TOURISM EXECUTIVE BRIEF
October - 2007

Caribbean Tourism Organization (

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THE ECONOMY AND BUSINESS OUTLOOK

Overview

Little has changed since the last edition of the Brief came out in late summer and conditions in our key markets, particularly the US, are as confusing and hard to predict as they were then. The recent Caribbean Tourism Conference (CTC-30) in Puerto Rico and its preceding business meetings brought forth some welcome and important structural changes to CTO and its hierarchy that should make it easier for the organization to respond more quickly to the challenges that undoubtedly lie ahead in these uneasy times, even as prospects for a good winter season remain strong in the face of possible recession.

The Economy

In spite of a stock market that remains resilient, though volatile, an increasing number of economists and business media writers are forecasting near-term recession in the U.S. Consumer surveys now show that 2 out of 3 respondents expect recession as the “likely scenario in the coming year.” In what Wall Street Journal writer David Wassel calls “the three ingredient recipe for recession”, the housing market is in a state of collapse and getting worse as commercial and investment banks have belatedly tightened the screws on lending to protect against further losses; oil, natural gas and gasoline prices are soaring as crude topped the $90 a barrel mark – an increase of over $30 a barrel since January; and consumer spending which drives the economy is finally slowing with only a 2% growth expected in this final quarter, a very slow rate indeed while retail holiday sales are projected to grow a slim 4% over last year’s already weak numbers. In response, Mr. Bernanke and the Federal Reserve have sent Wall Street and Main Street a signal of support with another quarter-point reduction in interest rates to 4.5%. But will it be enough?

The consumer sentiment survey by the University of Michigan has dropped 11 points in just three months – an alarming rate – and the October report on consumer confidence from the Conference Board shows another 4.1 point decline from September. Consumer concerns about job security and their short-term future were reflected in both the Present Situation and Expectations indices. Consumers were not alone as an October survey of small-business owners by National City showed a drop of 1.3% in business confidence to a new low for the survey. The tightening of the Credit market shoulders most of the blame.

Global Outlook

The International Monetary Fund IMF cut its global growth outlook for 2008 to 4.2% from 5.2% in its semi-annual report released on October 17. The IMF has cut its forecast for the US economy next year to 1.9% and is notably more pessimistic about the timing of any rebound than it was in July. If the IMF forecast holds up, the US will trail four of its seven partners in the G7 – Canada, France, Germany and the UK, for the first time - only Italy and Japan are forecast to have a lower growth rate among the G7 countries. At this point, the short and mid-term outlook would support the UK/Europe economic development picture over the US although there are some clouds on the horizon for Europe as well.

Britain’s GDP rose by 0.8% in the second quarter and improved impressively over the previous year by 3.3% for the same period. Financial and business services output also rose by 1.7% in the quarter. However, higher taxes and sharp increases in the cost of living for food, fuel and mortgage payments have brought disposable income in the UK as a portion of overall income to its lowest level in a decade. Newly appointed Prime Minister Gordon Brown’s honeymoon with the electorate was over as quickly as it began and he was forced to call off a planned snap election as polls showed his party could actually lose. Nevertheless, Britons have a long history of shrugging off gloomy news when it comes to making their vacation plans and the UK overseas travel market had already reached a new high by the end of August. In the first eight months this year, 6.9 million Brits traveled abroad according to the office of National Statistics and one in seven went to a long-haul destination accounting for most of the increase.

In the eurozone, Europe’s biggest economy, Germany, is predicted to continue to outperform France in 2008 (unless newly-elected Nicolas Sarkozy’s economic reforms are embraced more rapidly than predicted by the unions, although he has strong public support for now.) Germany’s economic minister, Michael Glos, tends to be gloomy in his predictions for Germany and the EU but the president of the European Central Bank, Jean-Claude Trichet is equally optimistic about the strength of the EU economy and we tend to agree with him. It is true that the average German Consumer is normally more negative and reactionary to market fluctuations than his British counterpart, particularly when it comes to spending on discretionary travel and the latest available survey results from TATS, representing 2550 German retail agents, confirms this. Holiday bookings to all destinations made in August declined sharply after a strong 7-month showing since the start of the year. However, long-haul bookings were the least affected and it goes without saying that the soaring value of the euro makes travel to dollar zones an incredible bargain. Of course, the strength of the euro is a two-edged sword with a negative impact on European exports and the rising price of fuel which is already leading to inflation in the eurozone.

Currency Matters

After a brief holiday period in late summer and early fall, the US dollar resumed its precipitous drop against the euro and British pound. By the end of October, new record lows were set against both currencies. The euro fetched $1.448 and the pound cost $2.079 at the close of trading. In fact, the US dollar is at its lowest level in 11 years against a broad group of currencies and the Fed’s latest rate cut is likely to send the dollar even lower although higher-than-expected inflation in Europe may cause their central banks to rethink positions on interest rates.

The collapsing dollar has alarmed both US travel agents and the European inbound travel industry and government tourist boards. Agents say exchange rates didn’t really hurt this summer’s sales to Europe although their clients did a lot of “moaning and groaning” on their return but they are very concerned about sales in 2008. ASTA officials predict that next year more people will take all-inclusive tours rather than booking on their own via the Internet. Readers will know that we have also been predicting the same trend for months including a newly heightened interest in European-based cruises for the same reasons.

Closer to home, the Canadian dollar reached parity with the US dollar back on September 21st and has since extended its gains to C$0.94, its modern day high against the greenback, to the general delight of Canadian chauvinists long used to being in the shadow of the US. However, much of Canadian industry in manufacturing is not as pleased as sales to their most important trading partner, the U.S., are fast diminishing. Canadian holidaymakers are now being targeted in a big way to come south for their vacations. Florida and New York are just two states aggressively promoting their tourism wares through advertising and promotional spends in both traditional and electronic media. Several of our member states are doing the same with similar expectations.

Energy – Availability and Prices

The price of crude oil closed at the end of October above $94 a barrel – a jump of $20 a barrel since August and another new record. Can we be far from the $100 barrel that many analysts see as inevitable? It seems to us to be all but certain if we look at the key forces driving the market. Since crude oil prices are denominated in dollars, a weaker US currency means that it takes more dollars to buy the same amount of oil and prices will go up or down in tandem. Supply and demand in global markets is obviously crucial and enough ink has already been spent on soaring demand in Asia and elsewhere. New oil fields are becoming increasingly hard to find and increasingly expensive to develop as the-easy- to reach reservoirs like those in the huge oilfields in the Persian Gulf region are being rapidly depleted.

According to one prominent Saudi oil consultant and former executive at Aramco, the Saudi national oil company, many of the mature reservoirs in the Middle East are already 60% depleted. He predicts that supply shortages will continue to add $12 a barrel to the price of oil for every million barrels a day in additional demand over today’s average usage. No doubt, the price of oil will fluctuate up and down in the weeks and months ahead and OPEC may yet intervene to stabilize it, but there is also no doubt at all that the only direction for the future is up and global markets will learn to live with that reality.

Airfares and Vacation Demand

One immediate consequence of the jump in oil prices is a concurrent jump in airfares in major markets where the increases are likely to stick as all carriers, including the low cost carriers LCCs, are facing huge increases in operating expenses. A mid-October industry wide increase of $10 on every roundtrip domestic ticket initiated by American Airlines was followed quickly by another$10 increase matched by most other carriers including Continental, Delta, Northwest and United, and is now applicable on most city pairs. Increases on international routes including the Caribbean are more selective but inevitable. Airfare bargains for the coming holidays are all but non-existent unless you bought and paid for your tickets very early when fares on some holiday routes were actually lower than last year prior to September. For the Caribbean and most competing leisure travel destinations this winter, seat inventory will be tight and airfares increasingly high. Fortunately, for the moment at least, demand is also high in the US marketplace.

Regional Winter Season Demand

As we approach the first big holiday of the season, almost every sector of the US travel industry is reporting strong demand for Thanksgiving, Christmas/New Year holidays (with some small windows), and the following 2008 winter months. As we have mentioned above, high fares and limited inventory are prevalent throughout, but advance bookings from wholesalers/tour operators and retail chains are running well above last year at this time. Cruise bookings are also brisker than they have been for some time for the Caribbean region and big discounts are becoming harder to find. One significant retail group of over 5000 agents Vacations.com reports that advance bookings to sun destinations are at a record high and the Caribbean’s share of Travelocity’s bookings for the holidays is also up to the highest percentage of their total business.

American Airlines which remains the largest carrier to the region by a significant margin in spite of increased services from other carriers reports an average monthly increase in advance bookings to their entire Caribbean network of 5%-6% through March. This is very healthy in view of a less than rosy economic picture and the potential impact on travel of a major election year with earlier than ever primaries in our major-market states during the winter. Perhaps the strong advance bookings mean that many American are simply fed up with the long drawn-out process and want to get away from it all! That would certainly be a good outcome for the Caribbean.

PASSPORT ISSUE

Few issues have so inflamed Caribbean destinations as the Western Hemisphere Travel Initiative while its full impact on discretionary travel to the region will never be properly measured. However, the major elements of the new passport requirement, with the exception of the cruise industry where a delay has been granted to next summer at the earliest for returning passengers from the Caribbean and Mexico, are now in place and the backlog in passport processing by the State Department has disappeared (your editor got a new passport recently in six working days.) What is certain is that the number of new passports issued to US citizens this year is really impressive with more than 14 million passports issued in the first nine months compared to 12 million for all of last year.

Don’t think for a moment that these numbers are going unnoticed by the competition, particularly by European destinations who will be heavily promoting themselves, addressing a short break audience who might normally be headed for Florida or the Caribbean. This is particularly important as we note the growing trend to shorter (3-4 days) and more frequent vacations in the U.S. marketplace. The European Travel Commission ETC has dubbed the new US passport holders resulting from the US WHTI as “passport virgins” and sees them as a huge target of opportunity for its members. The French Government Tourist Office is one of several drawing up a specific action plan and separate budget to address this market. Belgium is already promoting to them on its website with special pop-ups and ETC’s current chairman, Conrad van Tiggelen of the Netherlands Board of Tourism says specifically “we will be targeting the audience that takes a short break to the Caribbean; without mentioning their new passports, we might say that with a few hours more travel, you can be in a cultural capital.”

While the Caribbean should certainly be aware of this and prepared to react positively in its own messages, it has the great advantage that most of these new passport holders got them to travel to the Caribbean in the first place.

AIRLINES AND AVIATION NEWS

  • The San Juan Accord

Congratulations to the ministers of tourism and transport and other officials who recently met in San Juan to discuss issues of the regional air transport sector to ensure safe, secure and sustainable airlift throughout the Caribbean. The discussions led to a long overdue agreement known as the San Juan Accord which identifies the need for a single airspace and a common civil aviation region. Execution of the Accord won’t be easy but with goodwill and the new recognition of the need, it could be the most significant step forward that the Caribbean has seen in aviation since the creation of regional carriers well over half a century ago.

  • LIAT

Congratulations, as well, to LIAT for another significant aviation event on the signing of the acquisition agreement to take over Caribbean Star on October 24. Caribbean Star will close operations on November 15 and LIAT, whose major shareholders remain the governments of Antigua and Barbuda, Barbados, St. Vincent and the Grenadines, will operate a combined fleet of Dash 8 aircraft over the existing route structure of the two carriers,

Chairman of LIAT and former Secretary General of CTO, Jean Holder, said “the heritage of an important regional icon was preserved in the process.” Those of us whom over the years have flown many thousands of miles on LIAT and remember funny items like their old theme song “LIAT, LIAT, we love you” as interpreted by a young local musician called Morris Marks or the funky in-flight uniforms from Betsy Johnson worn by the stewardesses of another era, would certainly agree.

  • Other Airline News

Moving away from regional aviation matters, there were a number of other significant happenings of Interest to the region during October – a busy month for airlines. Mid-October saw the unveiling of a new transatlantic partnership between Delta and Air France which is designed to take advantage of the recent open skies pact between Europe and the US. This agreement calls for a joint venture starting in April 2008 when the open skies pact takes effect which would share costs and revenues on all transatlantic flights operated between Air France and Delta hubs. In addition the agreement covers any flights to be operated by either carrier between London’s Heathrow and US airports in a direct challenge to British Airways’ LHR supremacy. Although Air France and KLM have merged, they operate now as separate entities and KLM’s hubs are not yet covered by the agreement. Later plans call for expansion into more routes between Europe and North America and given both carriers’ extensive interests in the Caribbean, it is conceivable that the venture could eventually include mid Atlantic routes to the region.

  • Southwest Airlines

Still another development with some intriguing long-range possibilities is the new interest in future international routes recently demonstrated by domestic low cost carrier pioneer Southeast, long a leader in cautious expansion and profitability. For the first time, Southwest sent high level delegates to the annual conference on worldwide route development held this year in Stockholm. This conference attracts more than 300 airlines and 750 airport representatives worldwide. Airports make pitches for service and airlines explore contacts at airports they may be interested in. International service by Southwest with their own aircraft is probably a long way off, but they will get a foot in the door when they start code share operations to some destinations in Mexico and the Caribbean in 2009 using aircraft from existing code share partner ATA.