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The Honolulu Advertiser
Posted on: Sunday, February 16, 2003

In the face of war

 •  Airlines plan for sharp drop in bookings
 •  Rethinking travel plans
 •  State may reassess Japanese daily spending
 •  $50M approved for tourism push
 •  Visitor industry plans for fallout from war with Iraq

By John Duchemin
and Kelly Yamanouchi
Advertiser Staff Writers

A war with Iraq hasn't started yet, but the tourism industry already seems to be in a bunker.

With armed conflict seemingly inevitable, how will Hawai'i weather a new storm?

Graphic Illustration by Jon Orque • The Honolulu Advertiser

The prospect of Gulf War II is the new worry plaguing the tourism industry, whose fate it has become to suffer through one geopolitical uncertainty after another.

The Asian financial crises of 1997 and 1998 were followed by the U.S. economic slowdown of mid-2001, when dot.com companies began dropping off the map and business travel started to shrivel. Then came the 9/11 aftermath, which decimated the high-end and international visitor sectors. Through 2002, the uncertainty revolved around how quickly the economy would heal, travelers would come back and the tourism industry's profits would recover.

And now, before that question has been resolved, hotels, retailers, airlines and other tourism employers worry that the possible war has already had a chilling effect.

Fourth-quarter 2002 results proved far more healthy than those of late 2001, when the industry was mired in post-9/11 crisis. But fewer visitors came than most Hawai'i forecasters had expected, leading state officials to temper the optimism of their forecasts, which had called for a complete recovery by mid-2003. Experts say the best hope now is for a complete recovery by 2004. Keith Vieira, head of Starwood Hotels and Resorts in Hawai'i, says recovery by 2005 is more likely.

The culprit they blame is fear.

Travel-industry lore holds that people are less likely to travel in times of impending violence. Right now, that means they may be worried about their finances and jobs if a conflict pushes the stock market down and the economy back into recession. Or they may be scared of being trapped in a remote place during another terrorist attack — 9/11, after all, shut down airports for days.

"War doesn't actually have to happen; it's just the perception that this is a distinct possibility," said Chuck Gee, dean emeritus of the University of Hawai'i School of Travel Industry Management. "And each time the Bush administration announces they're getting impatient and willing to go it alone, a lot of people are going to stay closer to home. They just don't want to be caught in the 9/11 situation where all the planes are grounded and we're tracking aircraft in the sky."

Visitor industry experts say it's too early to tell what could happen in the event of war. But most aren't taking any chances. They remember the first Gulf War, which produced a four-month spell of bad tourism results. In February 1991, at the height of hostilities, visitor counts here were down more than 20 percent from the previous year. The Japanese visitor count that month was down more than 40 percent.

The shock certainly was short-term; visitor counts recovered by May 1991, and the industry posted decent results for the rest of the year.

This time, however, the tourism industry starts from a weaker position. Tourism rode a wave of growth in the year before Desert Storm, but it gasped for air in 2002. Thanks to 9/11 and continued economic sluggishness in the United States and Japan, Hawai'i entered 2003 following the worst two-year period, in terms of visitor count, since 1993 and 1994. A second Gulf War would thus be a shock piled onto a fragile recovery.

Also, no one's taking it for granted that a war would end as quickly as the previous Gulf conflict. If America enters a lengthy war, the tourism industry will be on unfamiliar ground. Industry executives are reserving their judgments on the potential damage of a war until after its course becomes more apparent.

"When you get Colin Powell on TV going through his rather chilling rendition (of Iraq's alleged stockpiles of weapons of mass destruction), and then George W. looks pretty focused on what he wants to do, of course it's going to have an impact," said David Carey, chief executive of Outrigger Enterprises Inc. "The problem for us is we don't know how much."

Trends to watch

Despite the uncertainty, several trends are emerging that will be important for tourism's course in 2003.

• First, the industry's so-so holiday season is causing many to see the official state forecasts, which don't take the possibility of war into account, as too optimistic. Hotels report a softer-than-expected start for 2003.

"Usually, about now we're pretty full and looking at a very good month," Carey said. "This year, February is very soft. March is OK, but it's not cranking. It's not a disaster, but it's certainly not anything that anybody would expect."

State officials, despite a downward revision of their forecast, are still predicting more than 6 percent growth in visitor arrivals this year. Gee says a 4 percent growth rate seems more likely.

• Second, the industry is continuing to be money-conscious a full 15 months after cutting thousands of workers in the wake of 9/11. Most of those jobs are still gone, and aside from a long-term increase in visitors from West Coast states, demand is still soft, forcing hotels and airlines to keep prices down in order to draw more visitors.

Throw in the prospect of war, and tourism businesses have little reason to spend aggressively, said Kelvin Bloom, president of Honolulu-based Aston Hotels and Resorts.

"It pays right now for all of us to be really diligent on all levels of expenses," said Bloom, whose company runs 34 hotels and time-share properties in Hawai'i. "That's everything from capital investments to payroll and operating expenses, even things like linens and terries, pencils and paper."

Even though most businesses already have cut back, Bloom says, a war probably would bring another wave of cost-cutting.

"Generally, many of the properties are operating lean," he said. "But if there is a drastic drop in business levels, I can't imagine any scenario other than having to further reduce staffing."

Gee says the airline industry, which was hardest hit on and after 9/11, would likely respond to a war by immediately cutting flights. That's what happened in both the 1991 Gulf War and in fall 2001, when seating capacity to Hawai'i plunged. As visitors slowly returned in 2002, airlines restored several flights and continued to expand into the Neighbor Islands. But demand is still tepid, keeping ticket prices in check, and airline financial problems continue, epitomized by the bankruptcy of United.

• Third, Hawai'i tourism is realigning its marketing plans. Promotional focus has shifted to the least speculative, most certain, near-term opportunities.

For many, this means the reliable West Coast market, which has rebounded quickest since 9/11. West Coast visitors actually increased to historically high levels last year.

Hoteliers, for instance, say they plan to focus on visitors from the closest locations, particularly the West Coast, and will market to kama'aina to fill rooms when arrivals are scarce.

By implication, that means less focus on Japan and East Coast markets, both of which have rebounded poorly since 9/11.

"The Japan market, I'm sure, would cease very shortly" in the event of war, said Peter Schall, senior vice president of Hilton Hotels in Hawai'i. "That market is vulnerable to any kind of a conflict. I think our immediate focus will have to be the West Coast and the Midwest markets."

Those reliable nuptials

Another area of focus is weddings, which proved a steady source of revenue immediately after the 9/11 attacks. Because nuptial plans are difficult to change on short notice, marriages and receptions continue to happen even when the world turns bad, said David Liu, publisher of bridal magazine TheKnot.

"Either people have money already sunk in or they are thinking everything will be fine by the time they get married," said Liu, who was in Hawai'i for talks with tourism officials.

Still, experts warn tourism promoters to be ready for quick changes if a war happens. Hawai'i risks being perceived as insensitive if it engages in all-out tourism advertising just as a war turns nasty, says Joe Toy, who runs the tourism consulting firm Hospitality Advisors LLC.

Hawai'i will have to be low-key and sensitive in its approach, said David Preece, vice president in charge of North American marketing for the state Visitors and Convention Bureau. Depending on the perceived mood of the public, the bureau would likely cut back on major media ads, focusing instead on public relations and passive on-line promotions, Preece said.

But the industry should prepare for drastic strategic changes, Starwood's Vieira said. A war could end quickly, the public could prove resilient and willing to travel — or the war could drag on and travelers could be spooked.

Worst of all, another terrorist attack could happen. Hawai'i needs to be ready to react differently to each of these situations, Vieira said.

"Our goal is to have the most logical response — from a sensitivity standpoint, from an economic return standpoint, from the viewpoint of our employees — to whatever happens," he said. "The point is to be very flexible. We won't know what will happen until the war starts."

• • •