By the planeloads, visitors have been forsaking O'ahu for the Neighbor Islands, many leaving the world-famous beach to first-time visitors and tourists who like the shopping nearby.

The tale is in the numbers: O'ahu suffered a 7.4 percent drop in visitor arrivals through June, the most of any island in the state, based on the latest available numbers.

Residents also tend to keep their distance unless they have a stray visitor to meet or the occasional Brunch on the Beach to attend.

But the area bounded by the Ala Wai Canal and Kapahulu Avenue remains a key economic engine for the state. Waikiki generated more than $5 billion, or 46 percent, of all visitor expenditures in the state in 2002, according to the state Department of Business, Economic Development and Tourism.

Most everyone agrees that Waikiki needs to continually renew itself if it is to compete against tropical destinations willing to invest millions to keep visitor dollars rolling in.

But Waikiki's fortunes could change next year. Upgrades to several hotels, improved sidewalks and landscaping and the widening of Kuhio Beach are on the agenda as hotel owners, developers and others try to revitalize the area for both tourists and residents.

2004 may even be the year when Outrigger Enterprises' planned $300 million redevelopment of its Lewers Street properties in Waikiki takes flight.

David Carey, chief executive of Outrigger Enterprises Inc., said the Hawai'i-based hotel chain is re-evaluating its revitalization plans after Gov. Linda Lingle vetoed hotel construction tax incentives earlier this year.

Lingle chose not to extend and expand the credit for hotel construction and renovation primarily out of concern for the projected revenue loss to the state. The tax credit, which expired in June, cost the state $6.4 million in fiscal 2002, and an estimated $14 million this year. Extending the credit would have cost an estimated $32.9 million a year.

The decision pushed back the scheduled completion of the first phase of Outrigger's project to 2006.

Outrigger is expected to again approach the state Legislature next year, arguing hotel tax breaks return more to the state than credits given to technology start-ups or an aquarium in faraway Ko Olina.

Lawmakers have been sympathetic because there is little argument that Waikiki needs help.

O'ahu, more than any other Island, is being hurt by the Japanese visitor slump in the wake of concerns about war and SARS. Even while there are hopeful signs that the tide may be turning, the numbers remain depressed.

Maui's visitor traffic has rebounded but "we really haven't seen that where Waikiki is concerned, just because they're so reliant on Japanese visitors, and that's the one market that really hasn't come back," said Marsha Wienert, the state's tourism liaison.

That highlights the need for revitalization efforts, she said.

Already in the works for Waikiki are:

• A planned $30 million to $60 million renovation of Royal Hawaiian Shopping Center that could start next year.

• Plans to demolish the Waikiki III theater for a low-rise shopping complex.

• Possible lease of the vacant Waikiki I and II theaters to a large retailer.

• An estimated $10 million to $15 million theater renovation project by Robertson Properties Group that involves expanding Duke's Lane to roughly double the number of kiosk vendors.

Robertson Properties hopes to start building next spring for a late 2004 or early 2005 opening.

More immediate plans call for trucking in sand to widen the beach between North Kuhio Beach and the Kapahulu storm drain.

Lawmakers included $700,000 in the state budget for the work, which should begin early next year, said Rick Egged, Waikiki Improvement Association executive director.

Beach restoration "is a big priority because the beach is our biggest attraction," Egged said. "Ten thousand people a day visit that beach.

"It's not wide enough."

Also expected to start sometime early next year are improvements to roads, sidewalks and landscaping on Kuhio Avenue and the area's mauka-makai streets. The idea is to create a more pedestrian-friendly Waikiki, Egged said.

Identifying other needs is not hard; older, off-beach hotels cry out for upgrades.

Some progress has been made there as well.

About $500 million has been spent overall renovating hotel properties that include the Waikiki Beach Marriott and Renaissance 'Ilikai Waikiki Hotel in the past five years, Egged said.

Another $500 million has been committed for the next five years, including projects at the Sheraton and Outrigger Waikiki, which is in the midst of a $15 million upgrade.

But whether other properties get face-lifts may depend on the economy and availability of state tax credits, said Carey. Without those credits, older hotels aren't likely to invest the money to upgrade, rendering them less competitive, he said.

"We're going to need to give them an incentive, or there will be a real revenues deflation for Waikiki and the state," Carey said.

Average daily hotel room rates in Waikiki, a closely watched measure of hotel business success, averaged about $105.43 through July. That was well below the rates at hotels on Maui, Kaua'i and the Big Island, according to hotel consultant PKF Hawaii Inc.

Nicer rooms command higher prices, so renovating older hotels makes good business sense, Wienert said. But she agreed that some form of tax incentive may be needed to make it easier for property owners to secure needed financing for the upgrades.

"Hopefully we can come up with something else this (legislative) session," Wienert said.