We Shouldn’t Wait To Find Out

Hawaii business leaders forecast the economic future.

January, 2002

There is a reality television series that debuted in 2001 called Fear Factor, in which contestants face their greatest fears in a quest for (what else?) money. In Hawaii, we are collectively staring down our greatest economic fears in a quest for basic survival for some businesses and workers.

The terrorist attacks on Sept. 11 and the subsequent war in Afghanistan gave a one-two punch to an already reeling tourism industry that had been contemplating softening numbers for months. The ripple effects were immediate and immense:

• Visitor arrivals to Hawaii were completely disrupted for two days after Sept. 11. The University of Hawaii Economic Research Organization is projecting a 7 percent decline in overall visitor arrivals for 2001.

• Unemployment insurance claims expanded geometrically as airline carriers reduced flights, hotel occupancy rates dropped and American Hawaiian Cruises (employing about 800) filed for bankruptcy.

• Retail and other related industries felt the pain, leading kamaaina companies, such as Chun Kim Chow Ltd., to file for bankruptcy.

Hawaii Tourism Authority Chairman Roy Tokujo notes that the vast majority of businesses in the tourism industry are small businesses. “A lot of those people might go out of business, and they owe money to others, so it creates a huge rippling effect in our industry, which can become very, very devastating,” Tokujo says. (See related story on page 24).

Enterprise Honolulu’s new executive, Michael Fitzgerald, sees a new spirit of cooperation and a renewed emphasis on the need to diversify Hawaii’s economy. “There are significant challenges, but we have lots of tools, lots of assets, lots of abilities,” Fitzgerald says. “Since Sept. 11, I think there will be potential for a new consideration of Hawaii as a relatively safer haven to have a global business, and that’s one of the kinds of new potentials that we need to seize upon.”

Q. Hawaii doesn’t always follow the rest of the nation in terms of recession and recovery. Please assess the current situation in that regard. What is your best estimation of when growth will return?

A. Walter A. Dods Jr., chairman and chief executive officer, BancWest Corp. and First Hawaiian Bank

All the economists are hedging forecasts these days, because of the unprecedented uncertainty, and I’m no different. The good news is that Hawaii went into Sept. 11 in reasonably good economic shape. We were in our third year of a healthy expansion. We were creating jobs. Unemployment was down and tax revenues were up, despite cuts in income tax rates. Until the attacks, this would have been the first year since 1990 that Hawaii grew faster than the national average.

Now, everything has changed dramatically. Hawaii was hit harder, because of our dependence on air travel.

Our new tourism promotion has a goal of restoring arrivals to “normal” levels by mid-2002. If the world doesn’t give us any more shocks, I think that’s a reasonable target – although it’s a long shot for the Japan market. It’s realistic to expect that we’ll be well into a recovery by the second half of next year, with the full year showing flat and recovery by early 2003.

A. Keith Vierra, vice president, Starwood Hotels & Resorts in Hawaii

Hawaii was already having a very difficult economic year prior to Sept. 11, which, as opposed to the rest of the nation, was under a pretty good recovery. This continues to be reflective of our one-industry economy and inability of our government to create a structure that is favorable to business. While in recent years with a nationwide decrease in military spending, Hawaii has done relatively well in that area. But although the technology segment has grown nationally, the growth in Hawaii has been relatively minor. Having said that, with Hawaii’s dependence on Japan visitors, we will continue to be affected by Japan’s eight-year-long economic slump.

For our company, we are forecasting to be back to 2001 levels by the end of next summer and anticipate growth over 2001 projections prior to Sept. 11.

Q. How much of a decline do you expect in your particular industry? What are the financial implications for the private and public sectors?

A. Robert F. Clarke, chairman, president and chief executive officer, Hawaiian Electric Industries Inc.

We really don’t know what the impact will be on our company. Lower tourism and higher unemployment will obviously impact kilowatt-hour sales and may increase delinquencies at American Savings Bank. We really have not seen either yet, but have developed contingency plans once the impact becomes clearer. The public sector will likely see lower tax revenues, and they must find ways to trim expenses.

A. Bette Tatum, state director, National Federation of Independent Businesses

Small businesses are doing what they do best during this time of crisis — using their creativity and imagination to the hilt just to stay in business and keep as many employees working as possible. But they are up a creek without a paddle unless customers begin spending again. “Buy Hawaii” should be engrained in every Hawaii resident’s mind. It’s vital to spend and keep the money in Hawaii. (I flew to the mainland on Hawaiian Airlines.) The powers that be must try harder to keep businesses in business, for, without employers, there are no employees. Without seeing to it that businesses can afford to stay in business, state revenues will plunge further.

A. Michael Fitzgerald, chief executive officer, Enterprise Honolulu

When the economy takes a hit like the economy has, that’s the time for government to do all the infrastructure projects that have been on hold. To do everything it can to help businesses, whether it’s cut taxes, give tax credits for employment, give tax credits for new investment to help businesses to stay in business, to do worker training programs. All of those would make an important difference. And now would be the time, where government is saving for a rainy day – this is pretty close to a hurricane right now that’s going on economically.

A. Evan Dobelle, president, University of Hawaii

Traditionally, enrollment goes up during economic downturns as people use the opportunity to improve their job skills. This period will likely be no different. Enrollment was already on the rise before the attacks — up 3.6 percent system-wide at the beginning of the fall 2001 semester — and we expect to reach capacity within a few terms. The question for the university is how far we grow beyond our current capacity and how quickly we do so.

Q. What are the biggest variables or hindrances to recovery? What would another successful terrorist attack do?

A. Faye Kurren, president, Tesoro Hawaii Corp.

Perhaps the greatest variable is consumer confidence, worldwide. When consumers feel safe and secure, businesses can begin to get back on track, and jobs may begin to be restored. Although there have been signs of improvement, from a business perspective, another terrorist attack would create a major setback and recovery may take even longer. As the general level of anxiety rises in our world, even incidents that may not necessarily be linked to terrorist activity may have an impact on consumer confidence.

A. Robert F. Clarke, chairman, president and chief executive officer, Hawaiian Electric Industries Inc.

We need to be concerned about the economic viability of the airlines, which are our only real source of visitors. They are losing money at a huge rate and cannot sustain themselves at current loads and fares. The main carriers (United, American, Delta and Continental) are almost too important to the American economy to be allowed to fail. The government would have to step in.

Q. What impact has bioterrorism, such as anthrax, had on Hawaii businesses? What should be the response from the public and private sectors?

A. Bette Tatum, state director, National Federation of Independent Businesses

Both the public and private sectors should be alert and aware of their surroundings. But the nation’s anthrax scare has been nothing in Hawaii compared to what it has done on the East Coast. Dengue fever seems to be more on the minds of Hawaii residents than anthrax. Remember that flu takes 20,000 American lives each year, so get a flu shot. That’s about all you can do to get rid of the fear factor.

A. Walter A. Dods Jr., chairman and chief executive officer, BancWest Corp. and First Hawaiian Bank

I think the public and private sector response in Hawaii has been entirely appropriate. First, give people as much information as possible. Government has done that and we’ve tried to do that with our own employees. Second, try to be sympathetic to people’s fears, even if we think they are overblown. For example, we’ve provided employees with gloves to handle mail and step-by-step instructions in dealing with suspicious items.

Q. What will be the source of Hawaii’s recovery?

A. Faye Kurren, president, Tesoro Hawaii Corp.

Although others have said this before, I think it’s worth repeating. The current economic downturn shows our need to diversify our Island economy beyond the visitor industry. There has been some discussion about bolstering the construction industry to aid in our state’s recovery. I realize there are many proposals on the table and each is not without its set of challenges, and there is no panacea. However, while we seek a short-term stimulus for our economy, we have to really pull together and develop long-term solutions that will help our state weather challenging times like this.

A. Keith Vieira, vice president, Starwood Hotels & Resorts in Hawaii

Until there are other industries to generate significant off-shore dollars, it will be tourism. We need to have more focus on diversified tourism and less complaining about a diversified economy. Hawaii needs to have a better balance of visitors by significantly increasing the business traveler, primarily through corporate meetings, association and incentive travel. We are the only major resort destination in the U.S. that does not have a significant group mix. Currently our levels of around 15 percent to 17 percent, primarily to the neighbor islands, need to grow to where 35 percent of our business is coming from business and group travel. The visitor here for a meeting or incentive is higher income, younger, has a tendency to travel off-shore of U.S. and socialize in peer groups that are also excellent potential customers to Hawaii.

A. Michael Fitzgerald, chief executive officer, Enterprise Honolulu

The primary sources are going to be the recoveries of the overall global economy, particularly the strength and recovery of the U.S. economy and Japanese economy, which drives the tourism business here, but now would also be the time when a lot of new initiatives could be put in place here that will help diversify the economy.

A. Evan Dobelle, president, University of Hawaii

The source of the recovery will be the people of Hawaii. It will not come in the form of any angel from above, such as a spike in Japanese visitor arrivals or new cruise lines from the mainland. This crisis is showing us just how untenable our position had become. Our economic base had narrowed until we were walking a tightrope and on Sept. 11, we were pushed off. So the recovery won’t take the form of any return to the status quo; it must be something new. Otherwise, we’re setting ourselves up for the next international crisis: The Gulf War, the collapse of the Asian markets, the War on Terrorism … We have no idea what’s next in that sequence. And we shouldn’t wait to find out.

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