“Everyone’s a millionaire where promises are concerned.”-Ovid“If something is irrational, that means it won’t work. It’s usually unrealistic.”-Albert Ellis, American psychologist who in 1955 developed Rational Emotive Behavior TherapyThe Government has recently released its National Tourism Plan (“NTP”). It offers projections for air, cruise, and yacht arrivals from 2011 to 2022. A lot of comments have been bantered around about how “reasonable” this plan is. Since we are a curious lot, we thought we would try to figure this out without emotion and with numbers.It is our impression that the numbers are unrealistic at this stage based on details we will clarify below. We believe that the legalization of gambling could substantially help the government increase arrivals, and tourism spending, but even this monumental shift will not enable them to achieve the kind of growth projected in the current NTP.The NTP assumes annual air arrivals grow from 236,038 in 2011 to 481,715 by 2022. Cruise passengers are estimated to flat line and grow marginally from 415,711 passengers to 428,127 by 2022. Yacht arrivals are expected to jump substantially by over 165% from 3,487 to 9,246.According to Tourism Towards 2030, the World Tourism Organization’s (UNWTO) recently updated, long-term outlook and assessment of future tourism trends, the number of international tourist arrivals worldwide is expected to increase by 3.3% a year on average from 2010 to 2030. This represents some 43 million more international tourist arrivals every year, reaching a total of 1.8 billion arrivals by 2030. Forecasts prepared by the UNWTO in January 2012 point to growth of 3% to 4% in international tourist arrivals for the full year 2012. However, in the past, emerging economy destinations have grown faster than advanced economy destinations, and this trend is set to continue in the future. Between 2010 and 2030, arrivals to emerging economies are expected to increase at double the pace (+4.4% a year) of those to advanced economies (+2.2% a year).Over the 10-year period from 2010-2020 it is anticipated that advanced economy tourism will grow at a slightly faster rate of 2.6% and then slow to an annualized rate of 1.8%.As a result it would be reasonable to assume Bermuda’s tourism sector grows in line with the general level of advanced economies unless it continually steals market share.The current NTP calls for cumulative annual growth rates (“CAGR”) in air passenger arrival of 6.7% per annum, some 4.1% faster than the projected developed market growth.The combined air, cruise, and yacht numbers are more reasonable at a CAGR of 3.1% but still higher than the projected developed world growth over the similar forecasted period.The NTP essentially assumes Bermuda doubles its current market share in developed world air arrivals over the 11 year forecast period. To label the air arrival plan as ambitious would probably be an understatement.History would also suggest this growth is without precedent. Although the data is limited, only going back as far as 1980, the fastest 4 year CAGR for air arrivals was only 4.46%, some 2.2% slower than their projection for the next 4 years.We find it difficult to see how Bermuda’s air arrivals surge at a rate that is far in excess of the developed market rate and would anticipate a much slower growth rate in air arrivals, at best in line with advanced economy growth. It’s important to remember that Bermuda’s tourist product is more expensive than much of the rest of the developed world and tends to cater to a smaller sub-section of wealthy tourists.Also, as the composition of Bermuda’s population continues to shift, there is likely to be less of a contribution from ex-patriot visitors arriving to visit other ex-patriot family and friends. Friend and Relative arrivals fell 4.81% from 2010 to 2011 in line with the declining ex-patriot population which has fallen 7.6% over the same period.Friends and Relative visitors made up 15.4% of air arrivals in 2011 so they are not an insignificant factor.In fact from 2008 to 2011, Friend and Relative visitors have fallen 13.3%, the ex-pat population by 19.2%, and air arrivals overall by only 10.4%.Let’s now examine the visitor expenditure growth predictions which feed into the government’s future GDP projections, tax revenues and ultimately job growth.The NTP estimates visitor expenditures growing from $422 million in 2011 to $1,471 million by 2022, a CAGR of 12%.Air arrival expenditures per trip are estimated to grow over the same period from $1,511 to $2,814. This equates to a 5.8% CAGR over 11 years. Cruise ship passenger spending is anticipated to rise from $156 per trip to $263 per trip, a CAGR of 4.9%.How does this compare to history? Our data only goes back to 2003 and since that time to 2011, visitor expenditures have grown at a CAGR of 2.6%. Average year-over-year growth over the past 8 years is 3.2%. This suggests, historically at least, that expecting a ten year cycle of per trip spending growth in excess of inflation and prior experience to be somewhat optimistic.In an attempt to offer an alternative future forecast, we are adjusting the estimated growth rates and spending to reflect our more conservative stance.We believe that the great recession has made consumers more price conscious and discerning.This essentially means that comparable products which cost less are more attractive than ever. The tourism industry is getting ever more competitive and the internet is constantly changing the matrix of prices and discounts.Gaining market share in a frugal and ultra-competitive industry will be difficult.Doubling market share would be extremely difficult. With a revamping of the Bermuda product to have a clear brand identity some of the never-ending price squeezes could be avoided.We are focusing on the air arrival projections because these are the most material.The typical air arrival tourist spends and estimated $1504 versus a cruise ship passenger of $177 and therefore is far more important to overall tourism growth than any other aspect. The best 4-year CAGR in air arrivals, as noted above, was about 4.5% so we are willing to assume that extensive efforts could lead to a reacceleration to this rate.Remember this is still much more than the industry’s anticipated 2.6% rate and would consequently assume Bermuda gains market share.We are also lowering per trip spending to our anticipated rate of inflation of 3% plus 1% to account for “new product” spending that may develop.Our 4.5% air arrivals growth and 4% spending growth is predicated on one major factor: casinos. We fail to see how Bermuda can generate growth of this magnitude without a whole new tourist product that counters the persistent seasonality of arrivals.Casinos and gambling should materially alter this low attendance in the shoulder months as it offers a new entertainment venue and a substantially different product.For example, University of Chicago’s National Opinion Research Center (NORC) found that communities with casinos have 43% higher earnings in their hotel and lodging sectors than those communities farther from casinos.Putting the two aspects together we have charted our estimates versus the NTP below:Our revised estimates suggest there may be a gap of 98,660 less air arrivals by 2022 and a shortfall in projected expenditures of some $464 million.We would like to pause for a second and give ample warning.Albert Bartlett, a famous physicist, once quipped “The greatest shortcoming of the human race is our inability to understand the exponential function.”What we are referring to is how future projections can go horribly wrong due to the very nature of their forecasting.If one extrapolates a growth function into the future at a constant rate the numbers begin to exhibit an exponential growth curve.Larger numbers compounded lead to even larger numbers. Thus when estimating future growth it is more prudent to assume and imbed conservative factors so you are pleasantly surprised rather than disgustedly shocked.This is not say that our projected numbers are correct, but they are clearly more conservative and supported, we believe, with reasonable if not somewhat optimistic empirical assumptions.One could quibble with our air arrival growth rate as being overly optimistic. If so future growth rates would be even less and the resulting expenditure shortfall would be very disappointing. The key to discerning the validity and reasonability of a forecast series is its embedded assumptions, not the raw numbers.The result of our estimates leads to some further conclusions. As they are some 35% less than the current NTP projections we would assume both tax revenues, contribution to GDP and job creation would be lower by similar amounts. We would anticipate air tax revenues to be only $44.2 million by 2012.This, of course, has far reaching implication on the national budgeting processes. If the higher NTP number is factored into estimates it’s likely to lead to future budget shortfalls and unanticipated deficits. This of course, could be mitigated by new “gambling taxes” which could offset the lower air tax projections. Likewise, job growth is likely to disappoint and we would anticipate less than the 5% annual job growth as projected by the NTP. In fact we would assume a job growth profile of only 1% incrementally per year growing jobs to about 4,000 direct positions by 2022.The net effect of all our estimations leads us to our forecasted contribution of tourism to GDP. Assuming that casinos and gaming are introduced, we would anticipate tourism’s direct contribution to GDP to grow from $300 million to approximately $335 million by 2022, on an inflation adjusted basis. This represents an annual real growth rate of only 1% versus the current NTP plan of 5% per annum. Since our current projected long-term real growth rate of Bermuda’s GDP is 0% we could see this growing in excess of the overall economy and could grow in share but only marginally. Our revised direct GDP contribution graph is shown below.