TOURISM stopover arrivals, as highlighted Thursday by a major international investment bank, are reported to have climbed 1.6 per cent in 2011 to 1.95 million visitors. This was driven wholly by a 16.5 per cent increase in Canadian visitors to 379,000, now representing 19 per cent of our total stopover visitors, which offset a 1.4 per cent decline in US stopover visitors to 1.23 million.

The premium American market now represents just 63 per cent of total visitors (down from a pre-crisis range of between 65 and 70 per cent), although it has held up much better than the UK and Continental Europe, which now represent just nine per cent and four per cent of our tourists respectively. However, the latest balance of payments numbers show tourism receipts rising only 0.7 per cent to US$1.79 billion for the period January to November, suggesting continued erosion of pricing in Jamaica’s landbased tourism of about one per cent.

The pricing gap could be closer to two per cent, as cruise passenger arrivals surged 23.7 per cent to 1.13 million tourists, driven by a 12.9 per cent increase in cruise ship calls to 367. Cruise ships represents about five per cent of total tourism receipts in Jamaica, so assuming unchanged spending per cruise arrival, this would suggest a further reduction of approximately one per cent in the portion of tourism receipts going to land-based tourism, implying an overall pricing reduction of about two per cent in 2011. The story of margin compression in tourism does not end there however, as calendar year inflation of six per cent was clearly not offset by an overall rate of devaluation of less than one per cent in 2011.

While the exchange rate stability is welcomed from the perspective of the overall economy and consumer, it means that overall margins for the industry would likely have shrunk by a multiple of the fall in pricing, particularly as the inflation rate for the largest portion of direct operating costs, food and energy, has been substantially higher.

The situation is compounded by the fact that even the strongest groups currently face an inability to pass through cost increases, so that a one per cent increase in pricing leads to a one per cent decline in occupancy, or no net gain, and in some cases a decline in revenue. In their recent study of the Jamaican tourism industry, Travel and Tourism as a Driver of Economic Development in Jamaica, leading international economic consultancy Oxford Economics noted that, using operating surplus as a proxy for profits, Statistical Institute of Jamaica data suggested that the average profitability of the hotel and restaurant sector was about 10 per cent.

“Given the export nature of tourism and the need to remain competitive in the region, it is unlikely that increased General Consumption Tax could be easily passed on to customers,” reported Oxford, referring to the proposal to increase GCT from 10 to 12.5 per cent

“This would mean that the proposed 25 per cent increase in GCT would exactly equal a 25 per cent decrease in average profitability,” Oxford said, adding “Our survey of the tourism sector companies in Jamaica reveals that many companies are operating at an even lower profit margin, in the mid–single digits or lower, implying that this increase in GCT could bring these companies to a break-even or loss.”

In short, the 2010 statistics on which STATIN’s data is based are already likely to be out of date.

Inside sources confirm that margins have continued to decline, with one major hotel group reporting a 25 per cent collapse in margins since the financial crisis began, and another representative of a long established all-inclusive hotelier facing difficult times asking the question “Will there be a Jamaican-owned all-inclusive tourism industry in a decades time?”. What they are alluding to is that the domestic “all you can eat” all-inclusive model is facing a triple squeeze from sharply increasing operating costs, particularly from the huge spike in food and energy costs over the past few years, and a massive increase in both the domestic and international supply of all inclusive rooms that is in danger of making the typical all-inclusive experience a mere “commodity”. This increased competition also has a direct impact on the smaller domestically owned European plan hotels.

Finally, taxation on tourism has already been increased significantly as part of the original Interational Monetary Fund deal, with GCT increasing from 8.25 per cent to 10 per cent on April 1, 2010, so that 2011 was the first year where we saw the full impact of that increase, as well as the doubling of the tourism enhancement fund tax from US$10 to US$20 per head. There was also a further increase in the UK’s Air Passenger Duty (APD) on April 1st to 162 pounds per person per premium economy flight for countries in band C (Jamaica), with the gap with the APD charged for a similar flight to countries in band B (notably the US at a cost of 130 pounds) widening further to 32 pounds, making Jamaica still less competitive for UK tourists versus the US.

Finally, there is the imminent introduction of an European-wide travel tax, and the ongoing European financial crisis to contend with. Whilst this tax may not have that much impact on our tourism numbers, as only four per cent of our tourists now come from continental Europe, the more interesting question is the economic impact of the latest intensification of the European crisis on Jamaica. The current epicentre is “too big to bail” Spain, whose credit default swaps (the cost of insuring against a government debt default) reached an all-time high of 498 basis points, and whose ten-year government bonds settled at just under 5.99 per cent, just below the psychologically important six per cent, where some investors believe Spain starts to have a financing problem, ultimately requiring a bailout.

Despite all the controversy over Jamaica’s overly attractive incentives, a quick look at our Foreign Direct Investment (FDI) numbers may suggest that the foreign investors do not regard Jamaica as attractive enough. Total FDI for 2010 was only US$227 million, or US$167 million after subtracting retained earnings. Of most note is that tourism FDI more than halved to US$71.8 million in 2010 compared to 2009, or about one third of the average for the 2006 to 2008 period (the “Spanish invasion”), which was itself at least partly driven by a quirk in the Spanish tax code.

Spain now faces severe banking stress from the collapse of Europe’s biggest real estate bubble, leading one to ask what will be the Spanish chains’ appetite for new “greenfield” investment going forward. Another interesting question is what happened to the Spanish and other European tourists they were supposed to bring. Did they ever arrive, and if so, where have they all gone now?