Tuesday, April 23, 2013

Tourism Industry at Risk

Remember your last vacation?  Did you walk along a tropical beach taking in the sun and marveling at sparkling blue-green waters?  Perhaps you took a cruise and explored the fjords of Norway with lush, green mountains soaring on either side of your ship.  Did you take a driving safari into one of Kenya’s national parks to see the majestic lions and regal elephants?

You may end up thanking your lucky stars you took that trip.  If our environment continues to deteriorate it is present pace, these pleasures may soon disappear.  Historically, environmentalists focused principally on tourism’s contribution to global toxic emissions.  In a report to the 2007 meeting of the Group of 20 Finance Ministers and Central Bank Governors in Davos, the Secretary General of the World Tourism Organization Francesco Frangialli reported that the global tourism industry was responsible for as much as 5% of global toxic emissions.  He predicted that volume to double by 2020 as the tourism industry expanded on rising middle classes in China, India and other developing countries.

Much has happened since 2007.  Although middle classes are expanding in size and purchasing power, a global recession in 2008-2010 stalled growth in tourism.  Mother Nature has also given us a few lessons on just what global warming truly means.  Our weather patterns are becoming more extreme and unpredictable.  It is no longer just a matter of melting polar caps.  Global warming and the loss of polar ice is just the beginning of our troubles.  Tourism is as much a victim as perpetrator climate change.

Climate change might mean increased market opportunity in some places.  Extended summers in northern destinations in Canada, Scandinavia and Russia may give tour hosts, hunting guides, restaurants and hotels new customers over a longer season.  Some brave travelers may even be attracted to the polar areas where the summer seasons are longer and the winter season less forbidding.

That is the “glass half full” perspective.  The rest of the story is less cheerful.  Winter resorts in moderate climates are already experiencing less snow and ice formation.  This has shortened ski and skating seasons and reduced the number of people traveling north to the slopes.  To cope with dwindling supplies of natural snow, resorts are incurring increased costs to generation artificial snow and ice.  

The Whistler Ski Resort in British Columbia is held out as one of the most profitable ski resort in the world with at least 100 restaurants and stores catering to clientele with international tastes.  Vail Resorts, Inc. (MTN:  NYSE) is among the largest ski resort operations with a portfolio of seven properties in Colorado and California.  The company is historically profitable and recent operating margins are only slightly lower than two or three years ago.  Still Vail Resorts has missed earnings expectations in all four of the last reported quarters.  This suggests that there is a lag in understanding the dynamic driving the company’s sales and expenses.  Such comparisons are probably not fair as a number of factors are at play in profit margins beyond increased costs from environmental pressures.   That said, it is clear that Vail Resorts’ formula for building sales by running first class restaurants and shops at the base of the slopes will need a recharge if North American climate change means higher temperatures and less snow.

No one is feeling the heat more than tropical areas, especially islands that are highly dependent upon tourism as a major contributor to economic fortunes.  These areas are already recording hotter days.  Days with strong, volatile winds are followed by days of extended rainfall.  Tourists do not pay top rates to stay in air conditioned rooms and watch the beach through a window.  Although a few decades from now, simply looking a beach could be considered a treat as island communities are experiencing unprecedented beach erosion.  Pacific Islands are already losing tourist numbers due the decline in coral beaches  -  long a favorite destination for snorkeling and diving.  It has only taken a three degree Celsius to kill the small animals that build the coral reefs, putting snorkeling areas at risk.   Pollution is exacerbating the problem.

A considerable amount of tourism is conducted on the backs of indigenous animals.  From the great lion prices in Kenya’s national parks to exotic birds the Amazon’s rainforest to Canada’s famed large game hunting grounds, the tourism industry is vulnerable because the animals are at risk.  In more recent pronouncements since that presentation to the G20 in 2007, the World Tourism Organization has estimated that 30% of plant and animal species are at risk due to global warming through loss of food change resources, reduction in habitat and infertility. 

Besides the shift in ambiance due to climate change and pollution, the tourism industry faces increase risk of loss from natural disasters.  Tsunami, hurricanes, tornadoes and flooding are all on the rise.  Meteorologists have warned that events such as Hurricane Katrina in the U.S. Gulf area or Hurricane Sandy along the U.S. East Coast are just the beginning.  Tourism related businesses are vulnerable to loss of assets, extended business interruption and demand destruction from such events.

In my view environmental questions have to be a part any due diligence effort on a tourism related investment.  Warnings related to global warming have been around for so long, typically couched in terms of something bad that would have some time in the future.  That day has arrived, Noah!  The dire consequences of temperature change are now a near-term factor in the profits and loss of the tourism industry.   

Even for municipal bonds in geographies that are heavily dependent upon tourism the environmental question must be raised.  In last 2012, the Natural Resources Defense Council and a non-profit called Save Our Resources published a “wake up and smell the coffee” report entitled Climate Impacts on the Winter Tourism Economy in the United States.  According to the report 38 of the 50 states have lost as much as $1 billion in revenue of the last ten years due to diminishing snowfall and the results reduction in winter related business.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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