Hawaii tourism faces stiff economic headwinds

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Hawaii's tourism economy continued humming along in the first quarter, with visitor arrivals increasing by 2.8% and key hotel performance indicators rising yet again. But challenges were brewing nonetheless.

Aloha Airlines and ATA shut down in quick succession, stripping Hawaii of 15% of its airlift -- a development that could give additional impetus to energized competition from the Caribbean and Mexico, whose resorts appear more strongly positioned than ever to pursue much of Hawaii's traditional visitor base.

Given Hawaii's near-total dependency on airlift, the demise of Aloha and ATA prompted the downward revision of a key forecast by the Hawaii Department of Business, Economic Development and Tourism. Despite the strong start to the year, the department is now predicting that visitor arrivals will decline by 3% this year, compared with its previous prediction of a 1.4% decline.

Signaling its concern, the Hawaii Tourism Authority moved to inject an additional $3 million to its marketing budget.

But as problematic as the sudden loss of two key air carriers and heightened competition from the Caribbean and Mexico might be, Hawaii actually faces other significant challenges, as well, including:

  • Higher fares prompted by the skyrocketing price of jet fuel.
  • The prospect of further air-service reductions, with American Airlines last week announcing the phase-out of its Chicago-Honolulu route, starting with cutbacks this fall.
  • The withdrawal of two of NCL America's three cruise ships from year-round, interisland Hawaii service.
  • High room rates resulting from years of demand-fueled price hikes.
  • Heavy reliance on visitors from California, whose formerly booming economy has been battered by the housing collapse and job losses.
  • Belt-tightening by consumers across the U.S., as the economy teeters on the edge of recession.

Although such a litany might suggest that it's time for Hawaii tourism officials and executives to locate the nearest panic button, reactions thus far have been tempered somewhat by a sense that the growth of recent years simply could not go on forever.

But there also is recognition that Hawaii must engineer some changes, including more aggressive marketing and perhaps some hotel margin sacrifices in order to help offset increasing airfares.

Although some of Hawaii's challenges are effectively outside of its control, others ironically can be traced to its own success.

Room rates, for example, have risen strongly for years, and the increases have continued even as the outlook began to shift. Average daily room rates rose 6.8% in 2007, according to Smith Travel Research, and continued upward by 6.6% in the first quarter compared with the same period in 2007.

As if to underscore Hawaii's strength, occupancy climbed in the first quarter despite the fairly aggressive rate hikes, to 78.5% vs. 77.4% for the same period last year.

But now, with the U.S. economy flagging and airlift under pressure, high hotel rates could turn around and bite.

Ken Pomerantz, president and chief marketing officer at MLT Vacations, described Hawaii's dilemma: "I don't think it's just a strong quarter," he said. "They're coming off four years of really strong performance." And while robust demand has helped drive average daily room rates higher, he said, one result is that "the total price point for a Hawaii vacation has increased dramatically."

Joseph Toy, president and CEO of Hawaii-based hotel and real-estate consultancy Hospitality Advisors, agreed that Hawaii's growth was contributing to its challenges.

"We've had a great run," he said. But he noted that while the oil shock, increasing competition and other recent factors are affecting Hawaii, a longer-term investment cycle was also in play. "This was really a long-anticipated downturn in the market," he said. "We knew that the levels we were growing at just couldn't be sustained."

Toy explained that the current cycle started earlier in the decade. "We had a number of hotel transactions with a lot of renovation dollars coming in by the new owners," he said, plus additional impetus from the redevelopment of Waikiki. Those investments helped stimulate several years of strong demand, but the cycle began showing signs of age as early as two years ago, when growth rates began to decline.

Now, he noted, weakened consumer confidence, reduced airline capacity and fare hikes are coinciding with this longer-term cyclical softening.  

Competitive challenges

But just as a favorable investment cycle helped propel Hawaii tourism to a long period of prosperity, it appears that a similar cycle now taking place elsewhere, specifically in the Caribbean and on the coasts of Mexico, is beginning to have some effect on Hawaii.

"Both Mexico and the Caribbean have seen a tremendous amount of development," noted Phil Gordon, head of the hospitality and leisure group at international law firm Perkins Coie.

And whereas both regions traditionally have offered strong, value-oriented product, more recently, "You've seen the arrival of properties, either new or expanded, that are very, very high-end -- five-star and above," said Gordon.

He added that much of the investment going into Mexico and the Caribbean has been noteworthy not just in the sums involved (a recent report from the Caribbean Hotel Association placed upcoming regional tourism investment at $100 billion) but in the interlocking nature of project components, including hotels, condos and timeshares. Condo-hotel rooms, for example, can supplement standard lodging inventory.

In addition, such developments provide the ability to market multiple lodging types under a single, well-known brand.

Major investments in Mexico and the Caribbean, backed by aggressive marketing and the advantages of strong value and close proximity to key U.S. origination markets, appear to be paying off for both regions.

Whereas "business to Hawaii has been flat for about a year and a half," said Pomerantz, "we're looking comparatively at huge increases to the Caribbean and Mexico year over year."

A key factor favoring Mexico and the Caribbean, particularly in today's economic climate, is the all-inclusive resort. "There is value to the consumer in paying for something up front and knowing what the costs will be," said Mark Noennig, vice president and general manager at Apple Vacations. "The all-inclusive product, which obviously has gained a lot of attraction in the past, seems to be of even more interest to the consumer now."

What's more, he added, "All-inclusive has now expanded into the luxury market." 

Eric Maryanov, president and owner of Los Angeles-based All-Travel, concurred. He noted that All-Travel receives numerous inquiries from consumers "saying they want to go to Hawaii and stay at an all-inclusive." Such consumers, who typically are considering Hawaii for the first time, "are interested, but then it's pre-empted by an all-inclusive" located elsewhere.

Hawaii is largely shut out of the all-inclusive concept because, as Maryanov and others put it, "the economics don't work."

While the current attractiveness of all-inclusives builds on a well-established trend, another pattern beginning to emerge in Mexico and the Caribbean -- increased bookings by American visitors in the traditionally slow summer months -- likely will come as a surprise to many in the travel industry and potentially could pose yet another concern for Hawaii.

"We're now seeing June and July as very strong months" for Mexico and the Caribbean, said Noennig. "We believe a lot of it is based on family travel."

Pomerantz agreed. "Summer to Mexico is booking very well," he said.

Hawaii's challenges seem to have triggered some creative thinking by tour operators and major travel agencies, who have a vested interest in helping perpetuate Hawaii's position as a preeminent destination. Among their recommendations, based on informal canvassing, are:

  • Redirecting marketing dollars from general branding to more direct product promotion through travel distribution channels, a strategy that they see as working well for Mexico and the Caribbean.
  • Increased bundling of breakfasts, dine-arounds and other value-adds, in order to blunt high prices and help counter the advantage of all-inclusives.
  • Modest reductions in hotel rates to help offset higher airfares.
  • Increased targeting of vacationers east of the Rockies, along with earlier hotel-rate availability to accommodate longer planning cycles.

For their part, Hawaii tourism officials seem to be taking a hard look at the new realities and at ways to address them.

Marsha Wienert, who represents Gov. Linda Lingle as tourism liaison, readily acknowledged Hawaii's challenges as well as the validity of much of the input she and other officials have been receiving.

She suggested that Hawaii must take on some of its challenges directly.

For example, she said, even though carriers including Delta and Alaska are moving to fill some of the gaps left by Aloha and ATA, additional airlift will be limited unless Hawaii makes itself more attractive. "From an airline perspective, there has to be demand," she said. The airlines "are just not assuming the risk ... so it behooves us to show that the demand is there."

In terms of origination markets, Wienert acknowledged that although California, Southern California in particular, has been a rich source of visitors for years, more focus could be placed on other markets. The Pacific Northwest, with its increased service by Alaska Airlines, and also the eastern and midwestern U.S. offer opportunities, she said. "We know there is an untapped market in the U.S. and that the East Coast can be more important."

Continuing to reap traditional visitors from the western U.S. while developing potential on the East Coast will require something of a balancing act. Hawaii's marketing strategies have become finely tuned to West Coast visitors with their briefer stays and receptivity to short-cycle deals, but marketing to Midwest and East Coast vacationers requires that attractive pricing be made available well in advance.

And while the payoff from the western U.S. includes high repeat frequency, long-haul visitors stay longer and spend more: As Wienert noted, visitors from the East Coast spent $186 a day per person last year, compared with $158 for western U.S. visitors.

Given the impact of jet fuel on Hawaii's airlift challenges, it is worth noting that competing long-haul destinations may suffer even more from high oil prices than Hawaii does. Jack Richards, president and CEO of Southern California-based tour operator Pleasant Holidays, pointed out that fuel surcharges alone can top $1,000 for a family of four traveling from the West Coast to Europe. That is twice the typical fuel levy of a Hawaii trip, he said.

And Hawaii could get a break from carrier competition. Continental and United, for example, recently have engaged in something of a fare war, cutting prices on several flights to Honolulu.

But Hawaii remains an expensive destination overall, and years of aggressive ADR growth have made it even more so, adding to the challenge as U.S. consumers clamp down.

"Hawaii can't compete with other destinations" purely in terms of low-cost value, acknowledged Wienert. "That's why we continue to go back to the experience that you can have here," she said.

"The overall experience is more than just a hotel room; it's the experience of the total vacation that can't be matched by other destinations such as Mexico and the Caribbean. It is both inside and outside the resort; that is what makes the total experience."

But in a nod to today's challenging realities, Wienert also signaled that value does matter. "There are different types of promotional programs out there to entice people to choose Hawaii," she said. "Third-night, fourth-night and fifth-night free; breakfast included; kids stay free" and so on.

Jay Talwar, senior vice president of marketing with the Hawaii Visitors and Convention Bureau, said that Hawaii would put much of its $3 million supplemental marketing program to work by increasing what many industry partners have been looking for: specifically, co-op.

The new initiative is "a big cooperative program," Talwar said. "Our travel partners work to sell the travel; they convert the business. The research shows great awareness, great desire and great intent to visit Hawaii. But the bridge to conversion is where it's weak right now. So as a result of that, we're putting more emphasis on co-op programs to help people get over that bridge" and convert more visitors.

The subtext, it seems, is that Hawaii cannot afford to rest solely on its uniqueness, especially when economic headwinds are blowing and aggressive competitors are snapping at its heels.

To contact reporter Lester Craft, send e-mail to [email protected].

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