
with both Canadian and U.S. GAAP. Each hotel is reviewed for impairment
whenever events or changes in
circumstances indicate that its carrying
amount may not be recoverable. An
impairment in value will be recorded if
the projected undiscounted future cash
flows from the hotel exceed the net book
value of the property and equipment. Future
cash flows are forecasted on a property
specific basis based on historical results
and recent trends or events that may impact
a propertys future performance including
new hotel supply, changes in travel
patterns and general economic conditions.
We feel that it is unlikely that any future
impairment will be necessary given the
quality and carrying value of its assets. Goodwill and Intangible Assets Goodwill impairment tests are performed on
an annual basis and in certain
circumstances between annual tests for
each reporting unit, which are the
operating segments as described in note 3
of the consolidated financial statements.
These tests are based on a fair market
value analysis of the various reporting
units, which use such methods as
undiscounted cash flow projections and
peer comparisons of earnings multipliers.
Based on our current operations, we feel
that it is unlikely that any future
goodwill impairment will be required. At
the most recent testing date, no
impairment would have been required based
on the low end of our valuations. However,
in response to unanticipated changes in
industry and market conditions, we may be
required to consider restructuring,
disposing or otherwise exiting certain
operations, which could result in an
impairment of goodwill. In the event that
such an impairment was required, we would
record the impairment in other expenses. We also evaluate the carrying value
of management contracts and brand name on
an annual basis to determine whether such
costs will be recovered from the projected
future revenue streams on an undiscounted
basis. The estimation of future revenue
streams is based on the same factors used
to analyze goodwill and property and
equipment. Any impairment loss would be
expensed in the consolidated statement of
income. Based on the terms of our
management contracts, their carrying
values and the quality of the underlying
assets, we believe that the potential for
future impairment is unlikely. Income Taxes We account for income taxes using the
liability method and calculate our income
tax provision based on the expected tax
treatment of transactions recorded in the
consolidated financial statements. Under
this method, future tax assets and
liabilities are recognized based on
differences between the bases of assets
and liabilities used for financial
statement and income tax purposes, using
substantively enacted tax rates. In
determining the current and future
components of the tax provision,
management   FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   38




---



##### 



interprets tax legislation in a variety
of jurisdictions and makes assumptions
about the expected timing of the
reversal of future tax assets and
liabilities. If our interpretations
differ from those of the tax
authorities, substantively enacted tax
rates change or the timing of reversals
is not as anticipated, the tax provision
could increase or decrease in future
periods. Over the past several years, there
have been numerous changes to income
taxation rates in jurisdictions in which
we operate. These changes have reduced
our effective tax rate and the resulting
income tax expense and future income tax
liabilities. A 1% increase in our overall
effective tax rate would increase income
tax expense by approximately $2 million,
which relates primarily to the
revaluation of future income tax assets
and liabilities. FHR has approximately $318 million of
non-capital tax loss carry forwards and
$396 million of capital tax loss carry
forwards available. We expect the Company
will be able to utilize the vast majority
of its non-capital loss carry forwards
prior to their expiration and have
recorded a future tax asset for virtually
all such loss carry forward balances. In
the event that future earnings do not meet
our projections, it may be necessary to
write down this amount. Currently, we
expect that these losses will be used over
the course of the next four to five years.
A future tax asset has not been
established for most of the capital loss
carry forward amounts due to the
significant uncertainty as to the timing
of their utilization. We expect that the
majority of these amounts will be used
through our real estate activities or
otherwise. Capital losses do not expire. Although the estimates used to derive
our future tax liabilities under Canadian
GAAP can have a significant impact on net
income and earnings per share, they do not
impact our operations, as the net income
tax expense reported on the consolidated
statement of income does not reflect the
actual income tax amounts that we are
required to pay due to the utilization of
tax loss carry forward balances and timing
differences in the recognition of revenues
and expenses for tax purposes. Employee Future Benefits We have defined benefit pension plans for
certain employees and also provide
relatively insignificant other post
retirement benefits. There are several
assumptions required for the calculation
of defined benefit pension plan
liabilities or surpluses and the current
years pension expense. These include the
expected return on plan assets, the
discount rate on the projected benefit
obligation and the expected rate of future
compensation increases. An expected rate
of return on plan assets of 7.5% is used
based on the plans asset allocations and
historic results. We feel this long-term
rate of return is reasonable based on our
current investment policies and that it
will be achieved over the life of the
plan. The discount rate used to calculate
the projected benefit obligation is based
on the market interest rate at December
31, 2003 of AA corporate bonds with an
effective duration equal to that of the
expected payments to retirees. Over the
past four years, our weighted-average
discount rate has dropped from 6 3/4% to
6%. It is difficult to accurately quantify
the impact of changes in the discount rate
as it impacts the valuations of pension
liabilities and pension plan assets.
Changes to these estimates impact our
hotel ownership and hotel management
segments as the pension liability and
expense are allocated to these segments. As of December 31, 2003, we estimate
that our consolidated pension plan deficit
is $14 million and that we have total
pension obligations of $103 million. We do
not expect to have significant future cash
outflows related to mandatory funding
requirements for our obligations under
these plans or that this deficit will have
any impact on our operations or financial
condition. Contingencies In the normal course of its operations,
the Company becomes involved in various
legal actions, including claims relating
to personal injuries, occupational related
claims and environmental matters. We
conduct a thorough analysis of all
potential legal claims on a regular basis
and provide for such potential claims when
the expected loss is both probable and can
be reasonably estimated. The possibility
exists that additional expenditures that
have not been accrued for may be required
to defend against or remedy potential
legal action against the Company.   Managements Discussion and Analysis  39
    
    2003 ANNUAL REPORT




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Changes in Accounting Policies In 2003, we adopted several new standards
issued by the Canadian Institute of
Chartered Accountants (CICA). These
changes to our accounting policies are
found in note 2 of the consolidated financial
statements beginning on page 52. Long-lived Assets Effective January 1, 2003, we adopted the
new CICA recommendations with respect to
accounting for the impairment of
long-lived assets. This standard requires
that long-lived assets be reviewed for
impairment whenever events or changes in
circumstances indicate that the carrying
amount of an asset may not be recoverable.
This standard is effective for fiscal
years beginning on or after April 1, 2003
and is to be applied prospectively. Early
adoption of this standard was permissible
and we elected for early adoption to
eliminate any potential differences
between Canadian GAAP and U.S. GAAP.
Adoption of this new standard did not have
an impact on our financial position,
results of operations, cash flows or on
our business operations. Also on January 1, 2003, we adopted
the new accounting standards relating to
the disposal of long-lived assets and
discontinued operations. Subject to
certain criteria, long-lived assets and
any associated assets or liabilities that
management expects to dispose of by sale
will now be classified as held for sale.
This standard is effective prospectively
for disposal activities initiated on or
after May 1, 2003 with early adoption
encouraged. We elected for early adoption
to eliminate any potential differences
between Canadian GAAP and U.S. GAAP.
Adoption of this new standard did not
have an impact on our financial position,
results of operations, cash flows or on
our business operations. Asset Retirement Obligations Effective January 1, 2003, we adopted the
new recommendations with respect to
accounting for asset retirement
obligations. This standard requires that
the fair value of a liability for an
asset retirement obligation be recognized
in the period in which it is incurred if
a reasonable estimate of fair value can
be made. This standard is effective for
fiscal years beginning on or after
January 1, 2004 and early adoption is
permissible. We elected for early
adoption to eliminate any potential
differences between Canadian GAAP and
U.S. GAAP. Adoption of this new standard
resulted in an increase to other
liabilities of $0.7 million, property and
equipment of $0.3 million and
amortization expense of $0.4 million. The
adoption of this standard did not have a
material impact on our operations. Stock-based Compensation Effective January 1, 2003, we
prospectively adopted the new
recommendations of the CICA with respect
to accounting for stock-based
compensation. This standard requires that
compensation expense be recognized in the
consolidated statements of income using
the fair value method for stock options
granted in 2003 and onwards. This new
standard is effective for fiscal years
beginning on or after January 1,
2004 with early adoption encouraged. Under
the amendments to this standard, we had
the choice of applying these changes
prospectively or retroactively. Adoption
of this new standard resulted in expenses
increasing by $0.4 million and did not
have a material impact on our operations. Vacation Ownership We have recently developed a vacation
ownership product and have adopted
accounting policies surrounding this
business that are based on FAS 66
Accounting for Sales of Real Estate, a
U.S. GAAP pronouncement. Pending Accounting Policy Changes The following are upcoming changes to
Canadian GAAP that may have an impact on
our financial statement presentation.
Details on these and any other recent
accounting changes can be found on the web
site of the Accounting Standards Board of
Canada at www.acsbcanada.org. Hedging Relationships In December 2001, the CICA issued
guidance on accounting for hedging
relationships. These guidelines specify
the circumstances in which hedge
accounting is
appropriate, including the identification,
documentation, designation and
effectiveness of hedges and also the
discontinuance of hedge accounting. This
guideline is applicable to hedging
relationships in effect in fiscal years
beginning on or after July 1, 2003. Early
adoption is permissible, however, we will
be implementing this guidance in 2004. The
adoption of this accounting guidance will
not have a material impact on either the
presentation of our financial statements or
on how we operate. FAIRMONT HOTELS & RESORT INC.
    
    Managements Discussion and Analysis   40




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Pending Accounting Policy Changes(contd) Variable Interest Entities The CICA has recently issued a guideline on
the consolidation of Variable Interest
Entities (VIEs). This guideline requires
us to identify VIEs in which we have an
interest, determine whether we are the
primary beneficiary of such entities and,
if so, to consolidate the VIE. A VIE is an
entity that is structured such that:  
    
    the equity is not sufficient to permit that
entity to finance its activities without
external support, or
    
    equity investors lack either a direct or indirect ability to
make decisions about the entitys
activities, an obligation to absorb
expected losses or the right to receive
expected residual returns. A primary beneficiary is an
enterprise that will absorb a majority of
a VIEs expected losses, receive a
majority of its expected residual returns,
or both. This guideline is effective for all
fiscal periods beginning
on or after November 1, 2004 and early
adoption is encouraged. We are currently in
the process of identifying any potential
impact on our financial statements and are
planning on implementing this standard in
the first quarter of 2004. We are adopting
this standard early to minimize potential
differences between Canadian GAAP and U.S.
GAAP. This guideline could result in the
consolidation of managed hotels and the
deconsolidation of any subsidiary where we
determine that the Company is not the
primary beneficiary. Due to the
complexities and lack of guidance
surrounding this guideline, we have not yet
quantified the impact this standard will
have on our financial statements and have
therefore been unable to determine if it
will have any potential impact on our
business operations. Generally Accepted Accounting Principles and General Standards of
Financial Statement Presentation The CICA has issued new accounting
standards surrounding GAAP and general
standards of financial statement
presentation. These standards lay out a
framework for the application of GAAP and
the fair presentation of financial
standards in accordance with GAAP. This
standard is effective for fiscal years
beginning on or after October 1, 2003 and
early adoption is permissible. We will
begin to follow these new standards
starting in 2004 but believe that we are
already in full compliance with these
standards. Disclosure and Presentation of Financial Instruments The CICA is currently in the process of
amending requirements concerning the
balance sheet presentation of financial
instruments, or their components, as
liabilities or equity. As part of this
project, the CICA amended its disclosure
requirements surrounding the presentation
of financial instruments that may be
settled in cash or by an issuers own
equity instruments, at the issuers
discretion, as liabilities. This amendment
is effective for periods ending on or
after November 1, 2004 with early adoption
encouraged. We will be implementing this
change starting in 2005 and it is not
expected to impact our financial
statements. Risks and Uncertainties This section describes the major risks
associated with our operations that could
cause reported financial information to
not necessarily be indicative of future
operating results. The order in which
these risks are listed does not
necessarily indicate their relative
importance. If any event arising from
these risks were to occur, our business,
prospects, financial condition, results of
operations or cash flows could be
materially adversely affected. Our operations are subject to adverse factors generally encountered in the lodging industry. We manage and own hotels in both the
luxury and first-class segments of the
lodging industry. This subjects us to the
operating risks inherent in the industry.
Besides the specific
conditions discussed in more detail
below, these risk factors include:  
    
    cyclical downturns arising from changes
in general and local economic conditions;
    
    varying levels of demand for rooms and
related services caused by changes in
popular travel patterns;
    
    the financial
condition of the airline industry and the
resulting impact on air travel;
    
    periodic
local oversupply of guest accommodations,
which may adversely affect occupancy rates
and actual room rates achieved;
    
    competition from other luxury and
first-class hotels and resorts;
    
    the impact of increases in local taxes;
    
    the
impact of internet intermediaries on
pricing;
    
    the recurring need for the
renovation, refurbishment and improvement
of hotel and resort properties; Managements Discussion and Analysis  41
    
    2003 ANNUAL REPORT




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Risks and Uncertainties(contd)  
    
    changes in wages, prices, construction
and maintenance costs that may result from
inflation, government regulations, changes
in interest rates or currency
fluctuations;
    
    the availability of
financing for operating or capital
requirements;
    
    seasonal variations in
cash flow; and
    
    other factors including
war, international conflicts, terrorism,
contagious illness outbreaks, natural
disasters, extreme weather conditions and
labor shortages, work stoppages or
disputes. The effect of these factors on the
Company varies on a hotel-by-hotel basis
depending on its geographic location and
whether we own or manage the property. The lodging industry is subject to significant regulation. We are subject to numerous laws and
regulations in all of the jurisdictions in
which we operate, including those relating
to the preparation and sale of food and
beverages, such as health and liquor
licensing laws. Our properties are also
subject to laws and regulations governing
relationships with employees in such areas
as minimum wage and maximum working hours,
overtime, working conditions, hiring and
terminating of employees and work permits.
Furthermore, the success of our strategies
to expand existing properties, acquire new
properties or to open newly-constructed
properties is contingent upon, among other
things, receipt of all required licenses,
permits and authorizations, including
local land use permits, building and
zoning permits, health and safety permits
and liquor licenses. Changes or
concessions required by regulatory
authorities could also involve significant
additional costs and delay or prevent
completion of the construction or opening
of a project or could result in the loss
of an existing license. As a result of the
geographic diversity of our businesses,
these regulatory matters arise in a number
of jurisdictions, many of which have
distinctive regulatory regimes. Under the United States Americans with
Disabilities Act (ADA) and similar state
legislation, all public accommodations in
the U.S. are required to meet various
requirements related to access and use by
disabled persons. If a U.S. court or
administrative agency determines that any
of our U.S. hotels are not in compliance
with the ADA, the result could be a
judicial or administrative order requiring
compliance, imposition of a fine or an
award of damages to private litigants,
including possible class damages. We have
responsibilities under the ADA for both our
owned and managed hotels in the United
States. Under the management agreements for
our managed hotels in the U.S., costs
associated with the ADA are generally borne
by the owner, however, any adverse rulings
could have an adverse effect on the fees we
earn on such management contracts. Operations are subject to laws and regulations relating to environmental matters. As the current or previous owner or
operator of certain hotels, we could also
be liable for the clean up of
contamination and other corrective actions
under various laws, ordinances and
regulations relating to environmental
matters. These laws, ordinances and
regulations often impose liability without
regard to whether the owner or operator
knew of, or was responsible for, the
condition requiring the environmental
response. The presence of contamination
from hazardous or toxic substances, or the
failure to remedy a contaminated property
properly, may affect an owners ability to
sell or rent the property, to use the
property for its intended purpose, or to
borrow using the property as a collateral.
In addition, as we arrange for the
disposal or treatment of hazardous or
toxic substances, we may be liable for the
cost of removal or remediation of
substances at the disposal or treatment
facility, regardless of whether the
facility is or was owned or operated by
us. As the manager or owner of various
hotels, we could be held liable for the
cost of remedial action with respect to
environmental matters. Environmental laws require abatement
or removal of certain asbestos-containing
material (ACM) in the event of damage,
demolition or renovation. We have an
asbestos abatement program and continue to
manage ACM in many of our hotels. Laws and regulations change over time
and we may become subject to more
stringent environmental laws and
regulations and may also face broader
environmental liability under common law.
We are presently not aware of any
potential material environmental
liabilities for which we will be
responsible with respect to any of the
properties which we currently or had
previously managed or owned, but such
liabilities may exist and may be material. Each year, every property, whether
managed, franchised or owned, is required
to complete an environmental questionnaire
which covers such items as the training of
employees in the handling and disposal of
hazardous materials, whether there have
been any environmental incidents and, if
so, the remedial action taken, as well as
environmental initiatives introduced by
the hotel. This questionnaire also
identifies any new laws or regulations
being imposed by local, state or
provincial governments and a propertys
proposed response to such laws or
regulations. We are not aware of any
potential material environmental
liabilities for which we will be
responsible with respect to any of the
properties which we currently or have
previously managed or owned. FAIRMONT HOTELS & RESORT INC.
    
    Managements Discussion and Analysis   42




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Real estate investments are subject to numerous risks. We own and lease hotels and are therefore
subject to the risks that generally relate
to investments in real property. The
investment returns available from equity
investments in real estate depend in large
part on the amount of income earned and
capital appreciation generated by the
related properties, as well as the expenses
incurred. In addition, a variety of other
factors affect income from properties and
real estate values, including governmental
regulations, zoning, tax and eminent domain
laws, interest rate levels and the
availability of financing. For example, new
or existing zoning or tax laws can make it
more expensive and/or time-consuming to
develop real property or expand, modify or
renovate properties. When interest rates
increase, the cost of acquiring,
developing, expanding or renovating real
property increases and real property values
may decrease as the number of potential
buyers decreases. Similarly, as financing
becomes less available, it becomes more
difficult both to acquire and to sell real
property. Governments can, under eminent
domain laws, expropriate or take real
property for less compensation than an
owner believes the property is worth. Any
of these factors could have a material
adverse impact on our results of operations
or financial condition, as well as on our
ability to make distributions to
shareholders. In addition, as our hotel
real estate investments are in the luxury
and first-class segments and include some
properties located outside of North
America, they may be relatively difficult
to sell in a timely manner. Further, any
additional properties we acquire may be
subject to the same risks. If our
properties do not generate revenue
sufficient to meet operating expenses,
including debt service and capital
expenditures, our income will be adversely
affected. Further, any additional
properties acquired will be subject to the
same risks. World events have had an impact on our industry. Various events including war, international
conflicts, terrorism and contagious illness
outbreaks (such as SARS), or the perceived
threat of these events, may cause
disruption in domestic and international
travel. Recent world events have negatively
impacted the lodging industry and have had
an adverse impact on our results of
operations and financial condition. The
continued weakness of the lodging industry,
or future world events, could have a
material adverse impact on our results of
operations, financial condition and cash
flow. There is a great deal of competition in the lodging industry. There is intense competition between the
operators of both luxury and first-class
hotels for guests, to secure new
management contracts and to acquire
hotels. Competition for guests is based
primarily on brand name recognition,
convenience of location, quality of the
property, room rates and the range and
quality of food, services and amenities
offered. Demographic, political or other
changes in one or more of our markets
could adversely affect the convenience or
desirability of our properties. We also compete for management
contracts and acquisition opportunities
with other luxury and first-class hotel
managers and owners who may have
substantially greater financial
resources. This competition may have the
effects of reducing the number of
suitable investment opportunities
available to us and increasing our cost
to acquire investments. Failure to obtain new or maintain
existing management contracts could
adversely affect our results of
operations. Management contracts expire or are
acquired, terminated or renegotiated in
the normal course of business. We manage
hotels for various third party hotel
owners subject to the terms of each
propertys management contract. These
contracts can generally be terminated by
the non-defaulting party upon default in
payment or unremedied failure to comply
with the terms of the contract. Typically,
our management contracts are subject to
economic performance tests that, if not
met or remedied, could allow a contract to
be terminated by the owner prior to the
expiration of its term. Failure to
maintain the standards specified in the
contract or to meet the other terms and
conditions of a contract could result in
the loss or cancellation of a management
contract. Some management contracts can
also be terminated if the owner sells the
property to a new owner that does not want
to retain the existing contract. In
certain cases, these contracts provide for
a termination payout upon cancellation of
the contract. In many jurisdictions, in the event of
bankruptcy or insolvency proceedings in
respect of a hotel, a management contract
may be subject to termination or may not be
enforceable against a trustee in bankruptcy
or other similar representative of the
owner. In such circumstances, the
management company would generally have an
unsecured claim for breach of contract
against the owner of the property or its
estate. Further, in the event of enforcement
proceedings by a secured lender in respect
of a hotel, a management contract may not
be enforceable by us against the lender
unless, to the extent permitted by
applicable bankruptcy or insolvency laws,
the lender has executed a non-disturbance
agreement. Managements Discussion and Analysis  43
    
    2003 ANNUAL REPORT




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Risks and Uncertainties(contd) Our acquisition, expansion and
development strategy may be
unsuccessful. We intend to increase revenues and net
income by increasing
the number of hotels under management
through securing new management
agreements, strategic partnerships for new
hotel development, the acquisition of new
properties and the expansion of existing
properties. It is not possible to assure
that future management or acquisition
opportunities will exist on acceptable
terms, that any newly managed or acquired
properties will be successfully integrated
into our operations or that we will fully
realize the intended results of our
strategy. We cannot give assurance that we
will be able to secure necessary financing
upon acceptable terms. Operations may be adversely affected by
extreme weather conditions and the
impact of natural or other disasters. We operate properties in a variety of
locales, some of which are subject to
extreme weather patterns that may affect
the hotels as well as customer travel.
Extreme weather conditions can, from
time to time, have a significant adverse
financial impact upon individual
properties or particular regions. Properties may also be vulnerable to
the effects of destructive forces, such as
earthquakes, hurricanes, fire, storms and
flooding. For example, our two owned
properties in Bermuda suffered extensive
hurricane damage in September 2003
resulting in $9 million of uninsured costs.
Although our properties are insured against
property damage, damages resulting from
so-called acts of God or otherwise,
including acts of terrorism, may exceed the
limits of the insurance coverage or be
outside the scope of that coverage. Our ability to operate its facilities may
be adversely affected if relationship with
employees were to deteriorate. Relations with employees in various
countries, including the more than 14,000
employees represented by 22 labor unions,
could deteriorate due to disputes related
to, among other things, wage or benefit
levels or our response to changes in
government regulation of workers and the
workplace. Our operations rely heavily on
employees, whether they are employed
directly or supervised by Fairmont or
Delta, and the employees ability to
provide high-quality personal service to
guests. Any labor shortage or stoppage
caused by disagreements with employees,
including those represented by labor
unions, could adversely affect our ability
to provide these services and could result
in the temporary closure of a particular
hotel, reduce occupancy and room revenue or
potentially damage our reputation. Vacation Ownership is subject to extensive regulation. We are developing and will operate
vacation ownership resorts and are subject
to extensive government regulation in the
jurisdictions where the vacation ownership
resorts will be located and in which VOIs
are marketed and sold. In addition, the
laws of many jurisdictions in which we may
sell VOIs grant the purchaser the right to
rescind the purchase contract at any time
within a statutory rescission period.
Although we believe that we are in
material compliance with
all applicable laws and regulations to
which vacation ownership marketing, sales
and operations are currently subject to,
changes in these requirements or a
determination by a regulatory authority
that we are not in compliance could
adversely affect the Company. Additionally, if the purchaser of a VOI
defaults, we may not have recovered
marketing, selling and general and
administrative costs related to the sale
of the VOI. Currency fluctuations may have a
material adverse effect on our financial
statements. We have hotel management and ownership
operations in Canada, the United States,
Mexico, Bermuda, Barbados and the United
Arab Emirates and record financial results
for operations in each country in the
currencies of these jurisdictions, while
reporting consolidated financial results
in U.S. dollars. As a result, our earnings
and financial position could be affected
by foreign exchange rate fluctuations,
specifically changes in the value of the
U.S. dollar, through both (i) translation
risk, which is the risk that financial
statements for a particular period, or as
of a certain date, depend on the
prevailing exchange rate of the various
currencies against U.S. dollar; and (ii)
transaction risk, which is the risk that
the currency of costs and liabilities
fluctuates in relation to the currency of
revenues and assets, which may adversely
affect operating margins. With respect to translation risk,
fluctuations of currencies against the
U.S. dollar can be substantial and
therefore our reported results could
fluctuate materially as a result of
foreign exchange fluctuations. We endeavor
to match foreign currency revenues and
costs, and assets and liabilities, to
provide a natural hedge against
translation and transaction risks,
although there can be no assurance that
these measures will be effective in the
management of these risks. In addition to translation risk and
transaction risk, a significant increase
in the value of a currency in the
countries we operate in, such as the 22%
increase in the Canadian dollar from
January 2, 2003 to December 31, 2003, may
have an adverse impact on the level of
demand at some of our hotels. FAIRMONT HOTELS & RESORTS INC.
    
    Managements Discussion and Analysis   44




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We are subject to a number of risks
associated with debt financing. As a result of incurring debt, we are
subject to a number of risks associated
with debt financing, including the risk
that cash flow from operations will be
insufficient to meet required payments of
principal and interest; the risk that, to
the extent that we maintain floating rate
indebtedness, interest rates will
fluctuate; and risks resulting from the
fact that the agreements governing loan and
credit facilities contain covenants
imposing certain limitations on our ability
to acquire and dispose of assets. There can be no assurance that we
will be able to repay or
refinance existing indebtedness and
any other indebtedness when it matures or
that the terms upon refinancing will be
favorable. Our leverage may have important
consequences. For example, our ability to
obtain additional financing for
acquisitions, working capital, capital
expenditures or other purposes, if
necessary, may be impaired or financing
may not be available on favorable terms. A
substantial decrease in operating cash
flow or an increase in expenses could make
it difficult for us to meet our debt
service requirements and force us to
modify our operations. We may have higher
levels of debt than some of our
competitors, placing us at a competitive
disadvantage. There can be no assurance that we will
be able to obtain the necessary
additional capital to finance the growth
of its business. The acquisition and expansion of hotels,
as well as the ongoing renovations,
refurbishment and improvements required to
maintain or upgrade existing properties,
are capital intensive. Such costs are
funded from operating cash flow and
financings. The availability of future
borrowings and access to the capital
markets for financing depends on
prevailing market conditions and the
acceptability of financing terms offered.
There can be no assurance that future debt
or equity financings will be available, or
available on acceptable terms, in an
amount sufficient to fund its needs. In
addition, an inability to obtain financing
for a project could cause cancellation or
short-term interruption of construction or
development of projects. Covenants in our financing agreements
could limit our discretion in
operating our businesses. Our financing agreements contain covenants
that include limits on additional debts
secured by mortgage properties, limits on
liens on property, minimum EBITDA to
interest coverage ratios, maximum debt to
EBITDA ratios and limits on mergers, asset
sales and capital expenditures. Future
financing agreements may contain similar,
or even more restrictive, provisions and
covenants. If we fail to comply with the
restrictions in present or future
financing agreements, a default may occur.
A default could allow creditors to
accelerate the related debt as well as any
other debt to which a cross-acceleration
or cross-default provision applies. A
default could also allow creditors to
foreclose on the properties securing such
debt. Credit facilities typically require
the repayment of funds or cash flow sweeps
when certain coverage ratios are not met. We cannot assure investors that a
judgement of a United States court for
liabilities under U.S. securities laws
would be enforceable in Canada, or that
an original action can be brought in
Canada by investors for liabilities
under U.S. securities laws. We are a Canadian corporation. A majority
of our directors and officers are
residents of Canada and most of our assets
and the assets of our directors and
officers are located outside the United
States. As a result, it may be difficult
for investors
to effect service of process within the
United States on us or our directors and
officers or enforce judgements obtained in
U.S. courts against FHR or its directors
and officers based upon the civil
liability provision of U.S. federal or
state securities laws. We have been advised by counsel that
there is doubt as to whether a judgment of
a U.S. court based solely upon the civil
liability provision of U.S. federal or
state securities laws would be enforceable
in Canada against FHR or its directors and
officers. There is also doubt as to whether
an original action could be brought in
Canada against FHR or its directors and
officers to enforce liabilities based
solely upon U.S. federal or state
securities laws. Managements Discussion and
Analysis  45
    
    2003 ANNUAL REPORT