Saturday Briefing

By Dr. Chuck Kelley

(Dr. Richard Kelley is traveling this week. His column will return on July 24, 2009.)

It’s no secret that the economy is down and everybody is struggling. We read every day about companies failing, workers being laid off, and crisis-level budget shortfalls. Local newspapers publish tourism-related numbers, and they aren’t pretty. Hotel owners are crying the blues, and some are even considering closures.

Why is it then, that Waikiki still looks so full of people? Over the last two weekends, there wasn’t a parking place for miles, and the beach was wall-to-wall bodies. Driving down Kalakaua Avenue last Saturday night, one might have been astonished to see all those people packed on the sidewalks, spilling onto the street, and standing in line to get into restaurants.

How can this be? Is tourism down, or isn’t it?

It is down – no doubt about that. The reason for the healthy-looking crowds lies largely in the fact that hotel rates and other prices – in shops and restaurants, for example – are set by the dynamic of free-market supply and demand. When demand is strong, as it was a couple of years ago, room prices move up rapidly, hotels are more profitable, more people are working, and more tax revenue is generated for state government.

When demand is weak, as it is now, hotel rates drop astonishingly fast. Shops put more things on sale. Restaurants offer more specials. This appeals not only to visitors, but to kama‘aina as well, so there may be more local folks in Waikiki, especially on weekends.

In the face of low demand, hotel owners and managers strive to keep occupancy as high as possible, even if they need to offer “bargain basement” prices. They work to keep the lobbies full of people, hotel employees on the job, and hotel concessions in business.

Estelle Kelley at her desk which was located at the Edgewater Hotel

Today there are many highly-sophisticated computer systems that predict future hotel demand and adjust room prices to try to maintain occupancy. It wasn’t always like this. Many of you have heard that back in the 1950s and 60s, my grandmother, Estelle Kelley, personally handled all the reservations. She stuck each reservation request on a spindle right on her desk. The more reservation requests that came in, the higher the stack of papers on her spindle. She was able to judge the demand for rooms by the height of that pile and the amount of mail she was receiving. She’d discuss these trends with my grandfather, Roy Kelley, and together they knew how to set room prices.

A few years later, but still before computers were common, Dr. Richard Kelley taught me another way to judge the demand for Waikiki hotel rooms. He’d go out for a walk with me on Kalakaua Avenue in the evening and ask me to count the rooms with lights on in our hotels, and then compare that with the number of lit-up rooms in other hotels. Since only occupied rooms are lit, counting lighted windows was an accurate way to compare our hotel occupancy with our competition’s. If I found that we had significantly fewer lights on than the competition, he knew it was time to reassess our rates. If we had a lot more lights on than the competition, he smiled!

Dr. Richard Kelley in the Outrigger Waikiki Hotel Reservations Office, 1975

Of course, things have changed greatly over the years. We now have computer systems that constantly track price points for all categories of travelers. And we have very capable, highly-trained revenue managers who use their expertise to interpret what the computers tell them. Our systems, along with those of the competition and our suppliers, create a very responsive free market for hotel rooms. Prices rise and fall quickly with supply and demand. Right now they are down – way down – because people are not inclined to travel in the face of all the bad economic news. To entice them to travel, we need to offer a very, very good deal.

Right now those very good deals are out there because hotel operators are willing to drop prices to rock bottom in order to maintain critical hotel occupancy. If occupancy is too low, not only do hotel owners lose money, but employees will be out of work, hotel concessions will suffer greatly, and the many businesses and people who provide goods and services to hotels, concessionaires, and guests will also suffer – taxi drivers, lei sellers, musicians, hula dancers, tour guides, tour boats – even local fruit and vegetable growers. With occupancy somewhat stabilized, even at the cost of much lower revenues, hotels may not be profitable, but at least the workers have jobs, the concessions can survive, and taxes keep flowing to the government to support needed services to the community.

It should be noted, however, that those visitors who are attracted by these extraordinarily low rates have different spending patterns than those who paid top dollar in better times. They spend less overall during their visit and spend it in different places. Some Waikiki business may see an increase in business, while many others see a decrease, and overall tax revenue to the state is down.

It certainly has not been an easy year. But when you travel down Kalakaua and see the crowds on the street, don’t be tempted to think that we are “out of the woods.” Things are still very tough and will likely remain so for quite some time. Fortunately, the modern yield management systems in place can rapidly adjust prices and attract enough visitors to keep hotel occupancy from dropping too far, thus keeping people at work and helping support our community. Conservative, responsible companies, like Outrigger, will ride out this downturn until someday higher demand and profitability return.