Caribbean Faces Hurdles and Hurricanes

The Caribbean hotel industry faces some big challenges, according to the latest edition of Caribbean Trends in the Hotel Industry, prepared by PKF Hospitality Research. After a soft 2006, most Caribbean destinations saw the number of visitors grow last year. This year, however, the sluggish U.S. economy, increasing competition, rising energy costs and threats of reduced air service could result in lower occupancy and profits for owners and operators.

“Given the region's dependence on airlift, the most daunting issue facing the Caribbean hotel industry is the cutback in air service,” says Scott Smith, senior vice president of PKF Consulting. “Due mostly to the rising cost of fuel, four of the five leading air carriers to the Caribbean have announced reduced service. Puerto Rico and the Dominican Republic could see as many as 26 percent fewer flights in December of 2008 compared to December 2007.” In an effort to maintain air service, the Puerto Rico Port Authority is offering to lower airport fees by 45 percent.

Rising airfares are another concern. “The Caribbean has always been attractive to price-sensitive travelers. If airfares continue to rise, hotels may have to reduce room rates to maintain the Caribbean's advantage as an affordable destination,” Smith says.

Airlines are not the only mode of transport affected by rising energy costs. The relatively low cost of Caribbean cruises has made the region the number-one cruise market in the world. “Despite the strength of the market, the cruise industry has been influenced by the rising cost of fuel. Cruises to more remote southern Caribbean ports, such as Aruba, are being dropped,” Smith notes.

Energy costs

The rising cost of energy also means Caribbean hotels have to pay more for utilities. Utility costs for the average property in the Caribbean Trends sample were 7.3 percent of total revenue, or $8,341 per available room, in 2007. This compares to just 3.6 percent, or $3,868 per available room, for comparable U.S. resorts.

To offset rising energy costs, some Caribbean hotels have instituted energy surcharges, but many industry insiders think a more permanent solution is to “go green.”

“Caribbean resorts have a long history of being environmentally friendly,” says Smith, “and hotel operators are parlaying this experience into energy conservation. In addition to installing efficient light bulbs, showers, toilets, sinks and air conditioning, hoteliers are working with local energy providers to develop sustainable technologies.”

Competition

Another challenge to Caribbean hotels is the anticipated growth in supply; most major international brands have plans to increase their presence in the area. The World Travel and Tourism Council estimates more than $100 billion has been committed to develop Caribbean hotels in the next five or six years. Most of the projects currently under construction are luxury and upper-scale properties. “Like the recent trend in the United States, the majority of the projects are resorts with a significant residential component and first-class spa,” Smith explains.

And competition is growing throughout Latin America. “Belize and Costa Rica are becoming increasingly competitive as vacation destinations for U.S. citizens, as well as travelers from Europe and South America,” he says.

Operating costs

For the third consecutive year, PKF-HR compared the financial performance of Caribbean hotels with comparable U.S. resorts.

“Historically, Caribbean hotels have paid their employees relatively low wages, but we have started to see a closing of the gap between U.S. and Caribbean labor costs,” Smith notes. Caribbean hotels also pay lower property taxes than their U.S. counterparts. This is attributable to the level of government subsidies tourist-related businesses frequently receive.

Besides paying more for utilities, Caribbean hotels must import most of their food and beverage. Thus, profit margins in this department are lower than in the U.S.

“And Caribbean insurance costs exceed the U.S. average due to the constant risk of hurricanes,” Smith observes.

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