By David Carey
(Dr. Richard Kelley is traveling. His column will return on March 6. David Carey wrote the following article for The Honolulu Advertiser, where it appeared last Sunday, February 21.)
The grim results of 2009 hotel revenue performance have hit the front pages. The industry is clearly hurting. What has led to this situation, and what does it mean for Hawaii’s visitor industry and economy as a whole?
David Carey
Hawaii is primarily a leisure destination. People come here to vacation, paying directly out of their personal savings. When people feel economically secure, many will invest in a Hawaii vacation. But when the economy turns down, vacation travel shrinks, especially big expensive trips.
In the past couple of years, several negative economic events have hit at the same time. Housing prices have fallen dramatically, particularly in California, Hawaii’s number one market. When home values fall below the amount of the mortgage, any sense of a personal wealth cushion is gone. Moreover, new loans to refinance mortgages are harder to get.
To make matters worse, the big drop in the stock market caused the value of retirement accounts and personal savings to plummet. Job losses around the country have also been sizeable. And in the 24/7 news world, we are reminded every hour of how bad things have become. This makes us feel worse.
So with “underwater” mortgages, declining investment wealth, job losses, rising unemployment, and state and local governments lacking sufficient revenues to cover expenses, it’s no wonder travel to Hawaii has been hurt.
The visitor industry has also been hurt by the massive decline in the group and meetings market, which, until recently, accounted for up to 20 percent of hotel business.
It all started during the government bailout of AIG, when senior AIG executives scheduled a retreat at a fancy resort. The outrage was predictable and appropriate. The broader impact, however, was not. Administration officials spoke disapprovingly about travel meetings by bailout recipients. Many meetings at hotels were cancelled. Even companies unaffected by the bailout that didn’t want to invite negative public perception also cancelled trips – especially to “luxury” destinations like Hawaii and Las Vegas. The near evaporation of the group market nationally has badly hurt many destinations, including Hawaii.
The rationale for criticizing such trips was understandable: How can you spend taxpayer money on fun? What the politicians didn’t understand was the impact on visitor industry workers and vendors – the people who most need a boost. When a group cancels, Taxi Drivers, Doormen, Bellmen, Housekeepers, food suppliers, liquor vendors, audio visual suppliers, and many others are hurt.
To respond to the challenges of the group market loss, on top of the national economic downturn, the resort industry’s only effective tool is to lower prices enough so that people will travel despite everything. This is precisely what has happened in Hawaii.
Hotel operators have cut prices dramatically to attract business. At least on Oahu this has helped maintain occupancy, which is essential to keep hotel employees working and give restaurants, shops, and attractions enough customers to remain open.
But the impact on hotel and condominium owners has been devastating. As occupancies stay relatively high, so do costs. But with room rates slashed, profitability plummets. While some owners and operators can sustain losses for a short period, the situation cannot continue for long, or properties will go out of business. When they do, many will lose their jobs.
With little or no profit, reinvestment in renovation will also stop. If we are not careful, the quality of Hawaii’s product will decline, hampering long-term recovery.
Hawaii’s resorts are also facing mounting cost increases: Our Legislature and county governments are considering tax hikes and increasing unemployment insurance; health care costs are climbing; several big hotel labor agreements are to be renegotiated this year; and energy costs keep rising.
I wish there were some good news in the near-term, but I don’t see any yet. We need the U.S. and Japanese economies to recover. Until there is real job growth, it will be a very tough environment for Hawaii’s largest industry. Without growth in visitor industry revenues, tax receipts will continue downward, exacerbating the government shortfall.
The one thing we can do is aggressively market Hawaii to maintain our fair share of business in the brutally competitive travel marketplace. It is the only hope our Legislature has of stemming the continuing revenue hemorrhage. To reduce marketing at this point would be suicidal. The travel pie may have shrunk, but with aggressive marketing, we can earn a bigger slice. Destination marketing funds are the only state expenditure that actually bolsters the economy and boosts tax revenue.
Finally, we need President Obama and his administration to stop discouraging group travel, as this would really help generate jobs. We must also hope our Legislature does not impose higher taxes and costs on a severely-stressed industry.
Tourism is really everyone’s business.
