H OSPITALITY AND T OURISM A DVISORY S ERVICES

1. HOSPITALITYAND TOURISM ADVISORYSERVICES A New Market Strategy for Israeli Tourism The Ministry of Tourism Government of Israel November 2006 e Quality in Everything We Do

2. Agenda • Introduction • The Potential • The Road to 4 Million Annual Visitors • Summary

3. Introduction

4. The Research Team • Ernst & Young, LLP – Project Leader • World’s largest professional services firm: • 106,000 employees in 140 countries • Global Real Estate, Hospitality and Construction practice with 3,500 employees in more than 25 countries serving more than 4,000 clients • The Hospitality and Tourism Advisory Services group: • Advisor to the leading organizations in the hospitality industry • Knowledge leader in hospitality, tourism and leisure • Extensive international experience • Expertise in hospitality & tourism infrastructure development

5. The Research Team • Ernst & Young, LLP – Hospitality & Tourism Advisory Services • Extensive international experience in: • Hotels • Resorts • Mixed-Use Developments • Convention Centers • Amusement Parks • Sport Facilities • Museums • Other Leisure Real Estate

6. The Research Team • A Fully Integrated Team • The advisory team represents the best in class in their respective fields • Project management and infrastructure assessment • Policy, economic analysis and tracking & forecasting systems • Source markets and future marketing strategy

7. Methodology

8. Holistic and Results-Driven Approach • Analysis and Practical Strategies • Supply • - Hospitality & Tourism • Infrastructure • Aviation and Investment • Policy Demand - Source Markets: Demographics, Attributes, Attitudes & Preferences Development and Marketing Strategies Economic Impact and Return on Investment A New Era of Tourism Growth for Israel

9. The Primary Research • Research in Fifteen Countries • Interviews with 104 tourism industry stakeholders in Israel • 135 site inspections of tourism infrastructure • 500,000 annual interviews for World Travel Monitor survey • Survey interviews with a total of 8,400 respondents in 8 countries • 18 focus groups in 8 countries • 51 interviews with international tour operators in 8 countries

10. The main goal is…To substantially grow inbound tourism and to establish tourism as a leading engine of growth for the Israeli economy

11. The main obstacle…Perception versus Reality

12. Israel – Current Perception

13. Israel – Current Reality

14. The Potential

15. 4-5 m 2 m The Potential • Substantial growth prospects for Israeli tourism • In 2005 Israel received a total of 1.9 million international visitors • A realistic target (also considering political setbacks and, on the other hand, aviation reform) is: • to double the number of international tourists in the next 5 years to 4-5 million visitors

16. The Potential • Substantial growth prospects for Israeli economy • Doubling the number of annual international visitors by 2011 to 4 million visitors could result in: • An annual addition of approximately NIS 18 billion in international travel and tourism receipts in Israel • An annual addition of approximately NIS 15 billion to Israel’s GDP • The creation of nearly 45,000 new jobs in Israel

17. The Road to 4 Million Annual Visitors

18. Marketing Strategy • A research-driven long-term marketing strategy for Israeli tourism • Israel has a large unexploited interest potential in international markets and thus considerable growth prospects • Current interest potential in Eight Priority Markets: 17.9 million visitors • Current annual visitation from Eight Priority Markets: 1.2 million • The political situation acts as a barrier but it can be overcome via the establishment of an attractive “touristic image” and a “moderate price” policy • Israel’s most important strength is its worldwide unique “religious culture / history” (but primarily in a touristic culture / sightseeing rather than a pure religious sense) • Another important strength is the “great diversity / variety” within a small area • Israel should implement a long-term marketing strategy

19. Marketing Strategy • Core strategies for the international markets: • Implementation of a 5-year image campaign: budget of 250 million USD / 50 million USD per year (this would be in line with the competitors) • Concentration on the first priority / high potential markets: • Russia and China are examples of second priority markets • Concentration on the core product “Tour” • Following a “mid-priced” strategy • Close partnership with tour operators / travel agencies as the central distribution channel • Improvement of the offer quality / orientation on the core product “Tour” • Improvement of the flight offer / cheaper flight prices • USA • UK • Germany • France • Italy • Sweden

20. Return on Investment in Marketing • High return on investment • Our analysis suggests that for every additional dollar invested in marketing, the return on investment will be $9 in additional spending • An annual increase in marketing spending to $50 million could initially yield an annual average of $447 million in spending and over 510,000 additional visitors. ROI of 9:1

21. Physical Infrastructure • Aging Lodging Supply • Upgrade the lodging product • Existing Hotels: generally dated, relatively unsophisticated, poorly designed, offer few international brands and present limited variety in product • First Priority: renovate existing hotels • Second Priority: develop new hotels • Attract well known international hotel brands • An upgraded lodging product could improve Israel’s market position

22. Hotels • Present vs. Future

23. Physical Infrastructure • Aging and Underdeveloped Sites and Attractions • Further develop existing sites and attractions • Israel has an unmatched concentration of unique attractions in a small area • However, many attractions are poorly maintained, underdeveloped, in need of renovation and do not include high-quality facilities and amenities • Public infrastructure in some tourist areas is in poor condition • Focus should be on further developing, expanding and upgrading existing sites and attractions in order to make them truly exceptional • Upgrade and better maintain public infrastructure in tourist areas: Old City of Jerusalem; Tel Aviv beachfront; Eilat promenade; Tiberias city center; etc. • Capital investments by the public sector, public-private partnerships, private donations, corporate sponsorships, etc.

24. Sites, Attractions and Amenities • Present vs. Future

25. Investment Environment • How can the government facilitate private investment in tourism? • Establish a single Tourism Investment Board (TIB): • Prospective investors in tourism in Israel face a confusing array of organizations and procedures to gain government approvals and grants • This creates confusion and inefficiencies, and does not allow for an overarching development strategy to be implemented • The TIB will assume all tourism-related responsibilities from the Investment Center and be responsible for tourism investment, grants, incentives and partnerships with the private sector, based on a clear long term strategy • The TIB will be a separate entity, under the umbrella of the Ministry of Tourism • Final decisions on projects will be taken by the TIB board, which will include IMOT, HAMAT, Finance Ministry, and the Land Administration • The TIB will develop and promote product concepts to investors and will act as a concierge to court prospective investors and fast-track approvals

26. Investment Environment • What government incentives should be in place? • Revise the incentives available for investments in tourism: • Current grant and incentive system is too limited to make an impact • Israel’s investment incentives must address the real issue of a deteriorating product in the midst of new regional development of a much higher quality • Further, incentives need to address the particular risks to tourism investment in Israel and must be at least as compelling as those of destinations competing for the same capital and developers • Offer a safety net policy to investors to counterbalance security risks • Offer low interest financing for projects of special significance and/or when private financing is difficult to obtain • Award grants and incentives for renovations, not just for new developments • Seek private sector equity and operational expertise in public projects

27. Aviation Policy • A more liberal aviation policy could result in substantial growth in tourism • Liberalize Israel’s aviation policy • Aviation policy in Israel has stunted market development • Liberalization of aviation policy alone could result in 580,000 more international visitors and 10,300 new jobs in travel and tourism sectors by 2011 • A liberalized policy will allow for increases in international airline activity to Israel, easing restrictions on airlines, capacity and frequencies • Provide extended rights for a second Israeli airline to fly international routes • Relax restrictions on connection flights • Pursue charter and low-cost airlines to operate international flights to BGA • Explore extending airport hours

28. Summary

29. Summary • Considerable growth prospects for inbound tourism to Israel • Israel has substantial growth prospects in the international markets • Doubling the number of international visitors within five years could add NIS 15 Billion to Israel’s GDP and create 45,000 new jobs • Improvements should be made to Israel’s organizational and physical tourism infrastructure in order for Israel to be competitive • Israel needs a better set of incentives and a more efficient organizational structure in order to more successfully attract investments in tourism • A more liberal aviation policy would have far reaching outcomes in terms of tourist arrivals, job creation and economic activity • A long-term marketing strategy with a secured long-term budget is necessary for Israel to establish a “touristic image” in the international markets