Note: This is a copy of Steve Hites' speech as provided.

I want to thank the Alaska Resource Development Council for giving me the opportunity to speak to you this morning. I want to offer a brief background on the history of tourism in Alaska, to explain how we got here; comment on how Alaska tourism works, and the singular event in 2006 that has changed that; and finally suggest a course of action.

Tourism is one of the five major industries in Alaska: oil and gas, mining, fishing, timber, and tourism. Cruise tourism is the single largest segment of Alaska tourism. In 2006 there were one million visitors who came to Alaska by cruise ship.

This summer there will be a 17% drop in cruise visitors to Alaska. We have lost three big ships from the three largest cruise lines, representing the loss of 140,000 passengers in 2010.

I’m very concerned about the downturn in cruise tourism that is occurring this summer, the like of which has not happened before in modern Alaska history, and whose ramifications will have far-reaching effects on every Alaskan community where tourism plays a part in the economy.

How did we get to one million cruise passengers, and why are these numbers FALLING here at the same time that they are GROWING in every other region in the world?

It’s a great story. Gold Rush – Klondike - Nome – Fairbanks - all these stampeders charge North – they fan out across the whole countryside; port cities pop up to be able to supply the mining communities in the Interior; a couple of railroads get built to get from the coast over the mountains to the mines. Tourists who heard about all this excitement, and wanted to see the place (mostly very wealthy people in those days!) used the scheduled coastal steamships to sail up the Inside Passage and across the Gulf. They’d get on the Alaska Railroad, see Mt. McKinley, get on a steamboat at Nenana or Fairbanks, head upriver through Dawson City, Yukon, and then back out over the White Pass Railroad to Skagway and down the Inside Passage again. They called it the “Golden Circle”, the big circle tour that went around the North.

They could only do this because the boom activity in the gold rush had created all the ports, docks, and railroads. And that infrastructure was in place when the North was plunged into WW II. The Allies used it to help build the Alaska Highway, using the ports at Skagway, Seward, Anchorage, and Whittier, and the railheads at Fairbanks, Whitehorse, and Dawson Creek. But, even after the War, when tourism started up again, the vast majority still used the coastal steamship route, and a revised “Golden Circle” that replaced the sternwheel riverboats with highways to tour Alaska.

Late 60s…trans-Atlantic steamships and ocean liners are gone, replaced by jet aircraft. A couple of the people who owned the last ocean liners got an idea about how to use their transportation assets in a brand new way: run the ships on short round-trip cruises to warm places for people as a vacation experience. A young Israeli business man in Miami named Ted Arison took an old steamship, marketed it as a party boat to go out and sail around for three or four days in the islands of the Bahamas, filled the thing up, and created a company called Carnival Cruise Lines. Over on the Pacific Coast a man named Stan McDonald got a vessel on lease, ran it out of LA along the Mexico Riviera, and ventured a season sending it to Alaska. Calling himself “Princess Cruises”, McDonald attracted British financing, and built a set of twin ships that were nicknamed “The Love Boats” after a hugely popular weekly TV series that they starred in, highlighting the fun of taking a cruise.

The TV show put the concept of cruising right out in front of Americans in their living rooms: they could see that cruising was not just for the elite. You didn’t have to be rich to take a cruise. It was a vacation that was within anyone’s reach. You unpacked once; every morning you woke up in a new port offering new adventures. All of your onboard entertainment and meals were included in the cruise price. So, while Americans laughed at Captain Stueben and Gofer, Princess Cruises was sending their fleet of “Love Boats” up to Alaska every summer full of new cruisers.

An Alaskan entrepreneur named Chuck West, who had started in the industry in 1947 by giving two lady visitors a tour of Fairbanks in his family car, had pioneered the concept of Inside Passage cruises using several former WW II Navy corvettes converted to carry tourists. West’s Alaska company grew, and “Westours” began using the Princess ships for some of their land tour passengers going overland on the “Golden Circle” from the coast, around through the Interior, and back out at the coast again.

In the mid-1980s, Alaska cruise tourism blossomed and experienced double-digit growth annually. More and more people heard about Alaska, and decided to visit on a cruise. In 1986 there were only 100,695 cruise visitors through Skagway. By 2006 there were 755,314, a seven-fold increase.

That kind of growth allowed for huge opportunities for entrepreneurs, gift shops, restaurants, sightseeing companies, package wholesale companies, or receptive tour operations. Property owners and real estate agents could sell a lot to a developer who could build a commercial building, and rent it out to someone else who had an idea for a tourism-related business. And every time someone created one of these businesses, the hardware store got business, the plumber, the bank, the gas station, the grocery store, the electric and telephone companies ALL got business, and all of them were able to create more jobs, hire more people, and pay their taxes to their local government. The growing cruise industry offered the engine that supported the economies of many Alaska communities.

The reason that the cruise industry grew so quickly during those years was NOT because of people’s insatiable desire to visit Alaska. Ma and Pa Kettle in Peoria, IL did NOT know about Alaska in 1973. You can’t blame them. They were taught in school that Alaska was off in the lower left-hand corner of the map, right off California, beside Hawaii, about the size of Arizona. But more specifically, Alaska was “cold and dark, ice and snow, Eskimos and igloos”. Fact. That’s what they’d tell us in every focus group that was held Outside in the Lower 48 on the subject: they’re in the room, we’re behind the dark one-way mirror glass watching them, and our guy in the room with them would ask , “give us the top six things that come to mind when you hear the word ‘Alaska’”. They would have said all of those negative things. The misconceptions about Alaska were absolute.

How do you get someone to choose to take a VACATION in a place that’s dark, cold, ice, snow, Eskimos and igloos? You don’t. You have to change the way they THINK about it. It costs a LOT of money to do that. And it certainly wasn’t the people in Alaska who paid for that changing. It was the CRUISE LINES, with their marketing dollars.

By 2006, the cruise lines that sailed in Alaska were spending a combined $75 million annually – every year- to market Alaska as a cruise region. They were putting Alaska out in front of people in the television ads showing blue skies, blue waters, white snowy mountains, glaciers calving, whales breaching, eagles flying, and smiling happy people all with cameras. Those images were everywhere: on TV, in magazines, in newspapers, on billboards, and across the internet. The bill was $75 million a year. That wasn’t being paid for by the State of Alaska. It ALL came from the private marketing budgets of the cruise lines that came to Alaska so that they could convert the individual consumer into someone who would consider Alaska as a possible destination vacation choice. “Why, Martha, just look at those pretty pictures of the eagles and the glaciers.” Next thing you know, George and Martha are in front of their travel agent saying, “You know, we saw an ad about Alaska. Tell us about that. How much does it cost to go there?”

If you did the same focus group today in LA, and asked for the six words to describe Alaska, you would get “wilderness, wildlife, mountains, glaciers, Mt. McKinley, Inside Passage, and CRUISE.” THAT is how the cruise industry has single-handedly changed the perception of the American consumer about Alaska. They convinced people that it was okay to take a vacation up here.

The “Alaska Tourism Industry Association” (ATIA) is the Alaska organization tasked with marketing Alaska as a destination. In 2009 it had a budget of over $12 million. The marketing message is intended to be generic, to help get the word out about Alaskan regions, communities, fishing lodges, bed and breakfasts, restaurants, hotels, attractions, and tours. ATIA’s 2009 budget included $9 million in State money; $200,000 from Destination Marketing Organizations (like the ACVB); $389,000 in Membership Dues (from little guys like me), and $2.6 million from “Cooperative Marketing Partnership Programs”. Who were the biggest contributing partners to THAT? The CRUISE LINES! $2 million of the money that funded ATIA’s generic Alaska Marketing came from the cruise industry, too! (This was in addition to the $75 million in marketing they were already spending). They did NOT have to kick in that other $2 million: they did it voluntarily, because they knew that generic destination marketing helps everybody, especially the communities and businesses in Alaska…the little guy.

The cruise lines put their $75 million into marketing Alaska because if they did, they could fill their ships up. They could charge a higher per diem per passenger for an Alaska cruise. And, because they were making record profits going to Alaska, they sent all of their new ships to Alaska as soon as they were launched. Brand-new builds get lots of publicity, and part of the big p.r. buzz about the “first destination” for that beautiful new ship was “…it’s going to Alaska!” This helped focus consumer awareness and interest in the place: it built demand. It said “you WANT to go here. It’s HOT!” All of this helped the cruise lines get the highest possible prices per person for their berths sailing to Alaska.

The beauty of it was that this is where the largest number of independent travelers to Alaska came from. Conversion studies done for the ATIA showed that 27% of visitors who came to Alaska on a cruise would return to Alaska as an independent traveler within three years. That’s HUGE. Having first come up on a cruise, 27% of these cruisers will return: they fly up, rent a motorhome, a rental car, go to a fishing lodge, go hiking, drive up the Alcan, stay for a month, spend money. THAT is where your independent traveler to Alaska is coming from, not from George in Peoria who says, “Hey, Martha, it just struck me like a bolt of lightning to get in the motorhome and drive to Alaska.” Yes, the George and Martha who do that exist: but they’re a very small number. The majority of actual independent travelers to Alaska have already BEEN here. And what got them here? The cruise lines and that $75 million that exposed them to those images of Alaska, and told them they want to come here. THAT’s how we hooked ‘em. Like a Homer halibut, we’ve wrestled that guy right up to the boat, and he’s a BIG one. He’ll spend a lot of money, a lot of time, and if he enjoys his 2nd visit, maybe we’ll get him for a 3rd.

So: we have one million cruise visitors, with that converting to 270,000 independent visitors within three years….and it’s 2006.

I’m not going to go into detail about the Cruise Ship Initiative battle. But I will tell you what happened. A very small group of environmental activists who were anti-cruise ship believed that the industry needed to “share its wealth”, and redistribute that wealth. They got the minimum number of signatures on a petition for a voter initiative to be placed on the ballot. Voters focused on a head tax of $50 that would be paid by every person who bought a cruise to Alaska. But the Initiative had nine different parts to it. There was a new income tax, a new gambling tax, new disclosure requirements for onboard excursion and retail sales, and new environmental regulations that said that the discharge coming out of a cruise ship had to meet standards that no Alaskan city or town could meet, and that no Alaska ferry or US Naval vessel could meet, either. To meet these strict new discharge requirements, especially for heavy metals, was technologically impossible: the science does not exist to put this technology on a ship and achieve these results.

The cruise lines lead the world in the development of clean onboard technologies, because they DO want to keep the waters where they sail as pristine and healthy and clean as possible. If a region wants to regulate that, that’s fine, but you need to be balanced about how you do this. You allow ships to be grandfathered in as we come in to the new technology, in a reasonable way, as the new technology develops. You can’t just set a bar up and say “we expect the cruise industry to develop the technology to do this by such-and-such an arbitrary date.” That’s unreasonable. It’s absurd. But that’s what the Initiative is forcing the cruise industry to do within the next 5 years. “Invent the technology, and put it on your ships, or face fines and legal action if those ships discharge into Alaskan waters”. It’s much simpler just to avoid the impossibility of the situation, and to just not come into Alaskan waters.

The sponsors of the initiative KNEW all of this when they wrote the wording of the initiative, but they didn’t bother to tell this to the voters. And by a vote of 51% to 48%, the Cruise Ship Initiative was passed. No landslide, but enough.

Since January 2007 the initiative has had to be amended by the Legislature twice. It has raised numerous legal questions. And it has put the State into Federal court with the cruise lines over whether the Head Tax violates the Commerce Clause of the United States Constitution.

But the question isn’t whether the Initiative is legal. It’s why is Alaska’s one million cruise passenger number declining, while at the same time the number of cruise passengers to every other region in the world is growing?

The Initiative increased the cost of doing business in Alaska for the cruise industry. They were no longer able to get the kind of returns that they could get for the same ship in other regions in the world.

Every other region watched Alaska cruise tourism grow. The Mediterranean, Baltic, Caribbean, Mexico, South America, Canadian Maritimes…they saw the numbers, saw the boom in economic benefits for communities in the Alaska. They all bought cruises and came up to Alaska, studying us, watching how we did it. They took what they saw home, and put it into practice, planning the location of docks, infrastructure, retail areas, the type of attractions and excursions. “Do it the way they do it in Alaska…” They copied us, copied our model, they went out and made sales calls on the cruise lines, courted those cruise lines, offered up their regions and destinations as alternatives for vessel deployment, on new itineraries. They became Alaska’s competitors.

“Look at us! We have scenery, and wildlife, and history, and colorful communities, and culture, and friendly people, and we now have docks and gift shops and tours and attractions JUST LIKE ALASKA. And best of all…we won’t charge you high taxes if you come here. We don’t have burdensome regulations that make it outlandishly difficult or expensive to sail in our waters. In some cases we’ll offer you incentives to come here so we can compete with the other destinations that all want your business, too. We know that everyone wants your ships, wants that economic activity going on in their region. It creates businesses, it generates jobs, it pays taxes, and it helps the citizens of our developing country.

The world COPIED US, and we didn’t even SEE it. We were too busy deciding what kind of regulations and taxes we should put on the industry that was bringing all of these inconvenient tourists right to our front door, inconveniencing us Alaskans so much. (Have you heard that ever, from your neighbors? “They’re in the cafes, the stores, the Post Office, blocking the sidewalk taking pictures.” I can’t tell you how many times I’ve heard some Alaskan say they hate tourism because “tourists are just in the way.” Hey: I know I’m in the way when I go to New York! Maybe we need to think of this as you would the Golden Rule: “do unto others as you would have other do unto you.”

So, when we put that cruise initiative on the cruise lines’ backs, and they ran their numbers, and they saw how much more it was going to cost them every year to sail in Alaska, they began planning to leave: to redeploy their ships to other less expensive places in the world. It took two years to implement the move. But this summer, 2010, three ships are gone, and cruise industry traffic to Alaska will be down 140,000 berths. Two more ships are being sent elsewhere in 2011. More may follow.

It’s no different than an auto manufacturer in Detroit looking at his cost of doing business there. If I can make more money, if I can be more profitable for my shareholders, if I cannot get the people in Detroit to understand the reality of my financial situation, I will move my factory to Tennessee. If you’re the Mayor of Detroit, or the Governor of Michigan, or a member of the Michigan legislature, and you don’t UNDERSTAND that, it’s YOUR loss. It’s no skin off the auto manufacturer. Really. He may not WANT to do it, but he will. He HAS TO. It’s about the health and survival of his business.

The cruise lines don’t WANT to leave. Alaska cruises have a good market niche. But they can make a whole lot more money putting their ships in other places where they don’t have such high costs and restrictive regulations.

Alaska was hijacked by the activists. The proponents of the initiative sold the citizens of Alaska a bill of goods. They were disingenuous. They told us “the initiative wouldn’t hurt the industry”: it did. “It wouldn’t hurt anyone’s business”: it’s wrecked businesses. It’s hurting our communities, our neighbors, and in the end it WILL hurt the State.

We have driven an entire industry to the point where they have been forced to pull their assets out of the State, remove part of their investment from Alaska. That’s 180 degrees opposite from what we as business people are supposed to do. We’re supposed to go out and FIND capital, FIND investors, bring new businesses to our communities so we can keep them viable. We’ve done exactly the opposite by allowing this initiative to drive away the very business that we need to have to keep one of Alaska’s five basic industries running. If we want jobs for our children and our grandchildren, if we want Alaska to continue to offer them opportunity, we should reconsider this kind of regressive taxation and regulation of our industries.

The tourism industry desperately needs your help. Please: contact your State Representative or Senator, tell them that you are extremely concerned about the future; that the cruise ship Initiative has made Alaska uncompetitive; and that this Initiative needs a very close examination to determine if it is really a law that is in the best interests of ALL ALASKANS.

Thank you very much.