Bracing for war impact

By Sean Hao
Advertiser Staff Writer

A sense of repeating history haunts the current conflict in the Middle East as the same names from the first Gulf War are repeated in war coverage — Bush, Saddam, Iraq.

While U.S. troops again wage war in Iraq, some local experts say Hawai'i's economy is in a better position to avoid the prolonged funk that came after the first Gulf War in 1991. Photo illustration by Stephen Downes • The Honolulu Advertiser

While much of the damage from current hostilities will be dictated by the duration and outcome of the war, Hawai'i in some ways is better positioned to handle a war-related drop in tourism that has already begun, economists and others said.

Among those strengths are the construction industry, a more stable hotel sector, low interest rates and less reliance on the Japanese market, which has struggled through several recessions since 1991.

Barring a major terrorist attack in retaliation for the U.S.-led attack on Iraq that began Wednesday, a drop in tourism should not derail the local economy, said Carl Bonham of the University of Hawai'i Department of Economics.

"If you add everything up — the aggregate economy — I think we're in a little bit better shape" than in 1991, he said. "My expectations are the overall economy won't get hit."

After the last Gulf War ended, Hawai'i's economy entered a prolonged funk. While that conflict undoubtedly accounted for the state's short-term decline, the bursting of the Japanese bubble and a recession in California are the real culprits for Hawai'i's decade of lost economic growth, said Byron Gangnes, a University of Hawai'i economics professor.

"Much of what happened in the '90s had no relation to the Gulf War," he said. "There's a few things different this time around."

For instance, even though the Sept. 11 terrorist attacks rocked the tourism industry, the overall economy remained resilient, Gang-nes said. Weighing in the economy's favor are low interest rates, which continue to drive home construction and refinancing.

"We've done rather well here over the last year-and-a-half considering the hit that tourism took," Gangnes said. "That's due to some of the strength."

Tourism/terrorism

During the last Gulf War, the construction industry was less than robust, meaning it was unable to take up some of the slack created in the tourism industry, economists said.

The state's visitor arrivals in February 1991, the month after the start of the war, plunged 22 percent, or by about 117,000 people, from the year before, according to the state Department of Business, Economic Development and Tourism.

Growth in visitors did not resume until July.

Signs that the current conflict with Iraq would sap the state's tourism-dependent economy emerged early. Starwood Hotels & Resorts reported a 15 percent drop in occupancy since February as tourists canceled plans in anticipation of the war.

On Thursday, the day after the war broke out, the number of passengers on international flights to Hawai'i fell 29 percent. Total passenger traffic, excluding that from Canada, dropped nearly 10 percent.

Visitor counts are closely monitored because the strength of Hawai'i's $10 billion visitor industry is the leading indicator of the state's economic health. But perhaps the greatest concern for Hawai'i's tourism industry is not the war, but the possibility that the conflict will result in renewed terrorism against U.S. targets.

Such attacks would not have to occur in Hawai'i to hurt the local tourism industry, Gangnes said. He added that any terrorist event that shuts down the airline industry or targets a popular vacation spot would do that.

"That would really clobber us," Gangnes said.

The number of visitors to Hawai'i dropped in 2001 by 600,000 from 2000 as travelers stayed away amid security and economic concerns after Sept. 11. To cope, hotels, retailers, airlines and other employers cut thousands of workers, causing the total number of jobs in the state to drop by 11,000 in 2001.

Short of an event the magnitude of Sept. 11, continued declines in tourism traffic shouldn't result in large layoffs at hotels that are already operating with smaller workforces since the terrorist attacks, he said.

Joseph Toy, president of hotel consultant Hospitality Advisors LLC, agreed that the second Gulf War is unlikely to result in major job cuts. That's partly because hotels have improved their efficiency after the first Gulf War, such as increasing their reliance on technology and outsourcing. Both moves led to lower labor costs.

In 1990, Toy said, hotels employed an average of 80 hotel workers per 100 occupied rooms, Toy said. By 2000 that figure had fallen to 72.

Additionally, during the early 1990s Japanese investors had purchased many Hawai'i hotel properties in highly speculative and leveraged deals, Toy said. Today, many such properties are financed under far more conservative arrangements, giving owners more leeway when revenues don't meet expectations.

"We probably won't see the huge cuts we've had in the past," Toy said. "Ultimately (war) will take its toll, but we have a little bit more of a cushion."

Energy prices

Another factor that could weigh down the economy is high fuel prices. Rising fuel costs not only drive up the price of gasoline, but increase the cost of energy for homes and businesses.

Periods of high fuel costs typically precede recessions, the economists said. If consumers are spending more on gasoline, there is less money in their wallets to spend on other items and services that could sustain the economy.

After Iraq invaded Kuwait in late 1990, crude oil prices spiked sharply, causing the average price nationwide of self-serve regular gasoline to jump from $1.19 cents a gallon to $1.34. By March 1991, however, the average price had plunged to $1.02 a gallon, in part because of a release of oil from the nation's Strategic Oil Reserve and a boost in output by oil-producing countries.

Since the start of the war last week, crude oil prices have seen a similar drop, if not as pronounced. On Friday, crude oil prices fell to a 3 1/2-month low after U.S. and British troops captured Iraq's two largest oil fields.

Gasoline futures plunged 6.3 percent to a 2 1/2-month low, capping the market's largest weekly decline in 12 years.

Still, Hawai'i's average price for regular gasoline climbed a little more than a penny Friday to $2.048 per gallon. Albert Chee, a spokesman for Hawai'i refiner ChevronTexaco Corp., said while the price of crude oil and prices at the pump typically moves in conjunction over the long-term — six months or more — there's little correlation in the short run.

That means local gas prices won't necessarily drop when the price of crude oil falls, he said. Other factors, such as the price gasoline will command in the marketplace, also enter into the equation.

"You want to be able to sell the product for less than it takes to produce it," yet remain competitive in the marketplace, Chee said.

Economic stimulus

Among the similarities between the first and second Gulf Wars is a general sluggishness in the national economy. Economists said the lack of momentum makes the economy, both nationally and locally, more susceptible to a recession.

And should the Gulf War or terrorism hit Hawai'i's economy hard, state lawmakers have said a budget shortfall leaves few governmental resources available to stimulate the state's economy.

State legislators are considering several options to help the tourism industry should war seriously dampen travel, including cuts in airport landing fees and airport concession rent.

Gov. Linda Lingle last week said she supports neither because she said the moves would hurt the state's ability to generate the revenues needed to pay airport construction bonds. She said one idea with merit calls for the state to pick up the hotel tab for stranded tourists if airports are shut down as they were after Sept. 11.

"Accommodating people of flights cancelled is a good idea so they don't get stuck here because they can't afford a room," Lingle said.

Regardless of whether Hawai'i can afford them, tax incentives such as extending a hotel construction and renovation tax credit can do little to spur the economy in the near-term, economists said.

While Hawai'i's economy appears poised to weather the second Gulf War, the ultimate impact may depend on events no one can foresee, just as in 1991.

"In 1991 we didn't know we were heading into as much trouble as we were," Gangnes said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.