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Cloudy Skies: Tourism-Dependent Caribbean Fears Sinking Under U.S. Financial Storm
The Washington Diplomat / January 2009

By Larry Luxner

With popular destinations from the Caymans to Cuba still reeling from the devastation of this summer's hurricanes, Caribbean islanders are no doubt relieved that the 2008 hurricane season officially ended Nov. 30.

Yet for the region's tourism industry, Fanny, Gustav, Hanna and Ike were mere drops in the bucket compared to the real threat on the horizon: financial disaster in the United States.

Today, fewer tourists are booking cruises to Jamaica. In the Bahamas, sales at duty-free shops along Nassau's Bay Street are flat.

And in the Turks & Caicos Islands, a group of disgrunted Chinese construction workers recently took their Israeli bosses hostage, after a Ritz-Carlton resort they were building fell through following the collapse of its chief backer, Lehman Brothers.

Throughout the Caribbean, nothing is making bigger headlines than the worsening global financial crisis. In fact — with the possible exception of energy-rich Trinidad & Tobago — the repercussions of this crisis on the Caribbean could be deeper and longer-lasting than those caused by the Sept. 11 terrorist attacks seven years ago.

"In 2001, it was an issue of security. In this instance, you're talking about people's livelihoods," said Wayne Cummings, director of business administration for Sandals Resorts International and president of the Jamaica Hotel & Tourist Association.

"Eight months ago, I started hearing about problems with subprime mortgages, and that's when I knew the very foundations of the American economy were shaky," he said.

"Even so, I don't believe this crisis is a singular event. It's going to have international catastrophic consequences," said Cummings. He added that "9/11 was a challenge of great proportions, but with this one, nobody seems to be able to tell what the endgame is."

In addition to the worsening U.S. economy, tourism-related businesses also face rising energy costs, increased competition and dramatically reduced air service to the Caribbean — all of which could result in lower hotel occupancy levels and losses for retail and duty-free outlets that depend on sales to travelers.

"Given the region's dependence on airlift, the most daunting issues facing the Caribbean hotel industry are the rising cost of airfares and the announced cutbacks in air service," said Scott Smith, senior vice-president of PKF Consulting. "Due mostly to the rising cost of fuel, four of the five leading air carriers to the Caribbean have announced cutbacks in service. Puerto Rico and the Dominican Republic could see as many as 26% fewer flights in December 2008 compared to December 2007."

In an effort to maintain air service, the Puerto Rico Ports Authority is now offering to reduce airport fees by up to 45%. But even that won't be enough to offset the rising cost of airfares themselves.

"The Caribbean has always been attractive to price-sensitive travelers," said Smith, whose Atlanta-based consulting firm has just released the 2008 issue of its study, Caribbean Trends in the Hotel Industry. "If airfares continue to rise, hotels may have to reduce their room rates in an effort to maintain the Caribbean's position as an affordable destination."

According to Cummings, before all hell broke loose on Wall Street and before there was any talk of a $700 billion Treasury bailout of the U.S. financial system, Jamaica's tourist industry was cheerfuly looking at a 10% growth in tourism revenues.

"Now, we're recalibrating the numbers," he said. "We think we'll be closer to 6% growth, and even that is optimistic. To lose four or more points from our projections has an immediate effect on GDP and all the things that go with that."

And even though the relatively low cost of Caribbean cruises has made the region the world's leading cruise market, that industry isn't much better off than the airlines.

"Despite the strength of the market, we have seen shifts in the cruise industry that have been influenced by the rising cost of fuel," said PKF's Smith. "Cruises to more remote ports in the southern Caribbean, such as Aruba, are being cut from itineraries due to the length of the trip and fuel required to get there."

One of the Caribbean's most popular getaways for American tourists is the Mexican resort of Cancún — which competes directly with such destinations as Montego Bay, Jamaica, and Punta Cana in the Dominican Republic. In 2007, just over 2.3 million passengers arrived at Cancún International Airport on flights originating from the United States, up from 2.1 million passengers in 2006.

"We think we may have some problems later on this year, or the beginning of next year, but so far, we've had no cancellations in Cancún," said Eduardo Chaillo, director of the Mexico Tourism Board office in Washington.

Chaillo added: "With our convenient flights from the U.S. to Mexico and our stable currency, we can attract those travelers who would have gone to Europe or Asia. We think that in the midst of this crisis, there are some opportunities we should take advantage of."

The one place that hasn't been affected yet is Trinidad & Tobago, whose economy thrives not on tourism but on oil and gas exports.

"The immediate impact of the financial crisis for us has been negligible," said Karen Nunez-Tesheira, the country's finance minister, during a recent visit to Washington. "Our stocks are doing extremely well, with investment in local and regional markets. Therefore, the contagion you see happening throughout the world has not happened in Trinidad. The banks and insurance companies have already said that."

She added: "No one welcomes this crisis, but Trinidad & Tobago is in a very strong position, because the commodities market is doing very well and our story is different from that of the rest of the Caribbean."

The economic downturn is already being felt in the U.S. Virgin Islands — which along with Cancún and the Bahamas rank as one of the Caribbean's leading cruise-ship destinations.

"We are looking carefully at the developments," said Edward Thomas, president and CEO of the West Indian Co., in a phone interview from Charlotte Amalie, St. Thomas. "Clearly, our business is all discretionary, and we're hoping we can weather this storm. We do firmly believe that, in spite of it all, people still want their vacations, and the cruise has proven to be a good bargain for their dollar."

In 2007, the U.S. Virgin Islands received 1.9 million cruise-ship passengers and 693,000 overnight visitors. For 2008, those numbers are expected to remain flat or show a slight reduction. Industry projections show fewer but larger ships calling on St. Thomas this high season, a 16% drop that does not necessarily translate to an overall decrease in passengers or dollars spent at local businesses.

Between Oct. 1, 2008, and April 30, 2009, St. Thomas will see 494 cruise calls, compared to 584 during the same period a year earlier, according to WICO. But ever-larger ships are visiting the territory, bringing more passengers per call. Royal Caribbean's Independence of the Seas, the world's largest cruise ship that went on its maiden voyage earlier this year, will be among the ships calling on St. Thomas this winter;

More than 75% of ships dock at St. Thomas after departing from Florida and other eastern states, he said, adding that the territory usually offers those passengers their first port of call after two days at sea, "giving us the first crack at their discretionary dollars."

But the truth is that cruise passengers don't have as much money as they once did — meaning they have less to spend onshore.

"The one good thing about cruising is that folks book a year in advance, so it takes awhile for the impact to hit. By that time, we hope conditions will turn themselves around," said Thomas. "Most folks who are cruising now have already booked their tickets a year ago. So the issue isn't whether they come, but how much discretionary income they have spend while on the island."

Puerto Rico, which like the Virgin Islands is almost entirely dependent on the U.S. mainland tourism market, is equally worried. The Puerto Rico Tourism Co. has kicked off a multi-city U.S. tour with promotional events in Washington, Boston, Chicago, Los Angeles and New York — all of which highlight the fact that American citizens don't need a passport to visit the island.

"There has never been a better time to visit Puerto Rico," said the PRTC's executive director, Terestella González Denton, in a prepared statement. "In spite of the current economic climate, travelers can find a wide array of vacation options on our island, from deluxe hotels to family-owned inns, all of which offer access to our beaches, mountains and cultural attractions. Through this U.S. tour, we aim to highlight that Puerto Rico has something for everyone at all price points."

Yet all the hype in the world won't change the fact that average Americans are deeply concerned about the future, and about their own financial security.

"We know this crisis is going to have an impact, there's no question. It's just to what extent," said Richard Kahn, spokesman for the Miami-based Caribbean Hotel & Tourism Association. "In the Caribbean, it hasn't been felt yet because the summer season was soft anyway. But we're expecting an impact for the fall and winter seasons. How much is anyone's guess."

Kahn added: "We're dealing with one of those perfect storms where economics and the presidential elections coincide, and every four years we have a presidential election, there's always a soft travel market in the fourth quarter. Everyone stops what they're doing."

In 2007, according to the Bahamas Ministry of Tourism, the country received just over 1.5 million stopover visitors, 82.7% of them from the United States. During the first six months of 2008, the Bahamas welcomed 848,700 stopover visitors, 81.5% of them Americans.

That unhealthy dependency on the United States has led the ministry to step up its marketing efforts in Great Britain and elsewhere in Europe because of potential volume and the favorable exchange rate of the British pound and the euro against the Bahamas dollar, which is linked to the U.S. dollar.

But the financial mess on Wall Street has already spread to Nassau's Bay Street as well — where John Bull's flagship store is one of the few that remain open for business. "It's shocking to see how many small businesses have closed," said Grammatico, whose company operates 22 retail shops. "They were not able to weather the storm."

The crisis has taken its toll in other ways. Lehman Brothers had been involved in financing a Ritz-Carlton mega-luxury project on privately owned Rose Island, a 10-minute boat ride from Nassau.

"When Lehman filed for bankruptcy, that came to a stop," said Grammatico. "With the way things are, it could be quite some time before they find a bank willing to pick up a project in the Bahamas."

Lehman's demise has also had a profound effect in the Dominican Republic, says Santo Domingo financial analyst Alejandro Fernández.

"The Monday before Lehman went bust, Cap Cana had given them the mandate to issue $250 million of debt. Obviously, that went down," he said. "But even if Lehman had not gone broke, who is going to invest $3,000 per square meter in real estate in the Dominican Republic? I don't think it's going to happen anymore, at least not for awhile."

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