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Local Hoteliers Preparing For A Weak Season

Winter Tourism Won’t Be Devastating Or Too Hot; 2003 Won’t Be A Banner Year For The Industry


November 21, 2002
Copyright © 2002 CARIBBEAN BUSINESS. All Rights Reserved.

The tourism industry is dragging itself out of one of the sharpest economic downturns in history.

Although Puerto Rico has weathered the storm better than its counterparts in other Caribbean islands, where the tourism industries are highly dependent on U.S. travelers and tourism is an economic mainstay, the fact remains that the pain lingers because room revenue is still below 2000 levels and the business travel segment has yet to rebound.

Leisure travel has bounced back faster than corporate travel, but this hasn’t helped Puerto Rico enjoy a commensurate lift in performance ratios because the island is recognized more as a business-oriented destination.

As a result, local hoteliers say they are preparing for a weak, but not devastating, winter season in comparison with 2001. The high tourism season, which runs from Dec. 15 to April 15, is traditionally Puerto Rico’s most profitable period.

"Christmas and New Year’s are almost sold out," said Willem Plegt, general manager of the Inter-Continental San Juan Resort & Casino. "However, filling rooms for the month of January looks challenging."

Although 2003 isn’t projected to be a banner year for the tourism industry, reasonable growth is expected as the U.S. economy recovers.

Tourism industry on the mend

Occupancy and average daily rates today remain slightly below 2000 levels. Although few predicted the depth and length of the decline, with performance levels expected to recover by mid-2002, the consensus that the industry was in a much stronger position to weather this downturn has proved true.

According to research firm Jones Lang LaSalle Hotels, the reasons are simple: Hotel profitability, at the operating performance level, has been protected by solid reserves and a continual improvement in operating ratios.

On the capital market level, the hotel industry hasn’t experienced the number of fire sales such as occurred during the last recession. Conservative lending and a more educated investment market have meant the mortgage default rate has remained at a historically low rate of less than 1%, according to the American Council of Life Insurers.

Economists expect recovery in 2003. However, a key risk remains: the possibility of a war with Iraq.

What if there’s a war?

Assuming a war occurs, economists believe the impact on the U.S. economy will be limited for a number of reasons. First, the potential invasion has been highly publicized, with consumers and the stock market already pricing in the effect. This is in contrast to

the 1990 Gulf War, which was unexpected and therefore had a significant impact on consumer confidence and on the economy.

Second, the actual cost of the war is unlikely to have a big impact on the economy or on long-term interest rates. The most obvious impact would be on oil prices, but it is doubtful a price spike would occur as other oil-producing nations have had time to increase oil production and inventories have consequently been increasing.

Puerto Rico trends

Puerto Rico and other destinations continue to offer discounts to help fill hotels, but those discounts continue to chip away at the hotels' bottom lines. The hotel industry, which was already soft from a slow economy in 2001, cut rates drastically after 9/11 in hopes of attracting the relatively few people who were traveling. What the move created instead was a buyer's market.

"If travelers come to expect markdowns, hotels may have trouble persuading them to pay full price as the economy picks up and fear of travel subsides," said Duane Vinson, an analyst with Smith Travel Research. Today, local hotels plan to offer discounts of at least 10%. Traditionally, the average winter rate at major island hotels is $250 per night.

"It looks as if December is going to better than last year," said Tom Netting, president & managing director of Hyatt Resorts of Puerto Rico. "We think our revenues for December will be 15% over last year and less than 5% below 2000 revenue figures."

That’s because Hyatt Hotels has been able to hike rates back to normal for December. "There will be discounting this winter season, but we are picking our spots and it won’t be done across the board," Netting said.

Also, local hoteliers continue to see more last-minute bookings than usual. Last Christmas, advance bookings were weak. Nevertheless, short-term reservations made it a better than expected holiday season. Booking windows have narrowed, making long-term projections more difficult.

"It’s too early to predict the outcome of tourism’s high season because travelers are booking later than ever," said William Shaw, president & chief operating officer of Marriott International. "However, airlines are offering attractive fares, which should provide an incentive to travel."

Travel wholesalers who sell Puerto Rico are forecasting last-minute, but healthy, bookings this winter season because the island generated more bookings than its competitors last year.

To help boost registrations at island hotels, the government launched a year-round internal tourism campaign to persuade residents to vacation in Puerto Rico. Participating hotels designed their own room rates and packages.

Furthermore, Puerto Rico’s Fly Free promotional program is still available, if needed. This initiative helped the industry after 9/11 by producing thousands of room nights. Fly Free offers two free airline tickets to tourists who book a five-night minimum stay on the island.

Perfect storm stirs deals in the Caribbean

Preparing for what some fear will be a slower winter than the last one, Caribbean hoteliers are putting forth some eye-catching deals in hopes of motivating the hesitant traveler to make plans to relax on a local beach. "Between the hurricanes, the recession, low consumer confidence, and the threat of war, it’s overwhelming," said Allen Chastanet, vice president of sales & marketing for Air Jamaica. "I heard someone describe it as the perfect storm."

Air Jamaica has reduced its Caribbean winter package rates by 40% and its airfares by 35% for travel from Dec. 27 through April 9. To accelerate slow bookings for January, Sandals and Beaches are running a 35% off early-bird sale. From Jan. 1 to April 27, SuperClubs’ discounts will be 40%. The Caribbean experienced an 18.8% decline in revenue per available room during the first four months of 2001. However, winter increases in tourist arrivals were reported for all the major destinations in the region.

Even more challenges for aviation industry

"We in the aviation industry foresee bigger challenges this winter season, given the possibility of a war against Iraq and United Airlines' possible filing for Chapter 11 (which gives it a financial advantage over its rivals)," said Enrique Cruz, regional managing director of American Airlines in Puerto Rico.

The airline industry is undergoing a transformation process. The rule of the day is reduction, reduction, and more reduction. Earlier this year, American Airlines—Puerto Rico’s dominant carrier—unveiled the first in a series of short- and long-term strategies which should return the carrier to profitability.

Initiatives include expanding depeaking to its largest hub at Dallas/Fort Worth to allow the airline to use people, gates, and aircraft more productively; retiring its 74-jet Fokker 100 fleet; standardizing, reconfiguring & consolidating a number of its fleet types to enhance its product in international markets; deferring aircraft deliveries in 2002; reducing capacity by 9%; accelerating the retirement of its nine TWA 767-300 aircraft, and cutting an estimated 7,000 jobs by March 2003.

Cruz said everyone is looking for the simplest way to cut both costs and the number of flights. To avoid this, the local government decided to extend its landing fee incentive into 2003, permitting major commercial airlines serving San Juan to continue with their strategic plans. As part of the incentive, all commercial airlines (except AA) that operate in San Juan will get 25% off their landing fees. AA's reduction is based on its load factor, with a maximum discount of 25%.

Last year, landing fee discounts cost the Puerto Rico Ports Authority $5.8 million, including $3.8 million in discounts to AA. "Puerto Rico is a late-booking market with more peaks and valleys than usual. In order for the island to secure a good winter season, we have to start aggressively working on it now," Cruz said.

One year later, it is clear the combined impact of 9/11 and the economic downturn on the tourism industry has taken shape but will continue to evolve for a while yet. The most striking example of this is the extent to which terrorism insurance will continue to affect acquisition underwriting of prime city hotels.

Though the hotel sector continues to struggle with lower performance ratios, fundamentals remain strong and all indicators point to a real recovery in 2003.

This Caribbean Business article appears courtesy of Casiano Communications.
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