November 10, 2005

Aruba Boycott II

The following is a post that was made on Riehl World View a couple of days ago in response to one of Dan's rants about the Aruba Boycott. I contacted the author for permission to use his words because it explains the effects of a boycott as well as a well stated view of this case. Thank you Dan in TX!

"NOTE: this post has been edited accordingly, in response to an excerpt from Scared Monkeys on 11/09/05: "The biggest concern is the fact that 27 percent consider Aruba to be an unsafe place to go to. Aruba has dropped from the second to the seventh place on the list of safe vacation destinations and is now almost at the same level as Jamaica and the Dominican Republic."-Jossy Mansur, Diario

Aruba Now, I can't independently verify this 27 % figure but I will use it in my calculations since it is a hard number at least. About the boycott: it might not be felt much now (though bestbuddy said it was being felt already), but the boycott will be felt in the coming months. So, going back to my recreation and tourism degree:
1. The fact that travel companies are offering discount packages at all is actually a sign of worry on their part. Consider this: let's say that (on average) it costs $100 per night for a 3 star hotel in Aruba. Jossy Mansur says that a 10-day trip to Aruba costs about $1400 per person altogether. Now assume that of this, 50% is hotel lodging- an expense of $70 per day. Let's say that hotel has 100 rooms, has 100% occupancy (very rare for any hotel) and so turns $7,000 a day. Then the boycott hits and in time the occupancy drops to 82% (27% of 70%=about 18% of 100%). Now the hotel only sees $5,740 per day. BUT...what if they offer a 10% discount on all rooms to combat the boycott? Even if their occupancy jumps back up to 100% , at $63 per room per night they are still LOSING $700 per day ($7000-$6300)! In short, offering a big discount on packages and keeping numbers up is better than suffering a flat-out occupancy cut but it is only damage mitigation, NOT a solution. Since Caribbean hotels operate on no more than a 30% profit margin if they're lucky (Source: American Hotel Lodging Association), that means that a 10% discount rate takes away 1/3 of their profit....and if 1/3 of your profit is $7 per hundred your profit margin is dangerously slim anyway.
2. To help recoup these losses and raise occupancy again, the travel industry in Aruba is going to have to spend MORE on more advertising- thus cutting into their profit margin even deeper.
3. A lot of people will be unwilling to cancel their prior reservations to Aruba when the boycott is called due to time constraints or cancellation penalties. The issue is not how many people don't go to Aruba now, it is how many don't go in the coming months. When you consider that Aruba has nothing special to offer over any other Caribbean or Pacific island, things look even worse.
4. As Jossy suggested, if the travel agencies prefer to suggest alternative packages to make up their commissions (see #2 above), then my guess is the cruise lines will also feel this. Remember: the boycott doesn't just affect travel packages, it will affect cruise lines as well. Let's look at this snowball effect for a minute: how many cruise lines will choose to keep stopping in Aruba if the travel agencies that refer guests to them stop referring guests as much, especially given the rising cost of fuel? The same is true for airlines. When one considers this boycott, you have to remember the ripples that a dip in one industry causes to other industries: if Aruban tourism drops- or I should say when (but keep in mind that it will take months for the full impact of this boycott to be felt)- so do the many guided tours in Aruba, the restaurants and clubs and bars, the souvenir shops, even the bordellos! Think about it this way: what would 9/11 have done to the U.S. economy if it were TOTALLY dependent on the WTC businesses? Incidentally, this is where Harry Tho's article on his website is wrong. Look at all the U.S. corporations that he claims might lose business due to an aggressive Aruban boycott. Ask yourself how many are linked to Aruban tourism. Of those, ask yourself which ones will not be able to conduct business elsewhere. Remember, if tourists abandon Aruba and flock to the Bahamas let's say, so will the companies that support the tourism industry. Harry talks as if these companies will go bankrupt if they lose Aruban contracts or at least fail to negotiate new contracts. The truth is, long before they start to lose significant profits through lost contracts in Aruba, they'll have other contracts lined up elsewhere if they're smart. Offshore businesses that profit from Aruban tourism will follow the tourists. To say that the death of Aruban tourism will be anything more than a blip in the U.S. or even Alabama economy is ridiculous. Dan on RWV: 105 million dollars of trade with the U.S. isn't squat. Get a clue- the U.S has a total trade deficit of 400 BILLION dollars. If you think that 105 million dollars worth of trade with the Netherlands Antilles is even a drop in the bucket, then you need to take ECON 101 again.
5. The U.S. makes up 70% of Aruba's tourism income. That means 30% comes from everywhere else. Assuming that all tourists to Aruba spend the same amount (and since the U.S. is, in general, a quite prosperous nation the truth is Americans probably spend the most per person): $1,400 let's say (again, Jossy's number). So for every 100 tourists, $98,000 comes from the U.S. and $42,000 from everyone else (a total of $140,000). What happens if 27% of Americans stop going to Aruba (a total loss of 18% of Aruban tourism)? We get a flat loss of $25,200!
6. The question remains, can Aruba make up this 27% elsewhere? Perhaps, but can they make up the amount of income? Remember, numbers do not equal income. If Aruba can make up the difference from the boycott with European visitors but these visitors spend less than Americans, they're still in the hole. And don't think that just because the Euro is stronger than the USD right now that Europeans will spend more- there's a nasty little thing called inflation that goes along with this that actually robs people of spending power. When the dollar is worth more, everything costs more. And when everything at home costs more, you have less to spend on vacation.
7. Moreso than many businesses, tourism and hospitality tend to pay disproportionately to the managers and owners over the laborers. In other words, in such a strongly service-oriented industry, few people are white collar and most are blue collar. As any economist will tell you, pay cuts hurt the least-paid workers from a standard of living standpoint the most and soonest. Let's say we have an Aruban hotel with one manager, 3 assistant managers, 3 shift supervisors, and 20 maids, cooks, porters, etc. Assume the manager makes $60,000 a year, the assistant managers make $45,000 a year, the shift supers make $30,000 a year, and the others make $15,000 a year. Now let's say that the boycott causes a significant loss of the hotel's business and everyone has to take a 10% pay cut just to keep their jobs. The manager now makes $54,000 a year, the assistant managers make $40,500, the supervisors make $27,000, and- here's the important part-the laborers make $13,500. Assuming a 40 hour work week 50 weeks (allowing for two weeks vacation since Arubans seem to take vacations left and right), that means the laborers went from making $7.50 an hour to making $6.75 an hour. The manager, however, went from making $30 an hour to making $27 an hour. Now- whose lifestyle do you think will be hurt most? Which of these people are living the closest to broke to begin with? Finally, consider this: what percentage of Aruban VOTERS work in the bottom tier of the labor force and will be very upset about the economy very fast? Let me remind you that even in a prosperous nation like the U.S. blue collar jobs outnumber white collar jobs significantly. I imagine this dichotomy is even worse in a Third World country like Aruba.
8. Nobody is going to keep a business open in a financially worthless location or conduct business there (see #4). Do you think that the Marriott or the HI will keep their hotels open for a 25% or even a 50% occupancy rate out of the goodness of their hearts, just to give Arubans jobs? What do you think will happen when the stockholders start crying foul? Most Caribbean hotels and motels operate at a 20-30% profit margin. This means that if you want to make money you can't lower rates more than about 15-25%. But by the time profit margins are down to 10%, most of your stockholders will sell out. So how do you avoid losing money if you're a stockholder with a failing company? You sell and get out (there are other companies to invest in after all), or you close locations that are showing consistent losses.
If you show me a person who criticizes Beth for calling for a boycott and hurting the Aruban people, I will show you an idiot who still thinks the boycott was called because of what happened to Natalee. Beth- and now Dave too bless him- are supporting a boycott because of how the investigation was mishandled and how it continues to be mishandled. Apparently now even Dan the sellout at RWV is beginning to understand that Beth is using the only weapon she has- and she is using it with a vengeance. As a staunch supporter of the boycott on Aruba, I like the numbers I am seeing.
- Courtesy of Dan in Tx


Jeff said...

Great post. I agree with your analysis 100%.

Janet Picardo said...

Wow! Very interesting. I hope this boycott works.