TOURISM EXECUTIVE BRIEF February - 2006 CARIBBEAN TOURISM ORGANIZATION (www.onecaribbean.org) OVERVIEW It’s time to take an early look at how some of our trend predictions are holding up half-way through the first quarter. At first blush, it appears quite well, although we said back then that trying to forecast where the price of crude oil may be heading is a fool’s game and certainly the international turmoil in several key oil-producing nations in January is stark confirmation of that truism. However, the performances our most important market economies are continuing to chug along at a satisfactory rate and consumers are continuing to spend even as their confidence levels in recent polls appear to be somewhat shaky. We also take a look at Germany on the eve of yet another ITB and some of the recent travel trends in Europe’s largest marketplace. There’s more on changes in distribution channels and developments in technology while this month’s postscript focuses on the passing of legendary airline pioneer, Sir Freddie Laker, whom some of us knew and who was both admired and vilified during the course of his long career in commercial aviation which did so much to create today’s low-cost carrier environment around the globe. USA The U.S. economy continues moderately strong even as fears of inflation appear to be gaining some momentum after the Federal Reserve, now under new chairman Ben Bernanke, issued minutes of its January 31 meeting suggesting that the current level of inflation was too high. The Fed’s statement supports the likelihood that short-term interest rates will continue to head higher, perhaps from 4.5% to 5% in the near future. However, the markets appear to have shrugged this off along with other bad news on energy costs as business confidence is still high and the Dow Jones soared back above the 11,000 level to its highest point in nearly five years. Other markets in North America and Europe have risen in tandem with the Dow. The Conference Board also released its latest figures showing the US Leading Index of Economic Indicators rising sharply in January. That index has now risen for five of the last six months suggesting that economic growth in the US is likely to pick up more steam in the months ahead. Consumers don’t seem so sure as business leaders and the University of Michigan’s preliminary findings in their February index of consumer sentiment showed an unexpected drop from January’s reading. The index fell for both current conditions and the expectations gauge. Most analysts believe, as do we, that this drop is largely related to concerns over the cost of fuel. Another factor could well be unease about the deteriorating situation in Iraq and Iran. However, the past connection between consumer confidence and spending appears to be more tenuous of late as retail sales have grown solidly while confidence levels have gone up and down. Thus far Americans are spending briskly in 2006 including on discretionary travel purchases and our monthly check on leading wholesalers, retail chains and airline executives finds most of them holding their breath that the good sales they are experiencing now to most destinations in the Caribbean will continue into the spring and summer. It’s just too early to tell. THE UK The British economy is in for a period of growth and stability for at least the next two years according to a just-released report from the Bank of England. The Bank projects that GDP in Britain will be rising by an average of 3% a year by the end of 2006, considerably higher than most analysts’ predictions, and consumer price inflation should stay close to the government’s target of 2% a year. The Bank is betting 1 that last year’s slowdown in consumer spending is a thing of the past and expects that British household spending will quickly return to its long-term average over the last three years. There is considerable empirical evidence that British travelers to the Caribbean are back in force and spending more than ever, particularly in high-end hotels and on expensive cruises. As in other markets, there have been big changes in booking patterns as many Britons are researching and booking travel via the Internet, either directly or with online travel agencies like Expedia and Travelocity (which bought Lastminute.com in 2005.) Tour operators are fighting back by moving more and more of their inventory separately onto the Internet and relying less on all-inclusive package sales. Many high-street travel agents are also learning to adjust to the new reality by helping clients book complicated itineraries researched online and charging service fees when net rates are involved. GERMANY The German Economy, which accounts for nearly a third of the 12-nation Eurozone’s economic activity had zero growth in the last quarter and grew by only 1.3% for all of last year. The sky-high optimism and big profits seen lately among Germany’s big exporting manufacturers suggests that a revival in the economy for 2005/2006 is likely. Unfortunately, the benefits of a stronger industrial performance have not trickled down thus far to the consumer as firms cut corners and hold wages down and household spending in Germany remains at a low level. A trend survey conducted by FVW in mid January found that holiday bookings for this winter season have been very slow with only long-haul travel and cruises sales performing well. The main reason given by the tour operators is the sharply higher cost of package tours as a direct result of rising oil prices. The impact of natural disasters in vacation areas in 2005 is also said to be holding back demand. The major operators are still hoping for a late-season pickup in sales prior to the Easter holidays. It’s also clear to us that a good part of the tour operator dilemma in Germany, as in other markets which we have pointed our before, comes from a change in demand from traditional all-inclusive packages towards more flexible constructions based on consumers combining various components of their trips often purchased through different channels. It must be noted, however, that German sales for Caribbean vacations are still dominated by package tours due mainly to the lack of availability of direct scheduled air service into the region from Germany such as exists in France, the UK and Holland. This trend was somewhat puzzling at first blush as opposite results and good sales were concurrently reported for early 2006 by German retail agents. According to the TATS organization which surveys 2,750 agency locations every month, tourism related sales grew by 6% in January and are up by 3.6% for the three-month period since November. However, a significant component of this increase occurred in airline ticket sales, up 7.1% which supports the switch theory away from all-inclusives. The big operators have taken notice of this trend and are taking defensive action as in the UK market. For example TUI and Neckerman are expanding their long-haul holiday business by focusing on modular bookings and individual component offers. TUI has transferred its own long-haul program for the Americas to Airtours which it considers better designed for this type of business. In other news from Germany, there is a continuing growth of e-commerce. 47.4 million Germans are now regular Internet users which cross virtually all age groups. Germans are also heavy online shoppers (58%) and forecasts call for online annual spending in the neighborhood of $108 billion within two years. As a consequence, TUI plans to double its online sales by 30% over the same time period. The TUI Group which includes seven airlines already generates 25% of its sales online across all its markets. While the UK and Scandinavia lead in the percentage of online sales, Germany is catching up fast according to TUI chairman Michael Frenzel. 2 We can’t leave Germany without noting that the new Chancellor Angela Merkel has been making an excellent impression both at home and around the world after a very difficult election process and early problems in forming a coalition government. A recent German opinion poll gave Ms. Merkel an 80% favorable rating, the highest ever recorded by a German Chancellor. While it can’t be expected to stay at that exalted level, it’s a great start. But it is in foreign policy that she has been making the largest and most positive impact. We hope that Ms. Merkel’s early successes can breathe new life into Europe’s largest but somewhat moribund economy. Together with Germany’s stirling performance in the Winter Olympics and the prospect of hosting this year’s World Football Cup, it should provide an optimistic and exciting background atmosphere for ITB. KEY ISSUES 1. Energy In the last Brief, we asked where the price of oil may be heading as the number one issue likely to affect our industry in 2006. Crude was then trading below $60 a barrel in New York and it was expected to remain in a narrow range for the near-term with supplies plentiful and demand moderating, even apparently in China which claims its oil demand actually declined by 0.2% in 2005. Troubles came quickly, however, starting early in January. Political turmoil in two major oil-exporting countries, Nigeria and Iran, combined with the Bush administration’s determination to halt Teheran’s nuclear-program aspirations sent oil prices soaring back toward the post-Katrina highs of over $70 a barrel in September.