Economics of a Boycott

Economics of a Boycott

"The biggest concern is the fact that 27 percent (of Americans) 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, Editor, Diario Aruba newspaper

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 (something the ATA doesn't dare release right now). However, going back to my recreation and tourism degree I have the following observations to offer:

1. The fact that travel companies are offering discount packages is actually a sign of worry on their part. Consider this: let's say that (on average) it costs $150 per night for a 3 star hotel room in Aruba (a comfortable average according to www.travelocity.com ). Let's say that a hotel has 100 rooms, has 100% occupancy (very rare for any hotel) and so turns $15,000 a day. Then the boycott hits and in time the occupancy drops to 82% (27% American tourism loss of 70% total American tourism equals about 18% of all Aruban tourism). Now the hotel only sees $12,300 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 $135 per room per night they are still LOSING $1,500 per day ($15,000-$13,500)! 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. I suspect that keeping numbers up is for the benefit of the government's image than anything else- that way they can tell the Arubans that numbers are up…but of course that is only a small part of the equation. 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 very 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 already shrinking profit margin even deeper. They've already started by spending money on more USA Today ads, hiring spin doctors like Steve Cohen, and most recently sinking about $700,000 into a new government-sponsored tourism campaign and millions into hotel and airport renovations.

3. Many people will be unwilling to cancel their prior reservations to Aruba when the boycott started due to time constraints (difficult to find another destination in such short notice) or monetary cancellation penalties charged by cruise lines and travel agencies. The issue is not how many people don't go to Aruba prior to today, it is how many go in the coming months. I notice that there are several things that have yet to be done to push the boycott, and if they ever are things will only get worse.

4. As Jossy Mansur suggested, if the travel agencies prefer to suggest alternative packages to make up their commissions, then my guess is the cruise lines (who are already losing business due to the upcoming Congressional hearings) will also feel this. Remember: the boycott doesn't just affect travel packages; it will affect cruise lines and airline tickets 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? 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 business 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 does the many guided tours in Aruba, the restaurants and nightclubs and bars, the souvenir shops, even the bordellos! Think about it this way: what would happen to the OPEC nations if they suddenly had no access to their own oil reserves? How much money from oil sales go to the Iraqi government now with oilfields only capable of a fraction of normal production? This is exactly the situation Aruba is facing: a coordinated and specific attack on the vast majority of their wealth! This boycott would not work nearly as well if Aruba had a varied economy (and this is why boycotts against other places for different reasons haven't worked. Any economist will tell you that the more varied a nation's resources are, the less susceptible to economic ruin it is). As it stands, 70% of Aruba's livelihood is in jeopardy!

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 more per person), $1400 let's say (again, Jossy's number). So for every 100 tourists, $98,000 of revenue comes from the U.S. and $42,000 comes from everyone else (a total of $140,000). What happens if 27% of Americans stop going to Aruba (a total loss of 18% of total Aruban tourism)? We get a flat loss of $25,200 per 10 days per 100 tourists! That is $252 a day per person. Now multiply this by the 500,000 American tourists that visit Aruba yearly, and the loss becomes $1.2 million dollars a year from hotels alone!

6. The question remains, can Aruba make up this 27% loss 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, that is not quite as good as it would first sound, is it? 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. The Euro might buy more in Aruba, but the cost of living is higher in Europe so Europeans bring less disposable income with them.

7. More so 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 management and most are labor. As any economist will tell you, pay cuts and economic downturns hurt the least-paid workers from a standard of living standpoint the most and the soonest. Let's say our Aruban hotel has 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 a year (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. This dichotomy is historically even worse in a Third World nation like Aruba.

8. Nobody is going to keep a business open in a financially worthless location. Do you think that Marriott or the Holiday Inn will keep their hotels open for a 25% or even a 50% occupancy rate 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 5%, most of your stockholders will sell out and your stock will be devalued. So how do you avoid this if you're a stockholder with a failing company? You sell and get out, or you close locations that are showing a loss. The loss of tourism in Aruba will not hurt American businesses there one bit- they'll simply open new hotels wherever the tourists go. Besides, U.S businesses in Aruba like the Holiday Inn and Marriott don't employ Americans- they employ Arubans. While we're on the subject, note that the annual trade between Aruba and the U.S. is something like 117 million USD. That is less than 1% of the U.S. annual trade surpluses. We won't miss Aruba nearly as much as they'll miss us.

No wonder the Aruban government and the ATA are running scared of a boycott. And make no mistake, they are- why else would they be four months behind in releasing tourism figures? Why else are they trying so hard to convince their own people, not Americans, that everything is fine and that they are competent?