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November - 2008
Caribbean Tourism Organization (http://www.onecaribbean.org/)
OVERVIEW
The US Election
So it’s finally over! After two long years of campaigning, the most expensive, disputatious and widely-watched election process in US history culminated with a result widely viewed as unthinkable only months ago by most observers in America and abroad when the first African American candidate became President-elect of the most powerful nation on earth. When Barack Obama takes office on January 20, he will preside over a domestic economy in ruins, face a recession among most global trading partners, and inherit an unpopular war being waged on two fronts that he opposed from the start. Perhaps no president before him will be as closely scrutinized over the new direction he is expected to set for his administration and his promise to “hit the ground running.” However, he has the initial advantage of his party control of both houses of Congress and the White House and expectations are high that positive change is possible. Post election polls reveal that over 75% of Americans, including many who voted for McCain, believe that given time an Obama presidency will lead to resurrection of an economy mired in the worst recession since the 1930s and start to repair the badly damaged image of the United States in much of the world. The task before him is immense and his priorities will certainly be centered first around a domestic agenda and it is our intent here to look beyond the big picture and speculate on how this extraordinary election outcome may affect future US relationships with the Caribbean and Latin America and how Obama’s victory may affect the region’s tourism industry and travel and tourism prospects at large. Here are several areas of concern to watch for in the early days of the new administration.
i. Political and Trade Relations
While on the campaign trail, Senator Obama frequently voiced his support for serious discussions without precondition with countries considered to be unfriendly or hostile to US interests. He specifically included Cuba on this list when he expressed a willingness, if elected, to meet with Cuban President Raul Castro. While it is unlikely that such a meeting would lead to an early lifting of the 50-year old trade embargo that requires congressional approval, it is entirely possible that it could happen during Obama’s first term. In the meantime, it is all but certain that the new President will move swiftly to fulfill his campaign promise to cancel the onerous restrictions imposed by the Bush administration on Cuban-Americans which limited their ability to travel to the island to visit family to three-year intervals and capped dollar remittances to family members living there. We also suspect that Obama could quickly act to lift all restrictions on US citizen travel to Cuba given the considerable support for such a move that exists within Congress and among US travel industry leaders to make travel legal for Americans wishing to travel to Cuba for any reason including vacations. Most Caribbean countries would welcome it as a big step towards normalization of relations between two countries so important to the region. Although there are some destinations close to the US who fear the diversionary effect of millions of American tourists rushing to visit Cuba after being shut out for so long by their own government, it is our belief that any negative impact would be short-lived and the overall result beneficial for the region’s image and tourism development.
In the area of trade relations, Obama’s position is less clear. As a candidate, it was politically expedient for him to propose revisions to NAFTA and oppose expansion of free trade to Latin America, particularly to Colombia that has been a bone of contention with the current White House and even some Democrats. As the President, while he probably will not want to confront his big union supporters off the bat, we believe his position is likely to be more moderate on hemispheric free trade issues that will ultimately benefit the Caribbean. For example, given the energy crisis, which is not going to go away in spite of the current drop in oil prices, and the focus on alternative fuels that Obama pushed as a candidate, there is an opportunity to further current administration proposals which would support the growth of the sugar-based ethanol industry in the Caribbean and Central America. Sugar-based ethanol is less costly and more efficient than ethanol produced from corn in the US and it has been a major factor in Brazil’s economic growth.
We have previously suggested in these pages that a rebirth of sugar as a long-term growth industry once again could be very important to a number of Caribbean nations reducing dependency on tourism while supporting its growth and reducing the need for ever-more expensive oil imports.
ii. Relations with the Airline Industry
Most industry analysts predict that higher airline labor costs resulting in higher fares are likely to happen given the traditionally strong support by Democrats of unions and their collective bargaining powers. The National Mediation Board which rules on airline labor disputes has been more oriented towards management under Bush; as an example, it ruled in favor of Delta on a complaint by unions that the company had interfered in a union organizing campaign. This could be important as Delta, now the world’s largest airline and increasing operations to the Caribbean, is also the least unionized of all US airlines. Next year will see a number of union drives to enlist Delta’s work force including the Association of Flight Attendants. A new more worker-sympathetic Board appointed by the Democrats could affect the outcome of any further disputes.
We can also expect a reversal of the Bush administration drive to auction off up to 10% of existing airlines’ operating slots at New York’s three major airports. This is another relevant issue for the Caribbean given the importance of the New York gateway to the region. A reversal would favor American, Continental, JetBlue and others serving the Caribbean but would curb opportunities for newcomers. On balance, we feel that protection of existing carriers is in the region’s best interests at this time. The first auction of 30 round trip slots is set for January 12 and has already received challenges which could delay the decision beyond Inauguration Day. In any event it will be up to Obama to shut down or continue the 5-year program approved only last month by the FAA and we anticipate he will take the former course of action.
On other issues of more than passing interest to Caribbean tourism given the increasing globalization of air carriers with multi-national owners, Obama has pledged to maintain current caps on foreign ownership of US airlines to 25% of voting stock and 49% overall. This is another concession to labor groups that have opposed any relaxation of these limits. The new government is also likely to be tougher on approvals for additional mergers in the US airline industry.
Lastly, it is to be hoped that the new administration will move quickly to fund the upgrades required in the outdated US air traffic control system. Modernization, including satellite guidance systems is desperately needed and pressing safely concerns and unacceptable airline delays make this a matter of urgency after years of fence sitting. Obama is also expected to address the concerns of air traffic controllers who had a 30% pay cut imposed on them in 2006. Both government and the airlines will have to make serious investments in a vital common cause.
iii. Obama and Tourism
Mr. Obama’s track record on tourism issues is slim although he did co-sponsor the Travel Promotion Act while a senator which was designed to fund promotion of the US as a destination in foreign markets. That bill passed in the House but has languished in the Senate where it remains unvoted. Unless the bill is passed in a lame-duck session, considered highly unlikely, the Travel Industry Association (TIA) headed by President Roger Dow is pushing hard for its incorporation into any new economic stimulus package proposed by the Democrats.
Mr. Dow is optimistic that this will happen and that travel and tourism will be recognized as a major engine of economic growth and job creation opportunities by the Obama White House. We can only hope that he is proven right as a healthy tourism industry and transportation sector in the US will benefit both inbound and outbound tourism interests.
PROSPECTS FOR TOURISM RECESSION IN MAIN MARKETS
It’s now official on both sides of the Atlantic, recession is in full swing. In America, consumer spending, for so long the primary engine of economic growth representing a full two-thirds of annual GDP, fell at an annualized rate of 3.1% in the third quarter, the first decline since 1991 and the biggest drop in nearly 30 years.
Overseas, the Euro-zone simultaneously fell into its first recession since the common currency was introduced ten years ago. Almost all member countries are affected with the sole exception of France expected to follow in 2009 and the combined economy of the 15 countries fell by 0.2% in the quarter for the second straight quarterly decline. Among the worst affected was Germany, Europe’s largest economy and the fourth largest in the world, where GDP slumped 0.5% in the quarter and expectations are worse for the final quarter of 2008. While Britain is not yet officially in recession, its economy also shrank in the third quarter and it will certainly be there by year end.
In the meantime, the value of the pound sterling has dropped appreciably vis-a-vis the US dollar. Towards the end of November, 2008 the value of sterling was 35% less than that of the same time in November last year. Currently it stands as much as 20% lower than the same time three months ago. This has serious implications for the British traveler’s purchasing power where foreign expenditure is incurred and will clearly impact negatively on willingness and ability to engage in international travel in the coming year compared to last year. This is not good news for those Caribbean countries which are heavily dependent on this market.
Back in America, the unemployment rate has risen to 6.8% and could go significantly higher if one or more of the big-three auto manufacturers are allowed to slip into bankruptcy. The stock market has plunged and consumer confidence is severely shaken with the Conference Board reporting late last month that its index had fallen to the lowest level since the survey of US households began over 40 years ago. It is clear that consumer spending growth is unlikely to get back on track soon as America tightens its belt and the travel and tourism industry is feeling the squeeze along with everything else. Companies throughout the industry including airlines, cruise lines, hotels, resort destinations, casinos and travel agents have all reported sharply slowing business and decreased advance bookings into 2009.
American Airlines, the Caribbean’s largest carrier, reported a system-wide drop of nearly three quarters of a million passengers boarded in October over the same month a year ago. The world’s two largest cruise operators, Carnival and Royal Caribbean Cruise Lines both say bookings for the winter are down over last year and Carnival announced on October 31st it was suspending its quarterly dividend “due to global economic uncertainty.”
The outlook for the hotel sector is equally grim. According to PricewaterhouseCoopers, the key measure of the hotel industry’s health, revenue per available room (RevPar) will show a decline approaching one percent this year and fall by 5.8% in 2009. PWC also forecast that demand would fall by two percent next year which combined with an increase in available rooms would reduce occupancy levels to an estimated 58.6%, the lowest rate since 1971. Several major hotel companies have reinforced this gloomy forecast including Marriott International and Starwood Hotels and Resorts which both reported significantly reduced third quarter profits and lowered their full-year forecasts. Disney also reported sharp declines in hotel bookings and theme park attendance for the current period and the first two quarters of fiscal 2009.
Casino operators in Las Vegas and other gaming centers which have sometimes bucked declining economic trends are not exempt this time around. Notably, shares in the Las Vegas Sands company fell to $7.29 from $122 just 11 months ago after a company auditor said there were doubts about Sand’s ability to survive.
In the travel agency business, big wholesalers are grappling with reduced demand and laying off staff. On the retail side, giant Liberty Travel announced that it was closing more than 30 of its locations in the Northeast and Miami after decades of expansion.
Is there a bright side to all this doom and gloom? It becomes increasingly hard to find one for the short term but Caribbean tourism officials may take some comfort in advance booking trend numbers we have recently received from several bellwether wholesalers with widely diversified product lines in packages to both domestic and international destinations. A confidential report made available to us this month shows future hotel room nights booked as of October 31st. The Caribbean as a region was off about seven percent, not including Mexico’s Caribbean resorts which were actually up over last year.
In contrast, competitive destinations like Hawaii, Florida, Las Vegas and Europe were down in double figures, several including Europe, in spite of a stronger dollar, off by more than 20%. While this is little cause for celebration, it does provide evidence that the Caribbean is more than holding its own, at least in the US market and we hope that sufficient resources will be found to keep the pressure on through advertising and special promotions. Our latest surveys find that agents and tour operators are generally finding enough airline seats to match demand even at peak holiday times. While seat capacity has been cut in some markets, other destinations in the Eastern Caribbean have actually gained. Low fare carrier, JetBlue, in particular, is adding
services from the Northeast and Florida to The Bahamas, Puerto Rico and other points beyond, Other LCCs like AirTran and Spirit have added seats and new services for the winter season while the two 800-pound gorillas of the industry, Delta and American have both cut and added flights on a selected market basis. Regrettably, a number of mid-Atlantic services from the UK to the Caribbean have been cut this winter by BA, BMI, Virgin Atlantic and by the collapse of the XL Leisure Group. Those services will be hard to replace although very limited new flights to Grenada and Tobago by Monarch are expected to start before Christmas. Summing up, we believe that the Caribbean will survive the current economic disaster better than most competitors but it certainly won’t be easy.
There is also an upside for those people who still have secure jobs and money to spend and there are many such less-leveraged families and individuals remaining in the population mix. There has been no other time in recent memory when such a plethora of discount airfares, cruise prices and hotel deals has been available to travelers as now for the coming winter season. The closer one gets to departure, the bigger the discounts but cruise fares are already at their lowest level since the aftermath of 9/11 for Caribbean sailings in January and February. If you visit an on-line discount travel site like www.vacationstogo.com you can find even bigger discounts on virtually every cruise line with close sailings offering as much as 80% off brochure prices and double digit reductions available throughout the season.
Airfares to the region are also coming down although not so drastically as some available to other destinations like Hawaii and Europe. The lowest airfares to Hawaii from West Coast getaways, for example, have now fallen below $300 round trip when it cost as much as $1,000 for the same flight last summer. Some all-inclusive packages to Oahu are now selling for less than the airfare alone a few months ago. All this is great for those people willing and able to take vacations this winter but dangerous for desperate suppliers who can discount themselves into oblivion when costs exceed income as has been clearly demonstrated by the demise of several low cost carriers this year who tried to capture a share of the profitable business travel market across the Atlantic. Their traffic figures were generally good but their bottom lines a disaster.
We have one other positive development to report on which bodes well for the future of international tourism growth in the US market. The State Department has issued nearly 15.7 million new passports this year on top of the record number of applications the Passport Office handled in 2007. First time applicants accounted for nearly 75% of the total. This means that the number of Americans currently residing in the US who hold valid passports will top 88 million by year-end, that’s more than 31% of the US citizen population in the country. While it’s true that much of this extraordinary surge over the last two years is credited to new US requirements that all returning residents from overseas destinations including passengers by air from the Caribbean must have valid passports, the target population in the US for foreign vacations has never been greater.
AIRLINE INDUSTRY UPDATE
i. Dark Skies for the World’s Airlines
The global aviation industry is struggling with the largest drop in passengers in eight years according to the International Air Transport Association (IATA.) So far this year more than 30 carriers around the world have gone under and that number is likely to double in 2009.
IATA’s Director General said in a recent release “The deterioration in traffic is alarmingly fast-paced and widespread (Latin America was the only region where passenger traffic showed a small increase in the third quarter). We have not seen such a decline in passenger traffic since SARS in 2003. Even the good news that the oil price has fallen to half its July peak is not enough to impact the drop in demand. At this rate losses may be even deeper that our forecast US $5.2 billion for this year.” Delta, American and Continental had a combined third-quarter loss of $650 million while Southwest, the low-cost carrier that has been consistently profitable for years lost $120 million in the quarter, ironically because its hitherto-successful fuel hedging strategy backfired with the sharp drop in oil prices falling below the value of its contracts. Surviving airlines around the world have responded to the crisis by cutting capacity as 46 million airline seats globally have been eliminated from previously published schedules according to the Official Airline Guide (OAG). US airlines have cut nearly 11% of internal flights in the last quarter compared to last year and the OAG says there will be 83,000 fewer flights originating within the European Union.
Forecasts for the world’s airline industry results in 2009 are decidedly mixed with IATA predicting losses totaling $4.1 billion while Credit Suisse and Morgan Stanley analysts are more bullish, even suggesting that cutting costs and capacity could result in a small profit if fuel prices remain low for next year.
ii. Mergers and Acquisitions Update
The big deal and the most significant for the Caribbean was, of course, the completion of the merger between Delta and Northwest last month. This milestone agreement approved by anti-trust regulators on both sides of the Atlantic sees Delta, the surviving carrier, replacing American as the world’s largest airline by traffic. The new Delta will have a fleet of nearly 800 planes, 75,000 employees and annual revenues around $35 billion. The airlines expect to be fully integrated within two years, but they have full code sharing ability immediately and although Northwest will temporarily operate as a subsidiary of Delta under Delta’s management, they were essentially a single carrier from day one (unlike the Air France/KLM merger where both carriers continue to operate under their separate identities.) The trans-Atlantic partnership relations of Northwest with KLM and Delta with Air France are likely to be maintained and since they already have anti-trust immunity create a huge competitive challenge for other carriers operating over the Atlantic. American and BA will push harder for the existing restrictions on their own trans-Atlantic operations to be lifted quickly and it is hard to see how regulators can turn them down. In the meantime, Delta has announced its plans for major expansion in Latin America and the Caribbean and has added new flights and increased winter season schedules to a number of Caribbean destinations starting in December.
iii. Other Mergers
In a long-anticipated deal, Lufthansa finally reached an agreement to take control of BMI and with it goes its 11% of those super-value slots at London’s Heathrow. Lufthansa now has 80% ownership of BMI and is expected to pick up the remaining 20% from Star Alliance partner SAS which has already put its shares of BMI up for sale. Lufthansa’s acquisition of BMI will make it the second largest operator at Heathrow although still a long way behind British Airways. The purchase has also forestalled Richard Branson’s interest in buying BMI and he has now proposed a new alliance with Lufthansa which would integrate operations of the three carriers at Heathrow in some unspecified way. Lufthansa has yet to respond to Branson’s approach but it seems unlikely to be positive unless Lufthansa moves to take over Singapore Airlines 49% share of Virgin Atlantic. The German carrier is involved in several other pending deals including a bid for Austrian Airlines and a possible partnership with Alitalia which narrowly avoided going out of business this month when the EU approved the latest Italian government rescue plan. And so the European airline chess game plays on.
iv. Big Equipment Order Bucks the Trend
It seems that American Airlines may not be content to accept its drop to number two behind Delta for long. When most other carriers are cancelling aircraft orders and grounding equipment, American still plans to take delivery of 76 more fuel-efficiency Boeing 738-800s over the next two years. Looking further ahead, American is talking to Boeing about the purchase of as many as 100 of the manufacturers new B787 Dreamliners that if fully concluded would set the airline back more than $15 billion – a staggering sum to contemplate in this time of short cash and credit. The plan is to place a firm order for 42 of the technically-innovative aircraft for delivery between 2012 and 2018 with an option for 58 more in the same timeframe. The model which American is ordering is a stretch version suitable for long haul markets with 20% better fuel efficiency than any other aircraft available with its range and capacity. It’s certainly a bold move in these uncertain times that should help to inspire confidence in American Airlines’ future.
CRUISE INDUSTRY UPDATE
Perhaps the most obvious and immediate result of the global economic meltdown on the cruise industry, in addition to the extraordinary levels of discounting for the coming winter season reported above, has been the relocation of homeports and itineraries back to the US and the Caribbean from the UK, Australasia and South America after a big shift in tonnage over the last two years. The cruise lines obviously have movable assets, a big advantage over the hotel industry, and are able to switch their ships to homeports that are easier and cheaper to get to for the largest anticipated customer base according to current market demand. However, there are considerable logistical and cost considerations in making these moves in addition to public relations problems that could make return to these international homeports more difficult for the future.
Carnival Cruise Lines announced in September that it was canceling its scheduled operations out of Dover, England for the Carnival Liberty which will now remain in Miami for year-round sailings to the Caribbean in 2009. In a related move that affects Carnival UK, it is closing its Ocean Village brand and transferring its two ships to P & O Cruises Australia late next year. Also in September, Celebrity Cruises announced that it is cancelling the Celebrity Millennium’s 2009-2010 sailings out of Australia and New Zealand and will operate the ship out of San Juan replacing the Celebrity Mercury which will sail out of Baltimore and Charleston SC. Only days after Carnival’s announcement, Royal Caribbean cancelled its entire 2009-2010 season in South America for the Radiance of The Seas and will operate Mexican itineraries out of San Diego instead. Rod McLeod, now a cruise industry consultant, was recently quoted in Travel Weekly on this topic. He said “Air cost and seat availability is a significant factor in most of the recent capacity shifts, most certainly related to Europe and even to the North American home ports.” In any event, it seems that the Caribbean comes out ahead as a result of these decisions.
i. New Ship Orders in Decline
We return to this subject briefly because the deepening crisis has certainly put a hold on most new ship orders and slowed the advance of what seemed to be an unstoppable armada of bigger and bigger vessels being launched into already crowded seas.
Tight credit and falling demand has reduced profits in an industry that clearly has excess capacity already and has recognized that simply shifting ships from one market to another (see above) will not solve the immediate problem. Both Carnival and Royal Caribbean have told Wall Street analysts that they do not envision any more new ship orders beyond those already committed for delivery in 2009-2010. Princess, which just took delivery of the 3080 passenger Ruby Princess, has no other ships on order and Norwegian Cruise Line may cancel its only two ships on order for 2010 in an ongoing dispute with the shipyard. Only Celebrity Cruises among the mass market lines is apparently sticking to its existing order for one new ship a year until 2013.
Perhaps investors and most governments in the Caribbean will see this hiatus as an opportune time to re-assess their strategic plan and direction.
Next month, this newsletter will take a break from economics and the roller coaster numbers game and take a close look at the problems of our peer organization in the Pacific, the Pacific Asia Trade Association (PATA.) PATA is in the process of reorganization and looking for a new CEO as is CTO. The two organizations have been around for similar lengths of time and there are many other parallels, including the ups and downs of the Chapter system, which we think our Members will find of interest.
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