TOURISM EXECUTIVE BRIEF August - 2006

CARIBBEAN TOURISM ORGANIZATION (www.onecaribbean.org)

ECONOMIC CONDITIONS AND OUTLOOK

Inflation figures for July in the US marketplace showed a slight decrease and the Federal Reserve reacted as expected by finally calling a halt to its long cycle of uninterrupted increases in short term interest rates at its August 8 meeting. The American housing market continued to cool down with July housing starts falling to their lowest level in 20 months. Concurrently, the National Association of Home Builders reported that its index of industry confidence was at its lowest level in 15 years. Industrial production in the US rose by 4.9% in the first six months but productivity growth slowed with labour costs rising more than expected.

Wall Street continued to see-saw wildly, reacting to daily good news/bad news scenarios coming out of the Middle East and elsewhere plus changing storm predictions for the vital oil-producing areas in the Gulf of Mexico. The price of crude oil has fluctuated by as much as 10 full points over the last few weeks and at the time of writing had briefly fallen below $70 a barrel on both the New York Mercantile Exchange and London’s ICE Futures Exchange. At the same time, the Dow Jones was back above 11,300 but storm clouds continue on the near-horizon with further wild rides to be expected for investors in all the major international stock markets. Immediately troubling is a sharp decline in consumer confidence in late August. The New York-based Conference Board Index, which had posted a modest increase in July, dropped 7.4 points a month later in both its Present Situation Index and the Expectations Index which measures consumer outlook for the next six months ahead. This is the largest decline since Hurricane Katrina’s aftermath last year and coupled with growing uneasiness about travel by air (see below) does not bode well for Fall and early Winter business to the Caribbean.

Unfortunately, this measure of likely consumer behaviour tracks closely with comments from our bellwether wholesalers and airline analysts who report that advance booking activity is extremely slow for most vacation destinations including cruises. A broader survey which will include Canada and UK/Europe will be undertaken and reported on in late September prior to the annual CTC in Grand Bahama.

CANADA According to Reuters, Canada's economy lost momentum in the second quarter with GDP slowing to 2.0% from the preliminary figure of 3.8% in the previous quarter as weaker exports and a slower pace in consumer and business sales activity took its toll. Statistics Canada also reported zero growth in June after a mere 0.1% in May.

1 The good news is that Canadians are spending more money traveling abroad than ever before, a government report said in late August. Tourism spending outside of Canada rose 1.4% to a record C$5.9 billion in the second quarter over the first quarter on a seasonally adjusted basis. Spending abroad by Canadian residents has now risen in 10 of the last 12 months.

EURO-ZONE ECONOMY The Euro-zone’s GDP grew by 0.9% in the second quarter, its best result since 2000, and the annual growth rate of 3.7% puts the single-currency area ahead of the US, Britain and Japan for the first time in seven years. Within the euro-zone, France had the best quarterly results with Germany and Spain growing at the same percentage rate as the area as a whole.

Most forecasters on both sides of the Atlantic do not expect this summer’s euro area financial boom to last and the most optimistic of them predict only a 2.6% growth in real GDP for the full year compared to a low-end forecast for the US of 3.1%. And the Euro Central Bank is expected to continue raising interest rates until the end of the year and possibly beyond while several new taxes on the consumer are said to be forthcoming in Germany and Italy which could blunt rising consumer confidence in those countries. Nevertheless, the signs are certainly encouraging for improved growth and employment in the Euro-zone enhancing its attraction for Caribbean tourism marketers.

FEAR OF FLYING Perhaps the industry’s biggest concern of the moment, outside of another major terrorist attack or natural disaster, is the impact of recent events on the consumer psyche when it comes to flying or even the contemplation of a trip by air.

The thwarted plot to blow up as many as ten large commercial jets en route from Britain to America has been followed by a series of incidents involving both international and domestic flights which graphically illustrate how deeply troubled both passengers and crews are at this time. On-board behavior thought to be suspicious and minor misunderstandings have caused a number of flights to be diverted or return at considerable expense, disruption of schedules and high anxiety. Two airline crashes, unrelated to terrorism, and the upcoming fifth anniversary of 9/11 are adding to the trauma. The stress level for flight attendants is tremendous and their major union representing more than 55,000 employees at 20 airlines reports large numbers of calls to an employee assistance line from attendants worried about their own safety. Union president, Patricia Friend, was quoted recently as saying “It’s one more level of stress on top of several years of severe stress.”

Since the foiled British plot, increased levels of security and an unprecedented crackdown on the contents of hand baggage which may be carried on board have created long lines at airports and more reasons not to fly unless you have to. Just how severe is the impact on passenger traffic and how long will it last are the big questions. Although airlines initially reported few cancellations in the days immediately after the foiled attack and most said bookings were near normal levels, the full financial impact is yet to be measured. While passengers are remarkably resilient and demand is bound to recover barring fresh incidents, the longer

- 2 - term impact may be resistance to the new security and baggage limitations. One measure of this concern is shown by results from Euro-star which operates train service between London and the Continent. Their passenger numbers jumped by 27% in the first four days after the new airport security controls were enforced.

In the US, federal officials say there are no plans in place to lift the ban on carrying liquids onto aircraft, other than for mothers with infants, creating still another burden on an already over-burdened baggage handling system. More delays and increased lost luggage are likely to happen. We will be monitoring this situation very closely, particularly at those airlines most important to the Caribbean region and reporting back in the weeks ahead.

NEW MARKETS – continued We continue our look at new markets in the Asia Pacific region with extracts from a recent report on mega-trends organized by the World Tourism Organization (UN) and compiled by the Hong Kong Polytechnic University. We also acknowledge once again the contribution of our friend and colleague Imtiaz Mugbil, Executive Editor of Travel Impact Newswire.

INTRODUCTION Asia continues to be the world economic powerhouse. According to the United Nations, China, India, Japan and Korea will be four of the top ten economies in the world by 2020 and Asia will account for 12 of the 22 cities with populations of more than 10 million. The important travel trends in this report were compiled through an analysis of articles in trade and consumer publications throughout the region and selective news from a major regional TV news organization.

THE FINDINGS

1. Travel Becomes More Activity/Interest Oriented More and more travelers are deciding what activities they want to partake first and only then choose the destination that offers them. Personal motivation is getting stronger and it is important for NTOs to associate their destinations with certain “unique” activities/offerings that can only be purchased and experienced in that destination. For example, one can do the daring bungee jumping in many places around the world, but if one wants to see the movie settings of a hit film, one has to go to the destination where it was filmed. The powerful influence of destination images has most recently been expressed in our region by the success of “Pirates of the Caribbean.”

• Other niche activities are wellness and medical tourism. Spa tourism is the most-mentioned wellness activity and the new emerging segment for spa holidays is the age group 26-35 where the range of treatments is more important than the design of the spa. Spa treatments are also one of the most important activities for Asian female travelers and women are expected to travel more frequently than men as a continuing trend. The Caribbean has experienced this phenomenon in the past with significant numbers of young women visitors from Japan.

- 3 - • Cruise travel is another large potential growth market within the region and China and India are two markets that cruise companies are considering for expansion. • Schoolchildren traveling overseas to gain a better understanding of other cultures, history and heritage is an ongoing part of the education process in China, Japan and Korea. With the emergence of a large middle class in China, this trend is expected to gain momentum. • Adventure tourism is on the rise. However, adventure tourism often involves venturing into off-the-beaten track destinations and fragile marine environments and a balance between tourism development and conservation needs to be struck. • The global phenomenon of money-rich and time-poor consumers has hit Asian markets and spawned the development of integrated resorts where theme parks, casinos, entertainment facilities, hotels and convention centers are all combined into one place. • Overall, North-east Asia is more associated with culture and heritage tourism and South-east Asia more closely associated with wellness/medical, marine and adventure tourism.

2. Attracting Chinese Tourists We have previously profiled China as a major source of outbound tourism. Last year China had an estimated 40 million outbound travelers, an increase of 38% over 2006 and the WTO predicts that by 2020, at the latest, China will become the world’s 4th largest tourist-generating country with over 100 million outbound travelers. As Chinese tourists become more sophisticated, the following recommendations are put forward:

• Aim for working-age empty nesters, the silver-haired segment, provincial capital residents, high-end FITs, small meetings and incentive travelers. • Provide more cultural activities as travel is a form of education for Chinese. • Bundle destinations into attractive combinations with easy access between them. • Cultivate business relationships with local companies. • Think locally while maintaining good international management practices.

3. Online Travel Bookings and IT Demand Keep Rising The growth in online bookings is leading to more e-marketing by airlines and hotels. Travel agents in Asia, as in the West, will be gradually forced into becoming travel consultants. Low-costs carriers (LCCs) have sped up this transformation by pushing direct online bookings and the full- service traditional carriers have followed suit and slashed commissions. Currently, online travel consumers in Asia tend to be FIT travelers, aged between 25-40, affluent and traveling without children. However, tourism and hospitality are industries that will always rely heavily on human contact. The growth of online bookings will not entirely replace personal service and a co- existence of online booking and call centers can be expected. Further consolidation between airlines, agencies and GDS/technology providers is inevitable. As for the technology itself, metasearch technologies that simultaneously access several search engines are the drivers in the Asia-Pacific online markets.

- 4 - 4. Low-Cost Carriers Critical Role In Tourism Boom Low-cost carriers are having a profound impact on travel industry stakeholders throughout the region. LCCs have forced traditional carriers to lower their fares in spite of rising fuel costs, encouraging more frequent trips to more destinations.

Some LCCs are already venturing into long-haul markets and the lines between the LCCs and full- service carriers are blurring. In the near future, air transport has to become a low-cost industry to survive. Rising fuel prices are forcing all carriers to cut operations costs, commissions and intermediary marketing channels while pressuring airports and governments to reduce fees and taxes.

Regional body ASEAN will implement an open skies policy in 2008 which will further create alliances and cooperation among regional carriers. India is considering the same policy and open skies will soon become the norm throughout the region.

5. Cooperation Imperative We have long preached the virtues, indeed the necessity, of cooperation within the Caribbean and Asia is following suit. China and India are two major tourist generating markets that other countries within the region endeavour to tap cooperatively; for example, Singapore and Indonesia combine their individual strengths and jointly promote themselves. Hong Kong has been working to strengthen an alliance with Thailand, Malaysia and Singapore. ASEAN countries are promoting their destinations as a whole while the countries of the Greater Mekong Subregion GMS are coordinating their efforts in tourism infrastructure development.

6. Hotel Trends And Developments • Demand is increasing for serviced residences, particularly in India and China. • There is increasing demand for hi-tech communications amenities as the line between leisure and business travelers gets thinner. • Boutique hotels are becoming popular • Demand is growing for niche hotels located in areas that feature cultural tourism and/or soft adventure activities. • Hotel and resort designs are taking a more holistic approach which combines social environmental, community and financial elements.

7. Safety And Health Considerations/Timely Communications Travelers are more and more concerned about pandemic outbreaks and terror attacks and the Asian travel market is no exception. Long-haul travelers are observed to be especially sensitive to negative news. Chinese people also emphasize security issues in choosing travel destinations. The threat of a pandemic outbreak such as bird flu calls for a coordinated effort among NTOs and other government agencies. Timely, accurate and responsible communication to the marketplace is even more important. Since Asian visitors make decisions based not only on risk itself but the

- 5 - perception of risk, crisis communications need to be proactive in a world full of news and information channels.

The following suggestions relate to timely communications. • Further development of NTO websites with multilingual versions. • More cooperation and exchanges of information between the NTOs and foreign counterparts. • Close coordination between NTOs, related government agencies, foreign ministries,hotel associations and international agencies in the preparation of accurate travel advisories. • Establishment of links with websites of travel agencies important to the region and GDS websites.

8. Visa Simplification/Political Influences Political influences that impact tourism include foreign relations, internal security regulations, tax and levy, immigration and visa rules. Exchange rates also significantly influence inbound tourism and play a more influential role than fuel surcharges in travel decision-making.

The following trends in this area have been identified. • Tensions between China and Japan, Japan and South Korea might disrupt North-east Asia’s stability and tourism flows. • Visa simplification will continue as it boosts travel, especially among countries that have close political, economic and geographic ties. • More countries will relax their visa requirements for Mainland China visitors, but the problem, of overstaying might create a backlash.

Details of the research methodology are available in the full report. To get a copy contact [email protected]

BARBADOS NEW YORK LONDON CANADA One Financial Place 80 Broad Street, 32nd Floor 22 The Quadrant 130 Bloor Street West Collymore Rock New York, NY 10004,USA Richmond Suite 301 St. Michael,Barbados Tel: 212-635-9530 Surrey, TW9 1BP, England Toronto, Ontario, Canada M5S 1N5 Tel: 246-427-5242 Fax: 212-635-9511 Tel: +44-208-948-0057 Tel: 416-935-1896 Fax: 246:429-3065 [email protected] Fax +44-208-948-0067 Fax: 416-935-0939 [email protected] [email protected] [email protected]

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Tourist (stop-over) Arrivals and Cruise Passenger Visits in 2006

Tourist Arrivals Cruise Passenger Visits

Destination % Change Cruise % Change Period Tourists Period (Stop-Over) 2006/05 Passengers 2006/05

Anguilla Jan-Jun 41,144 17.2 - - - Antigua & Barbuda * Jan-Jul 159,921 2.4 Jan-Jun 278,691 -1.9 Aruba Jan-May 289,794 -10.6 Jan-Jun 321,099 6.0 Bahamas * Jan-Jun 860,120 4.0 Jan-Jun 1,637,461 -3.9 Barbados Jan-Jul 340,263 2.9 Jan-Jul 306,737 -16.0 Belize Jan-Jun 141,226 4.5 Jan-Jul 406,509 -22.4 Bermuda Jan-Jul 178,558 9.1 Jan-Jul 185,906 61.6 Bonaire Jan-Jun 32,266 -5.9 - - - British Virgin Islands P Jan-Jun 205,148 2.2 Jan-Jun 276,25 6.1 Cancun (Mexico) ** Jan-Jul 947,686 -41.2 - - - Cayman Islands Jan-Jul 174,742 75.2 Jan-Jul 1,175,612 5.4 Cuba P Jan-May 1,128,261 4.3 - - - Curacao Jan-Jun 116,528 4.9 Jan-Jun 174,527 15.3 Dominican Republic * Jan-Jul 2,526,653 9.7 Jan-Mar 157,017 -0.1 Grenada Jan-Jul 70,270 21.7 Jan-Jul 140,287 -24.4 Guyana Jan-Aug 75,226 -4.8 - - - Jamaica Jan-Jul 1,072,176 17.4 Jan-Jul 772,709 13.4 Martinique P Jan-Jul 296,818 -1.3 Jan-May 56,922 -3.8 Montserrat Jan-Jul 4,423 -18.9 - - - Puerto Rico ** Jan-May 711,370 7.4 Jan-Mar 445,128 -8.2 Saba Jan-May 5,273 -3.4 - - - St. Eustatius Jan-Jun 5,236 -1.2 - - - St. Lucia Jan-Jul 193,419 -3.5 Jan-Jul 231,903 -9.0 St. Maarten * Jan-Jul 299,010 0.3 Jan-Jul 869,866 -4.0 St. Vincent & the G’dines Jan-May 41,632 6.3 Jan-May 63,120 86.6 Trinidad & Tobago Jan-Mar 121,406 -7.8 - - - US Virgin Islands Jan-Jul 459,896 0.2 Jan-Jul 1,140,953 -5.5

* Non-Resident Air Arrivals **Non-Resident Hotel registrations only - No Cruise Figures are Reported P Preliminary figures n.a. Figures not available N.B: Figures are subject to revision by reporting countries SOURCE - Data supplied by member countries and available as at September 25, 2006 ©©© CCCooopppyyyrrriiiggghhhttt::: TTThhheee CCCaaarrriiibbbbbbeeeaaannn TTTooouuurrriiisssmmm OOOrrrgggaaannniiizzzaaatttiiiooonnn RRReeeppprrroooddduuuccctttiiiooonnn ooofff ttthhheeessseee tttaaabbbllleeesss iiisss ppprrrooohhhiiibbbiiittteeeddd wwwiiittthhhooouuuttt sssooouuurrrccciiinnnggg ttthhheee CCCaaarrriiibbbbbbeeeaaannn TTTooouuurrriiisssmmm OOOrrrgggaaannniiizzzaaatttiiiooonnn

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TOURISM EXECUTIVE BRIEF October - 2006

CARIBBEAN TOURISM ORGANIZATION (www.onecaribbean.org)

ECONOMIC OVERVIEW AND TRAVEL OUTLOOK

Expect the unexpected! That aphorism could well be the catchphrase best describing the bewildering sequence of events that have typified late summer and early Fall this year.

Not even the most bullish of economic forecasters or energy market analysts back in mid-July could have predicted that prices for crude oil futures in world markets would drop below $60 a barrel by the end of October or that stocks in major financial markets led by Wall Street would be reaching record highs. Even as U.S. economic growth cooled somewhat, the Dow Jones blue chip indicator roared past the 12,000 level for the first time pulling other markets on both sides of the Atlantic along with it.

Although these events are well known to the majority of our readers, the impact of energy price fluctuations, up or down, on the regional economy is so profound that we have attempted a brief recap of the background to help suggest what might follow. Oil prices skyrocketed in early summer to the point where several analyst/traders were predicting that the price of crude would reach $100 a barrel by year end. However, it topped out near $80 and in late August, prices began to fall sharply as tropical storm Ernesto veered away from the oil platforms in the Gulf of Mexico.

A milder-than-forecast hurricane season coupled with a drop in gas usage by U.S. consumers has kept prices falling by a cumulative 25% before bottoming out. OPEC ministers, meeting in Vienna this October, agreed to cut production by one million barrels a day in an attempt to stabilize prices but the market initially shrugged it off. Later in the month, OPEC pledged a further cut of 200,000 barrels daily but after early gains in London and New York trading, prices quickly fell back to their lowest levels of the year on skepticism that the oil cartel could actually enforce the cuts. However, Saudi Arabia, the world’s biggest oil exporter, and the United Arab Emirates appeared determined to hold the price line at or near current levels around $60 a barrel in New York and an average of $55 in other markets while forecasts of a cold winter to come in the Midwest and Northeast U.S. is tightening crude prices.

Will energy prices soar again in the near-term? While there are bound to be more blips along the way, no one expects a rapid rise and we should see some stability for a while barring fresh incidents of terrorism in oil-producing nations or in the supply chain. International demand seems to be slowing and the International Energy Agency IEA has once again lowered its forecast for growth in world oil demand in 2007 by another 9% and that is very good news.

1 Meanwhile, there are more conflicting signals from the U.S. economy. Economic growth in the third quarter slowed to an anemic 1.6%, the worst performance in three years. This was mainly due to a huge downturn in the housing market coupled with slower auto sales.

However, consumers still seem fairly upbeat and willing to spend on other items including travel. The University of Michigan revised its index of consumer confidence upward to 93.6 for October, a significant improvement from the 85.4 reported for September. The Fed held interest rates at current levels as expected for the third straight month and, while cautioning about the continued threat of inflation, forecast modest growth in the economy.

The Impact on Travel

The largest direct beneficiaries of the moderating oil prices are clearly companies in the transportation business, in which for this purpose we include the cruise industry. Airlines are breathing a collective sigh of relief as prices came down in the nick of time for some carriers and demand for air travel was unexpectedly strong in the third quarter. Fuel accounts for up to 30% of operating costs for an airline so the impact of price changes on the bottom line is tremendous. American Airlines, the world’s biggest in revenue passengers flown, calculates that each drop of $1 dollar a barrel in the price of jet fuel saves about $80 million a year in operating costs. The reverse is also unfortunately true. Ironically, the airlines gaining the most from the current price drop are those without major fuel hedge contracts in place. Hedges which are designed to protect airlines from big price increases in a rising market can backfire if prices drop below the contract level.

United Airlines, for example, had locked in a good portion of its estimated fuel requirements for the third quarter at nearly $70 a barrel but declining prices in August and September meant a loss on some of their contracts. Still most U.S. and European carriers reporting thus far show improved results. American managed a second straight quarterly profit for the first time since the 9/11 disaster. CEO, Gerard Arpey says he is cautiously optimistic as fourth quarter bookings at AA are ahead of last year and unit revenue continues to grow at a healthy pace. In fact, six of the 10 largest U.S. carriers are expected to show a third quarter profit including Continental, United and US Airways, all with improved earnings. Of the major airlines serving the Caribbean from the U.S., only discount carriers JetBlue and AirTran have reported losses after limited profitability for the same period last year; something of a role reversal with the legacy carriers.

Advance Bookings for the Caribbean

The low-impact hurricane season and an early advent of cold weather are already picking up the pace of bookings for Thanksgiving and the winter season beyond. Business had been sluggish according to our last survey of the U.S. marketplace with one major exception Travel Impressions and perhaps was suffering comparatively from strong demand for Europe as the dollar strengthened and security eased at the airports for long haul passengers.

- 2 - After a very strong second quarter for the cruise industry, there is some evidence that demand may have slipped a little although a CLIA spokesman says its members report that Caribbean bookings are running at about the same level as last year while keeping up with increased capacity. Four new large ships were deployed in the Caribbean this year including the Crown Princess and Freedom of the Seas. The concentration of cruiselines in the U.S. marketplace is an extraordinary business model. According to the North American Maritime Administration (MARAD, a government agency), just three holding companies Carnival, RCCL and the Star Group now account for 96% of all North American cruise passenger nights.

Passports and their Impact on Discretionary Travel

There is little doubt that the passport issue, which favors the cruiselines after January 8, 2007, will create new bookings for them although so far they do not appear to be overtly promoting their advantage, while pricing for Caribbean cruises this winter remains very competitive.

It is still too early to gauge the full impact of the new passport requirements on stay-over visitor numbers from the US to the Caribbean but a recent incident may be revealing. It was brought to our attention that the websites of 2 major US airlines serving the Turks and Caicos were showing an effective date of November 1st 2006 for the implementation of the new passport requirement for visitors returning to the US from that destination. While CTO took prompt action to get this situation corrected, at least one large agency Libgo reported some booking diversion away from the Turks and Caicos.

UK Market

The upcoming World Travel Market in London will provide the venue for a full briefing on the performance and outlook for the UK outbound long-haul market. We note here that Britain’s economy grew by just 0.7% in the third quarter which nevertheless did exceed expectations. Year-to-date GDP growth is now at 2.8%. The annual inflation rate declined to 2.4% in September due to falling energy prices but some analysts believe that interest rates may be going up soon. The unemployment rate increased slightly during the summer but so did average pay and bonuses which rose by 4.2% for the year to August. Certainly Britons are still traveling in large numbers overseas and borrowing heavily to do it. A recent survey on moneysupermarket.com, a website which measures expenditures, showed that 57% of Britons use credit cards to pay for their holidays and that 41% of those card holders do not pay their balances monthly incurring big credit card debt as a result.

On the eve of WTM, we could not resist sharing the following extract from a recent column in the International Herald Tribune by a fellow traveler on Britons and their urge to roam:

“Britain may be among the fastest growing European economies, the land with low unemployment, the brisk Main Street stores, and fast growing house prices. But it is also the land, par excellence, of the budget airline, the cut-price escape, the second home in another land, the yearning of the malcontent to be somewhere else. Up to 14 million

- 2 - Britons, more than a quarter of the population spend at least part of the year overseas and, at any one time, about 4.5 million British passport holders are out of the country.”

US AIRLINES EXPAND OUTWARDS

A sea-change has been occurring in the US airline industry and to a lesser extent among some of Europe’s major carriers as well. In a world of higher and higher costs, cutting those costs can only go so far and many airlines are pinning their hopes for survival and growth by shifting emphasis on to profitable international long-haul routes where premium class cabins are still enjoying high load factors with top- paying passengers. This is nowhere more evident than on North Atlantic routes where about 54 million passengers are expected to set a new record this year in spite of fallout in August and September over the foiled UK bomb plot and increased security. This growth has occurred because of a concurrent increase in new flights to new destinations across the Atlantic. Delta alone has added 12 new transAtlantic routes since March with three more slated for this fall. Continental has also been accelerating its latest expansion into Europe using a combination of wide body jets and more flexible fuel- efficient 757s to reassert its international expansion objectives as the impact of post 9/11 fears on overseas air travel recedes. Both Continental and Delta share a strategy of seeking out second-tier cities in Europe and serving them directly from different US gateways around the country. This has created more competition for the big European flag carriers which still rely more on hub and spoke operations while several of them like Air France/KLM and Iberia are taking a leaf from the same book by increasing direct services to Latin America without stopovers in the US or the Caribbean. American continues its dominance of Latin America routes while focusing most of its transAtlantic route resources into the UK market which has bounced back strongly after the mid-summer terror threat. European advance bookings for American for the late fall and winter are running well ahead of last year. United is betting heavily on its Pacific routes and it is shifting emphasis and resources there away from Europe. This ability of the legacy carriers to shift resources into long-haul international operations has at least temporarily turned the tables on their low cost carrier competition which is generally unable to take similar measures. The principal impact of these developments thus far on the Caribbean appears to be in higher fares for economy class passengers but if these levels cannot be maintained through reduced demand, as some agencies fear, we can expect some attrition in lift to the region as those carriers with equipment flexibility may shift resources again. A strong Air Jamaica and a revitalized and re-branded BWIA as Caribbean Airways in January have never been more important.

CRUISE DEVELOPMENTS

Five new ships with complete or seasonal itineraries in Caribbean waters are set for launch between December 2006 and the end of next year. NCL starts off with the first of two new entries in its jewel class. Norwegian Pearl homeports in Miami this winter offering Western and Southern Caribbean cruises and October will see the launch of sister ship Norwegian Gem sailing out of New York. Each carries 2,376

- 3 - passengers in NCL’s increasing popular free-style cruising mode Carnival will launch its latest in the 111,000 ton Destiny Class with its Carnival Freedom. After cruising in Europe during the summer, Freedom will start Caribbean cruises out of Miami in November. This spring will also see the launch of two more behemoths destined to sail the Caribbean from Princess Cruises and RCCL. The 3,110 passenger Emerald Princess sets sail in April for Europe before repositioning in October to Ft. Lauderdale and the Caribbean. In May, RCCL follows with the launch of the still larger Liberty of the Seas carrying up to 3,634 passengers and home-porting in Miami.

The big growth in cruising continues to be in short-term itineraries of up to five days, which have increased by 724% since 1980 (CLIA). Another related trend in the cruise business which was inevitable if the cruise industry was to expand into different market segments in tandem with the increased tonnage has been a move to more flexibility and the idea of choice in varying length itineraries, dining options and shipboard amenities. Perhaps the optimum in flexibility is provided by easyCruise which will again be offering Caribbean itineraries for a second season with a minimum requirement of only 2 nights aboard and the ability to stay ashore until late at night for dining and entertainment options off the ship. Prices are for the basic cabin, everything else is à la carte. EasyCruise is a very minor player in the Caribbean but its apparent success seems to confirm the trend.

HOSPITALITY INDUSTRY – DESTINATION CLUBS

The concept of Destination Clubs which operate in a largely unregulated way in many countries around the world, including the Caribbean and Mexico, has been growing for several years as an alternative to second-home ownership or time shares.

Members are required to make substantial deposits that are supposed to be refundable as well as to pay annual dues which cover operating expenses of the clubs. The largest of the Destination Clubs, Exclusive Resorts, has the co-founder of AOL, Steve Case, as its majority stake holder and about 2,400 current members who pay between $225,000 and $425,000 in deposits plus $10,500 in annual dues. The Club owns nearly 400 properties including some in construction. At the lower end of the market, the High Country Club has membership deposits starting at $50,000.

Now this fledgling industry has been shaken up by the high profile bankruptcy this summer of one of its big players Tanner and Haley Resorts. Destination Clubs, unlike time share properties, are not regulated by specific local laws and Tanner and Haley members are unsecured creditors in their attempt to get all or partial restitution of their deposits which range between $85,000 and $1.3 million.

There is a Destination Club Association headed by Exclusive Resorts’ general counsel Adam Wegner which has introduced legislation to regulate the industry in Hawaii. Wegner says that its member clubs are responsible and safe for consumers and that his association will push for more legislation elsewhere to make its voluntary best practices mandatory under law.

- 4 - Concerns over the Tanner and Haley bankruptcy don’t seem to have slowed the growth of new memberships for now with several clubs reporting strong results this summer. However, caveat emptor should the watchword for buyers while local governments in countries where Destination Clubs are permitted should monitor their performance.

POSTSCRIPT

As part of our ongoing commentary on ecotourism issues, we note with interest a report from the British think-tank The Center for Future Studies (CSF) which proposes a lottery system to limit the numbers of tourists who visit some of the world’s most popular ecotourism destinations. The report used the Great Barrier Reef in Australia as a major example of the conflict between environmental concerns and commercial interests. CFS director Shaw says “In pursuit of economic goals, other problems are being overlooked.” The study has angered the tourist industry in Australia as well as the government and scientists who pride themselves on careful monitoring of the Reef, which attracts about 1.8 million visitors a year and generates over A$5 billion in income. However, it seems to us that there is the germ of a good idea in the lottery concept for eco-sensitive attractions in the Caribbean region. Do any of our readers have thoughts on this subject?

BARBADOS NEW YORK LONDON CANADA One Financial Place 80 Broad Street, 32nd Floor 22 The Quadrant 2 Bloor Street West, Suite 2601 Collymore Rock New York, NY 10004 Richmond Toronto, Ontario St. Michael, Barbados USA Surrey, TW9 1BP, England Canada M4W 3E2 Tel: 246-427-5242 Tel: 212-635-9530 Tel: +44-208-948-0057 Tel: 416-935-0767/1-866-997-0096 Fax: 246:429-3065 Fax: 212-635-9511 Fax +44-208-948-0067 Fax: 416-935-0939 [email protected] [email protected] [email protected] [email protected]

- 5 - Tourist (stop-over) Arrivals and Cruise Passenger Visits in 2006

Tourist Arrivals Cruise Passenger Visits

Destination % Change Cruise % Change (Stop-Over) Period Tourists 2006/05 Period Passengers 2006/05 Anguilla Jan-Aug 53,818 17.9 - - - Antigua & Barbuda * Jan-Aug 180,678 3.7 Jan-Jun 278,691 -1.9 Aruba Jan-Jul 407,786 3.7 Jan-Aug 362,554 5.5 Bahamas * Jan-Aug 1,124,631 1.1 Jan-Aug 2,108,791 -4.8 Barbados Jan-Sep 420,962 4.1 Jan-Sep 351,574 -11.5 Belize Jan-Aug 181,717 4.7 Jan-Aug 440,384 -23.1 Bermuda Jan-Sep 236,682 10.1 Jan-Sep 287,027 47.3 Bonaire Jan-Jun 32,266 -5.9 - - - British Virgin Islands P Jan-Jun 205,148 2.2 Jan-Jun 276,525 6.1 Cancun (Mexico) ** Jan-Aug 1,092,216 -40.0 - - - Cayman Islands Jan-Sep 202,961 69.0 Jan-Sep 1,430,762 5.5 Cuba P Jan-May 1,128,261 4.3 - - - Curacao Jan-Aug 154,932 4.2 Jan-Aug 193,964 14.0 Dominican Republic * Jan-Sep 3,072,429 9.0 Jan-Jul 219,651 2.0 Grenada Jan-Aug 84,938 24.3 Jan-Aug 140,287 -24.4 Guyana Jan-Sep 81,295 -6.2 - - - Jamaica Jan-Sep 1,294,204 17.2 Jan-Sep 950,329 15.0 Martinique P Jan-Jul 296,815 -1.3 Jan-May 56,922 -3.8 Montserrat Jan-Jul 4,423 -18.9 - - - Puerto Rico ** Jan-Jul 954,331 4.5 Jan-Aug 909,701 1.8 Saba Jan-Sep 8,830 -0.2 - - - St. Eustatius Jan-Jun 5,236 -1.2 - - - St. Lucia Jan-Sep 236,304 -2.8 Jan-Sep 249,558 -8.3 St. Maarten * Jan-Jul 299,010 0.3 Jan-Jul 869,866 -4.0 St. Vincent & the G’dines Jan-Jun 50,102 7.5 Jan-Jun 63,332 85.9 Trinidad & Tobago Jan-Jun 232,743 -1.0 Jan-Apr 62,897 63.9 US Virgin Islands Jan-Sep 528,303 -1.0 Jan-Sep 1,371,649 -0.8

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TOURISM EXECUTIVE BRIEF November - 2006

CARIBBEAN TOURISM ORGANIZATION (www.onecaribbean.org)

INTRODUCTION There’s a new buzzword these days in travel marketing circles around the world. It’s known as BRIC, an acronym for Brazil, Russia, India and China. These four huge countries are rapidly becoming power houses in international travel, both inbound and outbound, and their growing importance to destinations that are economically dependent on tourism cannot be overestimated. They are centers for international and domestic investment in the hospitality, transportation and attractions industries and each one has become a lodestone for travelers seeking new cultural experiences. Above all, each has a fast-rising core of affluent and middle classes with huge amounts of discretionary income to spend and the freedom to travel, in some societies for the first time.

According to the 2006 Asia-Pacific Wealth Report put out by Merrill Lynch, India’s affluent class has grown by almost 20% in the last year, disposable income among China’s middle class has more than doubled and Russia and Brazil are not far behind. Martin Raymond, founder of London-based Future Technology which forecasts trends was recently quoted in the New York Times to the effect that as BRIC national economies boom and middle classes swell, everyone gets wanderlust and the world shrinks a little bit more. Raymond says, “There’s a cultural exchange in place” with exchange being the key word for Caribbean tourism interests.

In a neat turn of phrase, the same Times article says “BRIC nations are building like ancient pharaohs” to accommodate the rising demand for these destinations and air service from major markets in all directions is keeping pace. India, for example, has four international airports with service from Europe and US gateways and direct flights to the other BRIC nations are increasing rapidly. CTO has previously provided market profiles on three of the four BRIC countries and we follow here with a thumbnail sketch of Russia after our monthly economic update and forecasts for the winter season ahead.

US ECONOMIC OVERVIEW AND TRAVEL OUTLOOK

Amid concerns about a slowing economy and the possibility of rising interest rates, the US economy now appears to be in position for a soft landing in 2007 following an upward revision in the third-quarter GDP numbers released in late November. The new figure of 2.2% considerably exceeded the expectations of both government and Wall Street analysts although a continuing plunge in new home starts and bulging corporate inventories suggest that there is little momentum in play for the final quarter.

Consumer confidence has also dropped this month in both the University of Michigan’s poll and the Conference Board Index which declined to 102.9 from 105.1 in October. Both the Present Situation Index and the Expectations Index also declined and consumers’ short-term outlook was less optimistic in November. Retail sales are a concern, particularly at the low end of the market, in spite of heavy mall activity at the start of the holiday shopping peak. The world’s largest retailer, Wal-Mart, had disappointing results for November while high-end stores like Tiffany’s and Bloomingdales are performing very well. A survey of shoppers in malls and stores across the country found that only one in five consumers intend to spend more for the holidays than in 2005.

1 In spite of economic concerns, including another spike in energy costs at the end of November, and the continuing passport issue, the outlook for the Caribbean winter season appears to be very positive throughout. Our current reading of the likely impact of the new passport re-entry requirements on potential visitors to the region suggests that the negative effect is likely to be short-term as a last minute rush to get passports may cause delays at the issuing offices. However, the extension of the deadline to January 23 should help.

Some diversion of business to Puerto Rico, the USVI, Florida and Hawaii can be expected although business to the USVI is currently reported flat by major wholesalers and agency chains while Hawaii’s tourism arrivals have fallen on concerns about recent earthquakes in an already soft visitor market. The largest percentage drop in mainland visitors to Hawaii has been from the Eastern US states, the Caribbean’s major market.

There is also no sign as yet that the passport requirement, which does not apply to returning cruise passengers, is having any diversionary impact on stayover numbers in the Caribbean to the cruise segment of the market as cruise business seems to be on a plateau or even down slightly as we reported in last month’s Brief and steep discounting is still prevalent.

Airline Capacity Overall capacity should be around the same as last winter season’s with some individual routes showing increases including new direct service from the US to places that have had to rely on inter-island connections for several years. A small percentage decrease in available seat miles(ASMs) from number one carrier to the region in lift, American, has been largely offset by new flights from other carriers including Delta, Air Jamaica, Continental and Jet Blue.

Agency Outlook Our bellwether wholesalers and reporting retail agency chains are all enjoying much stronger advance bookings for most, but not all, Caribbean destinations after sluggish growth in recent months. Double digit increases are reported starting in December and running through March for many places. High end properties are doing better than the average and this appears to be very much in line with the general retail sales results reported at the start of the holiday shopping peak.

THE DOLLAR SHRINKS AND ENERGY PRICES CLIMB AGAIN

That old philosopher Yogi Berra once said in his inimitable style “It’s tough to make predictions, especially about the future” and so it continues to be! After trading in a narrow range for most of the year against the euro and pound sterling the dollar began a precipitous slide prior to the Thanksgiving holiday. A combination of euro strength in a more buoyant European economy, disappointing US economic data and diversification in some central bank reserves has sent the dollar to its lowest point against the euro since March 2004 and to a 14-year low against the pound. Currency traders say even sharper losses may be on the near horizon if more corporate and institutional investors start hedging large dollar positions by buying other currencies. China is adding to the nervousness by signaling it may pull out a significant part of its huge dollar holdings to invest elsewhere including a build-up of its crude oil reserves.

In the short term, at least, the current weakness in the dollar should actually help business to the Caribbean where pricing in most countries is tied to the US currency. The advantage for UK and euro-

- 2 - zone based tourists is obvious and Europeans are already flocking back to the US for shopping bargains with the biggest single group by far being the British. Although demand for UK/Europe travel from the US remains strong for the moment, one can speculate that the loss of purchasing power in the already expensive environment of Europe today should soon put a damper on it. Of course, if the continued drop in the dollar contributes to a broader drop in the US economy as some bears predict, then all bets are off.

Crude Oil Rises Crude oil features started to climb again in tandem with the decline in the dollar and briefly topped $63 a barrel as the Saudi Oil Minister Ali Naimi threatened that a further cut in OPEC’s production levels may be forthcoming at the December 14 meeting in Nigeria, depending on the level of US stockpiles which diminished on heavier-than-expected consumer demand over the Thanksgiving holiday and the first cold weather to hit the Midwest and Northeast US.

Prices have since fallen back to around $62 a barrel and most energy analysts expect levels to remain in that range in the New Year with the high forecast around $65 for the average daily price a barrel. The stock market appears comfortable with this price range and remains in positive territory. Meanwhile, the US consumer continues to benefit from retail gasoline prices that are still well below summer levels adding significantly to the available dollars for other discretionary purchases including vacation spending.

EUROPEAN ECONOMY While this issue of the Brief has focused largely on the US economy and forecasts, there is good news out of Europe which bodes well for outbound tourism, particularly from Germany. The euro-zone economy continues its solid growth pattern on the strength of domestic demand according to new data on third- quarter GDP. Growth of investment is encouraging and the European Commission’s sentiment surveys shows confidence rising among euro-zone business and consumers.

The Commission’s index of economic sentiment is now at 110.3, the highest number since the last economic boom while Germany’s unemployment figure fell below 4 million in November, the lowest level in nearly four years. There was a rise in euro-zone inflation to 1.8% in November causing the European Central Bank to raise its benchmark interest rate by a quarter-point. The ECB however gave little indication of when it might raise it again.

CANADA In Canada, consumer confidence is increasing as the Canadian economy is performing well and the Canadian dollar is strong. According to a survey by the Tourism Industry association of Canada 46% of those polled said they planned to take a vacation between November and April 2007, up from 32% last year. Since most of those probable travelers will be “snowbirds” heading south for the holidays, it’s more good news for Caribbean prospects for a good season. In another positive indicator, Air Canada reported its best-ever November with a 4.1% increase in RPMs over 2005. November is normally one of the slowest months for Canadian travelers.

AIRLINE NEWS The big news of the month in the airline industry, without a doubt, was the $8 billion bid by US Airways for its much larger rival Delta. Such a merger would create an airline which would top American in size, making it the largest in passenger miles flown, and could challenge American for dominance in a number

- 3 - of markets, including the Caribbean where Delta has recently been expanding its route network. Although Delta would be the surviving name if the deal were to go through, Delta’s management is resisting the hostile takeover saying it expects to emerge from bankruptcy during the first half of 2007 as an independent carrier. However, US Airways has considerable support from a number of its bondholders who are urging Delta’s management to accept the deal. The first meeting between the two carriers and Delta’s unsecured creditors committee was to take place in New York around the time this report was written but its findings were not expected to be publicly released. The US Airways proposal is contingent upon a merger approval while Delta is still in bankruptcy in order to achieve some $1.6 billion in annual savings over two years. The merger would require Department of Justice approval if the two carriers can agree and almost certainly some of their parallel route systems like the North East Shuttle would have to be sold off to avoid anti-trust issues.

The implications of such a merger are huge for the Caribbean. Stay tuned on this one which we will follow and report on to resolution.

RUSSIA: MARKET PROFILE Background Russia has a population estimated at 144 million, currently the world’s 8th most populous nation. However, Russia’s population is rapidly declining, particularly in the younger age groups which contain the best prospects for overseas travel (25-34 and 35-44, well educated and from higher income households.) The language is Russian but English has taken over as the preferred foreign language to study especially among the increasing numbers of the nouveau riche who see it as a status symbol.

The Russian economy is largely based on a plentiful supply of natural energy sources and the increase in prices for oil and gas, worldwide, has brought unprecedented wealth to the country this decade. Russia’s last reported GDP figures showed a growth of 7.4% for the second quarter and a balance of trade plus 142.7%. Her foreign reserves stood at $265 billion through October, second only to China.

While the average per capita income in Russia this year will be $12,143, according to the IMF, wealth is unevenly distributed, typical of emerging market nations, with the largely rural areas of the country at the low end of the scale and a rapidly increasing number of millionaires and even billionaires at the other with Moscow and environs weighing heavily as the center of the rich. Russia’s new wealthy elite are extremely status-conscious and tend to seek luxury goods and trendy vacation destinations as well as new cultural experiences. Russian visitors typically spend freely on accommodations, restaurants and services but they demand high standards and good values. While France, Italy and the UK are at the top of the list of most desirable destinations, other countries are demonstrating that proper attention to this market can pay off handsomely. These include the Dominican Republic, most recently, which has stepped up its marketing in Russia and the CIS (Confederation of Independent States), as well as Cuba with its long-standing political ties to the former Soviet Union.

Russia’s currency is the ruble which has been fairly stable trading around 26.1 to the dollar in November.

Aviation Access Two countries in the Caribbean now enjoy direct flights from Russia. Cuba has Aeroflot with scheduled service between Moscow and Havana with interline links to other destinations in the region, and the Dominican Republic with regularly scheduled charter service from Moscow to Punta Cana during the

- 4 - winter months on the privately-held Russian airline Transaero, which has been operating successfully for five years with a fleet of mainly Boeing and Douglas jet aircraft and could well be considering expanded routes to the Caribbean and beyond to South America. Excellent service is available via both US and European gateways on Delta, British Airways, Lufthansa, Air France/KLM and others.

Market Size Up-to-date figures on the number of visits abroad from Russia are hard to come by but the number is probably between 7 and 8 million. The last-year where numbers are available is 2004 which recorded over 6 million and a considerable expansion in both the overall market size and the number of destinations visited has occurred since then. Southern European resorts have proved very popular with Russian tourists in the past with Turkey and Spain leading the way in both visitors and promotion.

According to the Dominican Republic, Russian tourists have increased by 14.38% in the past eight months of this year for a total of 10,516 arrivals. Adding in arrivals from the Ukraine, which also use the Transaero charter, the total is over 18,000 passengers.

While we are lagging in arrival statistics from Russia to Cuba, it too has reported a big increase in Russian tourists. The government is said to be purchasing a number of Russian long-haul jet aircraft to carry them on Cubana and is interested in other bilateral developments related to tourism.

The Caribbean Product Fit Key aspects in choosing a Caribbean destination for Russian travelers include great scenic beauty, cultural attractions, beautiful beaches, sporting opportunities and good shopping.

Participation in almost any sporting event is a strong attraction for Russians who are likely to try their hand at almost anything the island or resort has to offer including watersports, fishing, horseback riding and spa facilities (fitness.) Packages offering these opportunities should be negotiated with Russian tour operators in advance.

Many Russians are also into various forms of gaming. Casinos will be a plus.

Best prospects for the Caribbean are likely to be couples with spouse or partner although we believe that the Caribbean also has strong appeal for the family market with teenage children and younger (6-12.)

Some Russian Cultural Dynamics • Russian visitors can be demanding in regard to accommodations (large rooms) and service standards. Expectations will be high. • Although many educated Russians speak English and some Spanish and French, Russian speaking personnel would be a plus and promotional material in Russian a must. A number of Spanish and Turkish resorts are providing menus and on-site information pieces in Russian. • Russians tend to be big eaters, particularly at lunch times. While meat is preferred by many, the availability of plenty of fresh fruit will be expected in the Caribbean. Many Russians are also big consumers of beer, wine and spirits. • Shopping, as we have noted, is important and there is a good opportunity to flaunt many of the Caribbean’s gifted fashion designers.

- 5 - Reaching Russian Consumers and Agents The vast majority of Russian travelers will use a travel agent to make their bookings although the internet has become the primary source of information when planning a trip. Booking engines are virtually unknown in Russia due to banking regulations which do not permit credit cards for online transactions. Internet comparison shopping is largely used to select a destination by the style of vacation desired. Comparison price shopping will then be done through more traditional media and agency visits. Having said that, 24% of Russian households have Internet access with a much higher percentage of prospects for an overseas vacation being online. According to an eMarketer study released in October 2006, 41% of online shoppers in Russia are in Moscow, our primary market area. Only St. Petersburg at 10% has any other significant level of online shoppers. Over one third of best prospects are accessing international websites for information purposes.

Travel Agents Agencies doing international business are licensed by the State. Although agency locations are found throughout Russia, only Moscow has a significant number holding licenses, estimated in 2005 at 4217.

While travel agency brands or chains are the exception rather than the rule, there is extensive pooling of functions among many otherwise independent agencies. This means a level of cooperation between competing travel agents unknown in the West and is a hangover from the old Intourist state-owned structure. There is a travel agency association similar to ASTA known as RATA (Russian Association of Travel Agents) and most successful agencies are RATA members.

Tour Operators There are about 20 tour operators of interest for international markets, most of them in Moscow with a small group in St. Petersburg. They distribute through a retail agency network while accepting direct bookings from consumers.

Many of these tour operators offer single destinations like Turkey or a narrow regional product and there is considerable pooling of product for multi-destination packages. The smaller operators deal mainly with FIT business only. There are a number of tour operators already offering Caribbean destinations and CTO can help interested members in identifying those likely to be a good product match.

Trade Shows There are two major trade fairs in Russia, one in the Spring and one in the Fall, both are held in Moscow. The Moscow International Travel and Tourism Fair MITT is considered to be the leading annual travel industry event in Russia. It is held every year in March and most recently attracted over 2,500 companies from 100 countries and nearly 100,000 visitors. Close to MITT in importance is the Leisure Fair held at the Crocus Expo in Moscow during September. There is an added attraction for some exhibitors at the Leisure Fair due to the parallel event at the same site MIBEX RUSSIA dealing with the meetings and incentive industry.

Thanks are due to the British Tourist Authority for some of the material used in this report.

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TOURISM EXECUTIVE BRIEF December - 2006

CARIBBEAN TOURISM ORGANIZATION (www.onecaribbean.org)

INTRODUCTION As we stand on the threshold of a new year which is filled with early promise, we take this opportunity to wish all our readers and their families and associates good health and much success in the months ahead. Throughout 2007, we will continue our regular overview on the state of business for Caribbean tourism, the competition, and the many factors that influence them through a combination of first-hand interviews with key movers and shakers in the travel and tourism industries and a compilation and analysis of current information and statistics from relevant media sources, including the Internet, around the world. We start with a look back at some of the principal trends and issues that occupied us last year and where they may take us in 2007.

1. THE US ECONOMY-SOFT LANDING OR RECESSION? The consensus of leading economists taken from a survey in December supports the direction for a soft landing with a pickup in momentum towards the end of the year: Early signs suggest that their optimism, while cautious, is well founded. 2006 ended with major stock markets closing at their highest levels in three years after a strong second half rally sparked by a big decline in energy prices which relieved some of the fears of inflation affecting investors in the Summer. Forecasters now predict that GDP rates adjusted for inflation will grow at a modest annualized rate of 2.3% in the first half, expanding to 2.8%-3.0% by December. The big drop in housing prices and new starts and slumping sales by U.S. auto manufacturers have been countered by excellent results in the service industry sector which currently accounts for about 80% of the entire U.S. economy. The service industry which includes discretionary consumer services like travel, entertainment and restaurants added 1.1 million new jobs in the six months ending November ’06 and information technology companies and related consulting firms are growing and hiring. We must note that the optimism among forecasters is well short of unanimous. In a year-end poll of 60 economists taken by Wall Street Journal, 16 were predicting a recession within the next 12 months. This gloomy minority based their forecasts on a belief that inflation and interest rates are likely to rise again and that oil prices will be back to levels last seen in the summer of 2006 or even higher. Other concerns expressed, which everyone shares, include the proliferation of nuclear weapon development among unstable nations like North Korea and Iran and the ever-present threat of more severe terrorist attacks. However, consumer confidence appears to be more encouraging while remaining volatile. Consumers’ assessment of current conditions has improved considerably since November and their outlook for the six months ahead is also more positive according to the mid-December survey by the Conference Board. Confidence levels are substantially higher among upper income families and this was clearly reflected in the strong sales reported so far this season by high-end stores, up-market hotels and cruise lines and expensive tour packagers. The publisher of Travel Market Indicators, Jim Cammissa, has focused on the widening gap between America’s different income groups and the implications for discretionary travel purchases. He notes that a number of recent government and private sector research sources reveal the following:

1 • The top 20% of U.S. households now control more than half of aggregate earned income; the highest percentage ever recorded. • The top 10% of U.S. households control 37% of earned income. Their average net worth is $3.1 million, a full 70% of the total net worth of all U.S. households. • The average income of corporate CEOs is 431 times that of the average salaried employee, up from 107 times in 1970. • Real hourly wages of production and non-supervisory workers have declined in four of the last five years. They are 11% below the level of 20 years ago. • Among middle-income households, one third say they cannot afford adequate family healthcare costs and 20% say that they have problems meeting the costs of other necessities like food, clothing and fuel. We believe, with Jim, that this is not a problem that will go away in the foreseeable future and that major expansion in travel expenditures is likely to be skewed more and more towards the upper income levels of society to the benefit of luxury products and services. The performance of the dollar against the euro, sterling, Swiss franc and others will further narrow the market for lower/middle-income travelers to international destinations tied to those currencies. The declining purchasing power of the dollar, which had double-digit percentage decreases against both the euro and pound in 2006 created sticker shock for vacationing Americans in most of Europe and other countries outside the eurozone like Australia, Brazil and Scandinavia where the dollar also lost an average7% of its value. Where is the dollar headed next? For the time being it is moving in a narrow band around the $1.30 level to the euro but that could change quickly if the European Central Bank follows the Bank of England and raises interest rates while the Federal Reserve holds steady. There is no big government push to protect the dollar and in fact there is some desire in the U.S. to see it weaken further to reduce the huge balance of trade deficit. We can only repeat our earlier mantra-anything likely to happen to the dollar this year will have little or no serious impact on Caribbean tourism prospects.

2. THE PRICE OF OIL ─ WHERE IS IT HEADED? We have covered the roller-coaster ride of crude oil prices through the July high point of $73.03 a barrel to its current and surprising fall-back to around $50. It is instructive to note that in spite of its turbulent course throughout 2006, crude oil prices on the New York Mercantile Exchange finished up on December 31st at almost exactly the same level recorded when the year began. Nevertheless, the high price of oil and instability of supply and demand will remain a Sword of Damocles over all our heads for an indefinite future. Current price levels reflect reduced demand in the U.S. and much of Western Europe due to the unusually warm weather experienced thus far this winter bringing down the price of home heating oil and natural gas. 2006 was the warmest year on record suggesting that this phenomenon may not be short-lived. Investment in alternative energy sources, long lagging in the U.S. behind Europe, has recently blossomed there, including a big increase in the production and usage of ethanol. Ford and General Motors are following the lead of Japanese auto makers into the design and production of more-efficient hybrid vehicles and dependency on foreign oil in the U.S. should slowly diminish. We noted with interest recently that a prominent American energy expert recommended that the U.S. look to the Caribbean for a major, long-term source of sugar cane since cane is a much more efficient crop than corn in the

2 conversion process to ethanol and it is not a viable crop in most of the U.S. due to climate conditions. Could there be a rebirth here in the sugar industry to provide a much-needed secondary revenue stream to tourism for many small island nations? In the near term, however, all eyes are on OPEC and the implementation of production cuts that the organization has already agreed. The first cut of 1.2 million barrels a day officially took place on November 1st last year and the second is due in February. Some OPEC Members like Venezuela are pressing for additional cuts now to prevent crude prices from sliding further and leading producer Saudi Arabia has let it be known that it will do all possible to protect a floor price of $55 a barrel which has already been breached. According to expert energy watchers, compliance has been less than effective with estimates of cuts to date ranging between 700,000 and 800,000 barrels a day, well below the level of the November agreement. The next two months should tell the tale while the airlines and the rest of us are holding our breaths.

3. THE PASSPORT ISSUE ─ HOW BIG AN IMPACT? We tend to live in the present, including facing up to the issues of the moment, which is natural, so it’s easy to forget just how long the debate over the requirement for passports for foreign nationals and returning residents has been raging in Washington. In 2004, Congress passed the Intelligence Reform and Terrorism Prevention Act which required passports to enter or reenter the U.S. for all travelers by air, land or sea by January 1, 2008. Subsequently, in one of several actions, the Department of State and Homeland Security proposed a three-phase plan with the first phase requiring passengers entering the country by air or sea from Bermuda, the Caribbean and South and Central America to have valid passports effective December 31, 2005. Intense lobbying from destinations and travel industry groups, plus problems in implementation of a proposal for a low-cost I.D. alternative to passports for U.S. residents called PASS, caused a further delay. After more confusion and conflicting signals from the administration, yet another deadline of January 23rd was finally implemented for all passengers entering the U.S. by air. Cruise line passengers have been temporarily excluded for an uncertain period giving rise to predictable complaints from land-based tourism interests. A number of destinations and private sector entities, including many in the Caribbean, have reacted with special promotions and educational programs to lesson the impact. The Nassau/Paradise Island Promotion Board, for example, is advertising free passports for qualified stayovers while many hotels from Jamaica to St Kitts are making similar offers online and in the media. Mexico has an impressive program with a number of initiatives being heavily promoted including consumer contests designed to encourage U.S. citizens to get passports, distributing video news releases, micromedia flashes and free passport holders. Further checks have confirmed our report last month from the marketplace that the new passport requirement is having little measurable impact on travel to the Caribbean or Mexico (by air) although there is considerable public confusion over dates and details. What is more certain is that the number of Americans who have valid passports is growing exponentially from the current estimate of 70 million (27 %.) The number of new passports issued in 2006 jumped to an estimated 12 million, up by 2 million from the year before and this year’s numbers will almost certainly exceed that. In contrast to the U.S. brouhaha over cross border identification, Europe continues to expand the so-called Schengen Zone which eliminates passport checks at common borders. The Schengen Zone already includes 13 European Union countries plus Norway, Iceland and Switzerland joining in 2008. The latest expansion includes all 10 new members of the E.U.; only the U.K. and Ireland have elected to remain outside the Zone.

4. THE AIRLINE INDUSTRY ─ RETURN TO PROFITABILITY/MERGER FRENZY Is this the year when major consolidation in the U.S. airline industry will actually happen? Basic economics would suggest the answer is yes. Compared with results for airlines based in other parts of the world, U.S. carriers have been poor financial performers. Beset by soaring energy costs, bankruptcies and low-cost carrier competition, they posted a collective loss of $6.7 billion in 2005, while Asia-Pacific airlines posted a $2.1 billion profit and the Europeans had a $1.6 billion profit. Results for 2006 will be somewhat more positive with jet fuel going down in the final quarter and cost cutting measures starting to take hold but consolidation seems inevitable as four of the six largest U.S. carriers with international routes are in active merger talks or hostile takeover play. Consolidation would help airlines shed excess capacity and sell more seats at higher fares, essential elements for a return to profitability. Looking at some of the airlines in play, we start with the hostile bid last November by US Airways Group to take over Delta before it emerges from bankruptcy. The bid was rejected by Delta’s management as expected but US Airways is persistent and raised its offer to $10.2 billion in cash and stock. Delta is still not impressed but at the end of the day, Delta’s largest creditors will be the determining factor. Meanwhile, United Airlines, which emerged from bankruptcy last February, and Continental are engaged in early merger talks. United’s Chairman, Glenn Tilton, is a strong proponent of consolidation and while such a merger will face many challenges from regulators, unions and competitors, the shaky condition of the U.S. industry at large compared to its international competition (almost a carbon copy of the U.S. auto industry today) may make the Department of Justice Antitrust Division more receptive to mergers than in the past. The Commerce Department is holding a hearing in late January to examine concerns in Congress about airline consolidation although it was unclear at the time of writing who would be called to testify. The wild card in all this is Northwest Airlines, another candidate for consolidation, which remains under bankruptcy court protection for now. It has a strong interest in Continental’s future through an earlier partnership agreement and is itself a logical candidate for a merger with Continental. Further complicating matters, it has now been revealed that Delta and Northwest have quietly been discussing consolidation, which would appear to be a more popular outcome than a takeover by US Airways with Delta’s management. All five of these carriers in play currently serve the Caribbean at various levels of importance and any consolidation will have an impact on routes and fares. Is the recent return to profitability sustainable? In a related topic, most U.S. airlines are about to report their first annual profit in six years. The Air Transport Association ATA, the leading group representing major U.S. carriers, estimates that their member airlines will report 2006 earnings between $2 billion and $3 billion while they forecast a net profit of some $4 billion for this year. If that forecast is realized, it would make 2007 the best year since the record earnings set in 1999. However, the recovery is fragile and a number of positive factors need to stay in place. First, the price of jet fuel needs to remain stable or retreat and second, the economy needs to maintain a modest growth of at least 2.6% in GDP for the year. Right now those numbers seem attainable and the expansion by the U.S. airlines into more profitable international routes with higher yields is helping to offset higher fuel costs. None of this is likely to block the path to consolidation. The big airlines have done a good job in cost- cutting and restructuring labor agreements, much of it at the expense of the traveling public in terms of reduced capacity, trimming of routes and higher fares. We must expect more of the same in 2007 as the leading U.S. airlines recorded an unprecedented collective load factor of 80.19% for the first 11 months

4 of 2006. Hopefully, a resurgent Air Jamaica and the newborn Caribbean Airlines, together with more low- cost carrier interest in the region, can fill some of the capacity gap that exists between current demand and seat availability in some of our markets.

5. THE CRUISE INDUSTRY OUTLOOK FOR THE CARIBBEAN THIS YEAR By any standard, 2006 was another banner year for the cruise industry. Looking at the macro picture through available figures thus far, CLIA member cruise lines carried 5.76 million passengers worldwide over the first six months of last year, an 8% increase over the same period of 2005. North America accounted for 4.94 million, up 4.5%. Cabin occupancy rates were also up. In terms of market capacity, the Caribbean maintained its wide lead with 48.4% of all bed nights. Europe was second with 21.1% although that percentage actually declined as the cruise lines actively sought new international destinations as well as new source markets outside North America. For example, RCCL acquired Spanish cruise marketing company Pullmantur and Carnival entered into an agreement with TUI to promote in Germany. Both companies also tiptoed into the China outbound tourism marketplace. Demand for Caribbean cruises was slightly soft in the second half of 2006 and the trend has apparently continued into the new year although heavy discounting has helped to keep occupancies up. Some of that softness in the American market may be attributed to the extensive media coverage given to a big increase in reported incidents of norovirus flu. The Center of Disease Control in Atlanta says that 22 serious outbreaks of norovirus occurred on cruise ships last year including episodes on megaships Freedom of the Seas and Carnival Liberty. Capacity in the Caribbean will also be up again with five new ships entering the region’s waters including still more megaships from Carnival, Princess and RCCL. What else may we expect from the cruise industry in 2007? The big growth in the wider luxury travel market mentioned earlier in this report has not gone unnoticed by the cruise industry in spite of their recent focus on building larger and larger ships for the masses. The cruise lines have the deep pockets necessary to both build new ships in the luxury category and market them aggressively together with redesigns like NCL’s featuring garden villas, deluxe suites and exclusive areas for top-paying guests reminiscent of the class distinction in the golden age of Transatlantic liners We also expect that the cruise lines will continue their quest for new ports in more exotic locales and we may also see additional shifts in home-porting away from Florida, including to the West Coast if Caribbean business gets any softer. Overall, we see little to rock the boat, to use a bad pun, for the Caribbean’s continued dominance but nothing is forever and those countries which rely heavily on cruise business for their economic wellbeing should take nothing for granted, particularly for the longer term.

6. GLOBAL HOTEL INDUSTRY TRENDS-THEIR RELEVANCE It’s been an excellent year for the hotel industry, too, with strong profits accruing from high occupancy levels and even higher REVPAR (revenue per occupied room) contributing to a flood of available capital for investments into new hotels and upgrades of existing properties around the world. Hilton and Intercontinental alone have some 1,500 new properties in the development or construction stages in the U.S. and overseas. Marriott International and its franchisees will pour $ one billion over the next three years into upgrades for its Renaissance brand while InterContinental recently announced major renovations to its properties in Latin America and the Caribbean. Other channels for development include a number of new boutique and life-style hotel projects from some of the biggest names in the international hotel business. Prominent among them is a new five-star brand from Starwood Capital Group, the huge real estate investment firm, simply called Hotel 1. The first

5 Hotel 1 will open next year in Seattle and Starwood’s goal according to Travel Weekly is to become “the greenest of the green” of hotel brands. All new construction must conform to international green building design standards, land use, water and energy usage, lighting; indeed every aspect of development and operation will be undertaken to minimize environmental impact. Additionally, Starwood has pledged that one percent of operating revenue will go to environmental causes in the community. Travel Weekly comments that if Starwood is successful in transforming the eco-friendly label from a marketing platform to a fundamental principle of design and operation, it may set a new goal for the industry at large while setting a new standard of luxury – a worthy objective. Electronic bookings continue to grow in importance for the hotel industry. According to travelClick’s consolidated third quarter results, eTrak data showed the Internet contributing forty percent, or more than eight and a half million, to the total central reservation office bookings at major hotel brands, a huge 25% increase compared to the same period in 2005. The data also maintains the importance of e commerce to hotels through the travel agent – focused GDS systems. This accounted for 34.7% or over 7.4 million bookings. Internet bookings surpassed GDS bookings in a continuing trend for the second straight quarter and reservations by phone continue to fall. Hotel brand websites gained more ground over third-party merchant and opaque websites and were the source of 81.2% of CRO internet reservations. The importance to regional hoteliers, particularly for independents and smaller properties of having a search-engine-friendly technical site structure with appealing design, rich content and easy conversion capability to direct the bookings has never been more evident.

7. AGENTS/WHOLESALERS STILL IMPORTANT The continuing importance of agents is demonstrated in part by the GDS booking figures quoted above but it is only part of the story as agents learn to live with totally different techniques in dealing with their clients and suppliers as net fares and reduced commissions from non-airline categories continue to take their toll. Although direct bookings for simple vacation itineraries will continue to rise, there will be a concurrent need for expert advice on more complicated journeys and exotic locales as well as for well- versed destination specialists. One thing is certain, the downward pressure on commissions is here to stay and some other segment of the travel industry in addition to air is bound to go eventually to zero, although probably not this year. Last year GDS pricing was a big news maker in the travel industry and affected agents as the major airlines and GDS operators battled it out. In a development unthinkable only a few years ago, Sabre and American, its creator, stopped talking to each other in a fight over content charges. Some airlines threatened agents with a booking charge of $3.50 per transaction if they used a “non-preferred” GDS. Big competitors Amadeus and Sabre entered into a mutual assistance pact to provide content to each other if a major airline withdrew from either system. Eventually the old contracts dating from 2003 were re-negotiated and the airlines got price reductions from the GDS operators who quickly cut their losses by trimming their incentive payments to agents by an average of 80 cents per segment. Where will it all end? Not soon, at any rate. The picture is further clouded by two large acquisitions scheduled for later this year. Sabre has agreed to be taken over by two private equity firms in a $5 billion deal some time in March and Worldspan will be acquired by Travelport, parent of Galileo and Orbitz, a few months later. There are also several smaller firms emerging as potential players in the technology of distribution business which will bear watching. One of them is ITA Software currently involved in developing a new hosting platform for Air Canada.

It remains to be seen what changes these deals will make and how quickly to the current travel distribution channels but if anything is certain, changes there will be. Tour Operators Based on our own survey of major tour operators for the Caribbean and an overview from the U.S. Tour Operators Association President, Bob Whitley, 2007 should be an excellent year for most firms. Whitley says that the industry is more stable now than it has been in several years although consolidation could also turn out to be a factor among tour operators in 2007. In fact, it appears more and more that this may be the year of the merger for the entire travel industry.

8. Other Developments Ahead in Technology/Communications This topic cannot be left entirely on the sidelines but it is too complex and profound to be summarized in a brief overview of trends such as this. We will devote a separate issue to developments in technology shortly and provide here some updated statistics and information of broad interests: In the U.S. the population reached a new milestone of 300 million in October last year according to the U.S. Census Bureau. Shortly after their report was issued, EMarketer research updated its estimates on the size and demographic makeup of internet penetration in the U.S. According to EMarketer, 63% of the population, including children as young as 3, or 180 million people, uses the internet at least once a month. White users make up 74.8% of the total while Hispanics have increased by 9.3% to 16.7 million users. The number of Hispanics is projected to more than double by 2010 and this market segment should be of great interest to the Caribbean, not only to Hispanic destinations but to other islands, as this audience is predominantly bilingual and better educated. 77% of online Hispanics have broadband access and over two-thirds consider the Internet to be the best source for brand information. Women internet users slightly outnumber men at 92.6 million. Children are also increasingly using the internet especially teenagers and should be considered great influencers for travel purchases as well as future buyers themselves. In Europe, the UK is the most mature internet market and UK online buyers outspend their European and American counterparts for online products and services including travel. 35% of UK households have broadband access. In actual numbers, Germany has the largest base of internet users at 37 million with 9 million households having broadband access. Spain and France have the fastest growing internet populations. EMarketer estimates that the total spent in Western Europe for retail sales online last year, topped $97 billion compared to $186 billion in the U.S. The European online market is growing by 70% per annum, considerably faster than the U.S. growth rate which is currently forecast to range between 15% and 25% over the next four years. Broadband is both the now and the immediate future for tourism marketers with more than a quarter of a billion people world-wide connected to broadband networks of ever-increasing capacity. Broadband access has grown at a faster rate and has more usage than almost any other communications technology. Travel marketers are already turning to new online promotions using broadband technology. For example, Tourism Massachusetts has launched the first fifteen of planned fifty two-minute videos promoting tourism venues and activities around the state putting TV quality images in front of millions of potential new visitors at a very reasonable cost. To Massachusetts surprise the top source of responses thus far has come from mainland China. Other cities and states including Aspen, Hawaii, Miami and New York are offering similar virtual tours using broadband technology.

7 9. WILL 2007 BE THE YEAR FOR NEW MARKET PENETRATION? We covered a number of new market opportunities during 2006 culminating with a look at Russia in the November issue. We hope they have been useful in the preparation of future marketing plans for some of our members. This year the World Cricket Cup provides an exceptional vehicle to reach new markets, particularly among Commonwealth countries around the globe. The anticipated influx of visitors from those countries, most of whom will be getting their first exposure to the Caribbean region, will present a wonderful opportunity to promote return visits and to spread word-of-mouth recommendations to friends and relatives after they get back home. The growth of internet penetration everywhere makes promotion to new markets economically feasible for almost everyone. Current estimates, for example, for the online travel market in India one of the participants in the World Cricket Cup, are that travel-related online sales will top $750 million in 2006 and exceed $2 billion by the end of next year. What a target! Some governments in the region with private sector cooperation have been doing a good job in reaching out to new markets, particularly among the BRIC nations we mentioned last month. However, we believe that this could be a watershed year with special events that will not come again for a long time and that some collective effort on a sub-regional basis could pay off handsomely.

10. THE ENVIRONMENT ─ A YEAR OF GROWING CONCERNS Global warming has finally caught the attention of governments and the public in a big way, even in Washington where the President has conceded that polar bears could be an endangered species! Consumers everywhere are being bombarded with images of melting icecaps, rising oceans and massive climate changes. People are waking up to the fact that these changes are not only of concern to generations ahead but are likely to impact them adversely in their own lifetimes. Environmentalists are clashing with governments over the development of fossil fuel exploration in hitherto protected areas and efforts are being made in the European Union to strengthen emission standards for the airline industry. The growing concern is stimulating more and stricter regulations in many parts of the world and the international tourism industry is reacting at many levels from self-imposed new standards for environmental protection to lobbying governments. Protection of the environment has long been a critical issue in the Caribbean where beach erosion caused by overbuilding too close to the water, destruction of the reefs by cruise ship pollution and other sources are but two of the major concerns. Yes, there has been a wakeup call and we must all redouble our efforts to ensure that it is not too little, too late.

HAPPY NEW YEAR.

8 Tourist (stop-over) Arrivals and Cruise Passenger Visits in 2006

Tourist Arrivals Cruise Passenger Visits

Destination % Change Cruise % Change (Stop-Over) Period Tourists 2006/05 Period Passengers 2006/05 Anguilla Jan-Sep 56,014 18.7 - - - Antigua & Barbuda * Jan-Oct 210,315 3.0 Jan-Sep 304,569 -2.3 Aruba Jan-Oct 573,628 -7.7 Jan-Nov 507,458 7.8 Bahamas * Jan-Oct 1,276,377 0.5 Jan-Oct 2,509,263 -6.4 Barbados Jan-Sep 420,962 4.1 Jan-Sep 351,574 -11.5 Belize Jan-Aug 181,717 4.7 Jan-Aug 440,384 -23.1 Bermuda Jan-Nov 283,258 10.0 Jan-Nov 335,573 36.5 Bonaire Jan-Jun 32,266 -5.9 Jan-Dec 61,844 54.3 British Virgin Islands P Jan-Nov 320,334 4.2 Jan-Nov 381,630 0.1 Cancun (Mexico) ** Jan-Nov 1,425,833 -31.4 - - - Cayman Islands Jan-Nov 239,871 64.1 Jan-Nov 1,719,889 7.6 Cuba P Jan-May 1,128,261 4.3 - - - Curacao Jan-Nov 212,417 5.0 Jan-Nov 273,179 14.8 Dominican Republic * Jan-Nov 3,577,186 8.2 Jan-Sep 231,990 3.0 Grenada Jan-Oct 98,188 21.9 Jan-Oct 147,813 -22.5 Guyana Jan-Oct 90,084 -4.9 - - - Haiti Jan-Jul 59,800 2.5 Jan-Sep 318,874 18.4 Jamaica Jan-Nov 1,510,471 15.0 Jan-Nov 1,159,448 15.4 Martinique P Jan-Oct 427,028 2.7 Jan-Oct 61,181 0.0 Montserrat Jan-Nov 6,202 -17.5 - - - Puerto Rico ** Jan-Sep 1,153,536 2.4 Jan-Sep 972,901 2.8 Saba Jan-Sep 8,830 -0.2 - - - St. Eustatius Jan-Jun 5,236 -1.2 - - - St. Lucia Jan-Nov 275,449 -5.0 Jan-Nov 301,248 -10.5 St. Maarten * Jan-Sep 355,206 0.7 Jan-Sep 1,027,047 -1.2 St. Vincent & the G’dines Jan-Sep 73,742 3.6 Jan-Sep 63,872 85.8 Suriname Jan-Mar 34,887 -6.3 - - - Trinidad & Tobago Jan-Jun 232,743 -1.0 Jan-Apr 62,897 63.9 US Virgin Islands Jan-Oct 563,507 -1.4 Jan-Nov 1,681,793 -1.7

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