CUBA: TOURISM'S DECLINE MAKES GOC NERVOUS

C O N F I D E N T I A L SECTION 01 OF 04 HAVANA 000342

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/06/2017
TAGS: ETRD EINV PGOV CU
SUBJECT: CUBA: TOURISM'S DECLINE MAKES GOC NERVOUS

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Classified By: COM Michael E. Parmly; reasons 1.4 (b/d)


1. (C) SUMMARY: Cuban tourism figures for the first
trimester
of 2007 were dismal: An overall decrease of 15 percent,
the worst drop in 15 years. For years the GOC ignored the
warnings from foreign hotel companies about addressing
weaknesses in the sector. Successful competition from
alternative all-inclusive destinations finally seems to
have convinced the GOC that it must deal with what are now
systemic problems in tourism. While it is clear that the
GOC wants solutions, it is not so clear that it is willing
to countenance a solution that would include devaluing its
artificially overvalued currency. End Summary.

Tourism in 2006
--------------


2. (U) The total number of tourists decreased by four
percent, from 2.319 million in 2005 to 2.235 million in
2006 (see Reftel). There were fewer tourists who came from
Latin American while European tourists increased slightly.
But despite the overall reduction in 2006, the number of
tourists coming from the big three -- Spain, Canada and
United Kingdom -- increased in 2006.

Rough Start in 2007
--------------


3. (C) Econoff spoke with Eric Peyre, Director of
Operations in Cuba for giant French hotel company ACCOR on
2 April. Peyre, based at a four-star hotel in Old Havana,
confirmed that the tourism figures for the first
trimester of 2007 were dismal: An overall decrease
of 15 percent. Peyre said this constitutes the worst
decrease in 15 years. Spanish tourists in particular
dropped a whopping 45 percent for the quarter. He also
said that the situation was even worse in Varadero, Cuba's
premier resort destination, where the occupancy rate was
the lowest in 10 years.

Causes of Decline
--------------


4. (C) Peyre pointed out the following causes for the
decline:

-- Marketed Image. Peyre commented that the increase in
advertising in Europe for non-Cuba destinations,
particularly the Dominican Republic, has been remarkable.
While these destinations were busy broadening marketing
campaigns, investing in improvements and lowering prices,
the GOC was not.

-- Cost. It costs airlines 30 percent more to land in Cuba
than in places like Dominican Republic. At least part of
this cost is passed on to the customer purchasing a ticket.
Peyre has seen comparable packages from Europe to competing
destinations for about 200 Euros less. In addition, even
though European credit cards can be used in Cuba, the 11.24
percent surcharge (8% overvalued currency plus 3.24% in
banking fees) on every purchase is a major disincentive.
He said with price differences like this, "No sane middle
class European will come to Cuba."

-- Salaries. Peyre said hotels must pay the GOC between
500 and 600 CUC monthly (Cuban Convertible Currency; 1 CUC
= 1.08 USD) for each one of its employees. The salaries,
as most other payments, are paid directly into an account
at the Central Bank, centralizing tourism's hard currency
into a fund under the exclusive control of the GOC.
Separately, the GOC pays each employee a meager 15 CUC
monthly. In addition, hotels incur extra salary costs in
that they are unable to hire and fire employees without GOC
approval or must hire whoever the GOC wants hired. For
example, whenever a hotel is built GOC state security makes
a thorough assessment and then tells the hotel how many
guards to hire, which ones, and even where to place them.

-- Lost Profits. Between the eight percent exchange rate
revaluation that took effect on April 2005 and the GOC
compelling hotel companies to raise salaries, operating
costs have skyrocketed. The enactment of those measures
has translated into a 20 percent profit loss for ACCOR.

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Other additional costs may apply, as in the case of Old
Havana hotels, which must contribute 5 percent of revenues
to Havana Heritage Czar Eusebio Leal's renovation project
of that part of the city.

-- Neglected Investments. Peyre said that every hotel must
pay four percent of revenues into a "reinvestment fund,"
which he has never seen used. For years his and the other
hotel companies have hopelessly tried to get the GOC to
carry out not only needed investments but required
maintenance and upkeep of things like air conditioning
systems, water pipes, water filtration for pools, room
renovations, etc. Peyre used an example from one of his
ACCOR hotels to illustrate this point. The hotel requested
authorization to purchase a USD 15,000 compressor, which it
never got. The hotel had to close 60 rooms for five months
-- a hotel which, according to Peyre, is always full -- at
a cost of USD 800,000 before it could convince the GOC
about the compressor. Peyre said finally, "They just
didn't care."

-- US Sanctions. Sometimes GOC incompetence is compounded
by difficulties caused by US sanctions. Peyre gave the
example of one of his hotels, the four-star Sevilla in Old
Havana, which has had two elevators out of order since
October 2005. He explained that the Spanish company which
supplied the parts went bankrupt and ever since it has been
impossible to get parts from a company "unaffected" by the
sanctions. Another example had to do with two hotels in
Holguin province, Playa Pesquero and Costa Verde, which
were originally built by Iberostar and Melia,
respectively. Prior to inauguration, it was found that the
properties formerly belonged to US citizens. The hotels
were dropped like "hot potatoes" by the European chains,
yet were eventually opened under GOC management.

-- Limitations. The GOC has a limited capacity to expand
its tourism infrastructure. Fearing exposure to Cuba's
political reality, the GOC would never allow this sector to
adapt to other forms of tourism such as ecotourism,
shopping (after buying some rum, cigars and perhaps some
local art, there is nothing left to buy in Cuba),
non-package travel (traveling outside the resort or on
one's own throughout the island is limited to venturesome
tourists/backpackers willing to "rough it" and put up with
state security).

-- Quality of Services. While hotel managers in competing
destinations can pick from the best cooks, contractors,
tour companies and other service providers that money can
buy, hotels in Cuba must use the services of the GOC
monopoly. Without having to face any competition, these
services have steadily deteriorated over the years (see
para. 6 below).

All-Inclusive = Funneling Money to the GOC
--------------


5. (C) Besides the aforementioned reasons, Peyre
attributes the sharp decline in places like Varadero to the
GOC wanting to, "Keep tourists in a bubble" and what he
describes as the "ghetto-for-tourists" phenomenon.
According to Peyre, all of Cuba's resort hotels, except
two, are now all-inclusive. In economic terms, this means
that the vast majority of the money spent by tourists takes
place either at the time of booking (before arriving in
Cuba),or within the confines of the resort or in the
"canned" tours to GOC-approved destinations offered by GOC
tour operators. Peyre remarked that, "Some tourists leave
Cuba without ever knowing what a CUC is." As a result,
very little money is ever spent on the non-tourist and
non-GOC-controlled economy.


6. (C) Since most packages are prepaid, less money is being
spent inside the resorts themselves; as more components of
the trip are prepaid, there are fewer opportunities for
tips, creating a disincentive to good service. ACCOR
customer satisfaction surveys have consistently shown a
deterioration of Cuban customer service, overwhelmingly
rating it as "no amable" (discourteous or impolite). And
because all-inclusiveness concentrates most activities to
the resort, tourists barely get to see any of the real Cuba
that lies beyond and base their overall impression of the
trip on their hotel stay. Peyre remarked that everyone in

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the sector is aware of a pervasive "loss of Cubania"
(Cubanness) in the resorts.

Spain's Nose-dive
--------------


7. (C) According to Spanish Commercial Attach Jose Luis
Lancho,
and confirmed by Peyre, two embargo-related factors were also
important contributors to the 45 percent drop from Spain:

-- 1) Spanish Iberworld, which used to have three 747 (US
Boeing) flights per week, was bought by a Carlisle, a US
pension fund.

-- 2) Spanish Pullmantur, which until the end of 2006 ran a
weekly cruise from Havana, was bought by US Royal
Caribbean.

Heads Rolling at MINTUR
--------------


8. (C) Peyre said there was a meeting the third week of
March at the Ministry of Tourism (MINTUR) to which all the
hotel chains were summoned. Peyre learned at the meeting
that the Vice Ministers for Marketing and Investment were
being fired. Although he speculated on several candidates
he thought were being considered for Marketing Vice
Minister, he said he knew that the new Vice Minister for
Investment would be Jose Rodriguez Santos and opined that
the Minister of Tourism was hanging by a thread but could
possibly survive until the end of the year.


9. (C) Peyre said that despite the familiar tactic, "Fire
someone yet make no substantive changes," he felt
that at the meeting the GOC was, for the first time in
years, actually listening. He further remarked with
frustration that it would have never gtten to this point
if the GOC had listened; "We've been trying to warn them
for years." The GOC at least suspected that things were
getting out of control when it ordered last fall that all
Gaviota hotels (managed by the military) transfer
administrative functions to foreign partners. (Note: We
thought this only applied to some Spanish hotels, but Peyre
confirmed it was for all and supposed to have been carried
out by 1 November 2006. End Note.)

Changes Likely
--------------


10. (C) The GOC asked the hotel chains for their budgets
for 2008. Peyre said this was the first time the GOC has
done this, as they have usually asked for the current
year's budget projection, and always a few months after the
year has already begun. MINTUR also announced at the
meeting that the "reinvestment fund" will be used this
year, to which Peyre remarked, "That would be a first." He
added that there will be a Tourism Trade Fair held 8-12 May
in Havana, where MINTUR will announce, "New forms of
investment and new incentives to promote joint ventures in
tourism."

Venezuelan Social Tourism
--------------


11. (C) One of the 16 accords signed earlier this year
between the GOC and Venezuela is a social tourism project
which was supposed to begin by March 1. The plan aims to
bring 100,000 poor Venezuelans on vacation to Cuba. Peyre
said the project will use an Airbus aircraft with capacity
for 300 passengers, which means that they would have to fly
it almost daily in order to meet the 100,000 goal. He
confirmed the flights have not begun, although he did not
know why. As to where Venezuelans would stay, he
speculates that barring any new construction which could
take years, the GOC could use the Horizonte hotels. This
is a GOC chain of lower quality (1-2 star) hotels for
domestic use.


12. (C) Comment: Cuba's lost competitiveness in the
"fun-in-the-sun" all-inclusive package market vis vis
places like Dominican Republic and Cancun is a reality.
It is possible that Cuba will have less than 2 million
tourists in 2007. To the extent that some of this may be

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attributable to U.S. sanctions, we count this as a success,
in the sense that the average tourist who takes his business
elsewhere deprives the regime of roughly 1,000 dollars. Even
worse for the regime is that the problems are systemic in
nature and not amenable to quick fixes. The GOC may attempt
to use figures from the soon-to-come "social tourists" from
Venezuela to compensate for the lack of real tourists, but
we would view that as a clear measure of desperation.
PARMLY