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For all the world's worries from rising temperatures to falling credit, tourism to Israel has rebounded. No less than 2.3 million tourists visited Israel in 2007, a 25% increase on the year before, with the majority coming from the United States, France, Russia and England.

Last year wasn't the peak. In 2000, before the second intifada broke out, 2.7 million tourists visited the Holy Land. But Tourism Ministry officials are breathing easier, and so are the hotel and aviation sectors. Hotels report a 17% leap in business compared with 2006, which among other things created jobs. Some 85,000 Israelis work in tourism-related businesses, a third of whom are employed by the hotels.

As for the carriers, they report a 10% increase in business compared with 2006, though actually, the most significant increase was in tourism entering by land, rather than by air.

Restaurants, cinemas, stores, tourism sites, malls, souvenir vendors - all do well in a tourism boom. "It was a terrific year," says Yaakov Mitrani, chairman of the Israel Tour Guides Association, adding that a quarter of tour guides - 1,500 out of 7,000 - now work full-time, which means 22 days a month, throughout the year.

Incoming tourism means big bucks. Revenues are estimated at NIS 12.5 billion a year, an increase of 24% compared with the year 2000. Perhaps the number of tourists is smaller than before the second intifada, but clearly they're spending more.

Why the surge? For one thing, the security situation has improved (the missile-pounded towns of the southern Negev aren't exactly a tourism hot-spot). For another, the strong euro and weak dollar have made Israel attractive. It also helps that Israel's good restaurants are generally cheaper than their European counterparts.

More seats are available on planes thanks to intensifying competition, while marketing efforts over the years have borne fruit. Even British Airways has started plugging Israel as a prime destination, for the first time in years: "The company's management no longer views it as a war zone," says the airline's local manger, Yael Katan. Yet another reason is the feeling of relative prosperity in the chief countries of origin (which may pass).

If the marketing blitz continues, the "open skies" aviation policy is enforced and the security situation remains controllable, industry experts expect 2.8 million tourists in 2008, and 3 million in 2009. The Airports Authority anticipates a 5% increase in passenger traffic, also thanks to Israel's 60th Independence Day celebrations this year.

British Airways is gearing up for a flood of tourists from March until the end of the autumn religious holiday period, while El Al specifically expects a 10% year-over-year increase. Lufthansa expects far more than that. Ernst & Young think Israel's tourism potential is actually 5 to 6 million a year.

Lovely, lovely, lovely. But the influx isn't just one big happy story. First of all, as Lufthansa's local manager Ofer Kisch points out, the airlines may run short of capacity, which will lead to price hikes of 5% to 8%. A worse problem is a shortage of hotel rooms.

Israel presently boasts 47,000 hotel rooms, which is enough to house 3 million tourists a year, not one more. The outgoing tourism minister, Yitzhak Aharonovitch, warns that a shortage is developing. The forecasts predict 5 million tourists in 2012, which means Israel will be short some 18,000 hotel rooms. Unless construction starts soon, the lack of space could become a real cap on the tourism sector's growth.

So? Why aren't the real estate barons leaping to build more hotels in Israel? Well, says Ami Etgar, general manager of the Israel Incoming Tour Operators Association, it's a matter of horse sense. These businessmen know perfectly well that the situation is fragile. This is the Middle East and things can change fast. Mix in a healthy dollop of annoying red tape and what you get is business barons who prefer to devote their attentions to rather safer prospects.

Yitzhak Tshuva, Eli Papouchado, Lev Leviev - they have become household names in Israel, yet they pursue their construction and development businesses chiefly abroad, Etgar says. "None are contending with building new hotels that the Israeli market needs, and which could facilitate its development," he complains.

The biggest winners of the surge in tourism are the five big cities, led first and foremost by Jerusalem, followed by Tel Aviv, Tiberias, Netanya and Haifa, in that order.

The real recovery in Jerusalem began in March 2007, says Jonathan Harpaz, director of the Jerusalem Hotel Association. Jerusalem means something to almost everybody: it is the ancient city that birthed the three great religions. It ties us to our heritage, going back thousands of years. It has also become the bar mitzvah (or nuptials) spot for wealthy Jews from France, Canada, England and America.

The trend has done well for local businesses. "Revenue from Judaica objects and souvenirs rose 80% compared with the level of 1999-2000," says Ezra Attia, director of the National Association for Commerce in Jerusalem. Pilgrim traffic has also soared but they aren't major buyers of Judaica or even souvenirs, Attia adds.

Tel Aviv meanwhile boasted 2.3 million hotel nights in 2007, up 23% from the year before. It's most popular among the French and Russian tourists, and business tourism, which is responsible for some 30% of the hotel stays.

As for Tiberias, the hiatus in tourism badly hurt the city. The resurgence of tourism has perked the city up, which is now working on renovating its hotels.

One city largely left out of the party is Eilat. Its prior customers evidently tired of the Red Sea resort and new ones aren't coming in droves, though incoming tourism did rise 20% in 2007 compared with the year before.