Oil prices fuel tourism downturn, Things could get worse for Hawaii, the visitor industry says

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By Allison Schaefers
aschaefers@starbulletin.com
Friday, May 23, 2008

Visitor-industry executives and officials are facing worrisome signs that the recent spike in oil prices is starting to hurt tourism to Hawaii.

"We've definitely seen a reduction," said Jack E. Richards, president and chief executive officer of California-based Pleasant Holidays LLC, the largest wholesaler of Hawaii tours. "It's correlated with oil and the price of the fares and fuel surcharges."

The price of oil, which has jumped 13 percent in the past month and has nearly doubled from the prior year, has triggered higher fares and surcharges globally, and carriers that serve Hawaii are no exception.

Oil (fuel) is an important component of the raw materials required in the airline industry. Hence, and increase in oil prices equates to the increase in cost of production. A rise in cost of production will lead to a decrease in quantity supplied. Thus, the supply curve shifts leftward, and equilibrium price increases while equilibrium output decreases. Therefore, the increase in oil prices has triggered higher fares and surcharges globally.

Now there are early indications that the increase is cutting into demand for travel to the islands

When price of air fares increase, quantity demanded for it will decrease more than proportionately. This is because air tickets is considered to be a luxurious good (nature of good) and consists of a high proportion of income spent. Hence, there will be an upward movement of the original equilibrium point on the demand curve, resulting in a decrease in quantity demanded for air tickets caused by the increase in price.

While both May and June look strong for Pleasant Holidays and its sister company Hawaii World, bookings for July and August are weak, Richards said.

"The booking window is 90 to 120 days out, so most of the travel for May and June was booked before the worst of the fuel surcharges hit," he said. "The downturn in April's visitor numbers are a sign of what's coming, and it could get worse. If oil goes up to $150 a barrel, the airlines will park their airplanes."

Add to that the country's general economic woes, and "you almost have a perfect storm," Richards said.

State Tourism Liaison Marsha Wienert said no one knows at what point fuel prices will stabilize, but the answer has a huge impact on the local economy.

On top of the fuel crisis, Hawaii's visitor industry was already grappling with the loss of nearly 15 percent of its airline capacity as a result of the abrupt closures of ATA and Aloha airlines last month.

Please refer to Yanjun’s article- Fares will soar, Senate hears, for more details.

Rising fuel costs are only part of the problem, said Rex Johnson, Hawaii Tourism Authority president and chief executive officer.

"You can't attribute our problems to just fuel costs and the loss of ATA and Aloha," Johnson said. "It's all that combined with the mortgage crunch, volatility of the stock market and the U.S. economy about to become recessive. All of those things certainly give one cause to stay up late at night and think."

*Ceteris paribus does not hold true in reality.

“U.S economy about to become recessive”. à When a country’s economy is undergoing recession, demand for inferior goods will rise and hence, the airline industry should raise production of low-end goods (such as introducing or promoting budget airline- low quality of service/no frills/less frequent air travel services provided) so as to increase total revenue and cut down on the cost of production.

Wienert said that airfares are not the only way in which fuel costs can affect potential visitors.

"It's not only about airline costs; travel demand is also influenced by how much it costs to heat or cool your house and drive your car," Wienert said.

Due to the weakening of the U.S economy, quantity demanded of the air tickets will decrease significantly, as people will not want to travel unnecessarily so as to cut back on their expenses. For example, families may not go for their holiday trips (since air ticket is considered a luxurious good), businessmen will avoid overseas business trips etcetera. Therefore, travel demand decreases, which can be illustrated by an upward movement of the original equilibrium point on the demand curve.

In this kind of environment, Hawaii's challenge will be to convince people that travel is good for them, she said.

"Our message is that travel can relieve some of the stressors that people face today," she said.

The HTA, the Hawaii Visitors and Convention Bureau and the rest of the visitor industry will spend between $3 million and $4.5 million on marketing efforts to bring in Hawaii bookings to help protect against further cutbacks, Johnson said.

"To make sure that we will all be in the yield game rather than the market-share game, we need to drive demand," Johnson said, adding that strong demand is the only thing that will position Hawaii to weather any future airline cutbacks.

"My guess is that after the summer season more airlines will be cutting capacity," Johnson said. "We want to make sure that they don't have a reason to cut any of our flights."


Source: http://starbulletin.com/2008/05/23/news/story01.html



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Zijia