Biggest challenge to Irish tourism since 2008 economic crash
Now that UK Prime Minister Theresa May has signalled that the triggering of Article 50 – the instruction for the UK to commence exit negotiations from the EU – will commence in March of 2017 it is an opportune time for the Irish tourism industry to consider the ongoing implications of Brexit. Visitor numbers from Great Britain into Ireland have yet to be seriously impacted since the Brexit vote of June 23rd – perhaps a sign that travel arrangements were made prior to the Brexit vote – but there is already anecdotal evidence of reduced expenditure by those same British visitors when in Ireland who are feeling the pinch of sterling’s sharp depreciation. The impact on the volume of travel to Ireland from the UK since Brexit will likely become more evident in Q4 2016 and into 2017.
Britain, of course, is Ireland’s largest volume source market and is of critical importance to Irish transport and tourism businesses. Last year the market was worth just over €1 billion from 3.35 million visits. The British market provides the industry with a year round spread of demand as well as being critically important share of visitation to Dublin and to several other regions. Furthermore Northern Ireland is the source of approximately 1.5 million visits per year worth an estimated additional €350 million. The liberalised aviation market between Britain and Ireland has driven growth, with the Dublin-London route now the second busiest air corridor globally after Hong Kong-Chinese Taipei.
Formal Divorce Negotiations
The British Prime Minister’s announcement that Article 50 would be triggered in March 2017 has at least removed the uncertainty as to when the formal divorce negotiations with the EU will commence, despite some questioning the wisdom of opening negotiations in a crucial election year in both France and Germany. The assertion that it would be a ‘hard exit’ – most likely including an exit from the single market and the imposition of UK controls on people movement – was decidedly not good news for Ireland. The implication of a hard exit could potentially lead to a hard border with Northern Ireland and endanger the continued existence of the Common Travel Area. EU politicians appear to be toughening their approach as it becomes clear that Britain envisages a complete break rather than a close association with the EU akin to Norway’s access to the single market.
Since the Brexit vote in June politicians of all hues on both side of the Irish Sea talk about soft and hard borders, special circumstances, unique relationships and the peace process in relation to the border between North and South. However divisions exist between Belfast and Dublin, and between political leaders in the North, as to the threat of a hard border. Furthermore, the issue of the withdrawal of Northern Ireland from the EU is the subject of High Court challenges in Belfast, with a similar UK case before the High Court in London.
EU leaders have stated that Britain must accept free movement of people if it wants continued access to the single market and have warned that Brexit negotiations will be tough. As EU President Donald Tusk recently said the only alternative to a so-called “hard Brexit”, which would see Britain pull out of the bloc’s single market and impose tough immigration controls, is “no Brexit”.
The Irish Tourist Industry Confederation (ITIC) will be representing the tourism industry at the upcoming All-Island Civic Dialogue on Brexit on November 2nd which has been convened by the Taoiseach. In advance of that ITIC looks at some of the potential implications for Irish tourism both in the immediate and medium to long term timeframes.
An immediate impact to Irish tourism of Brexit – that pesky exchange rate
The most obvious immediate impact to Irish tourism of Brexit has been the sharp weakening of sterling against both the euro and the dollar. As a result Ireland’s competitiveness has been severely hurt. Put simply sterling has weakened by 18% since the Brexit vote meaning that the British visitor now finds Irish holidays 18% more expensive. It should be noted that the last two times that the exchange rate swung so dramatically between Ireland and the UK was 2008/9 and the Lehman Brothers-inspired global crash, and 1992 and Black Wednesday when the UK crashed out of the Exchange Rate Mechanism.
Research shows that the British consumer considering a holiday in Ireland is more concerned with good value for money and competitively priced air and sea fares than visitors from other source markets. In 2015, even when the pound was relatively strong against the euro, British visitors continued to be the most critical of the expensiveness of holidaying in Ireland.
2009 was the last time that the value of sterling dropped so sharply against the euro. While there were other factors at play in the immediate aftermath of the Lehman collapse, British visitors to Ireland fell by 16% with earnings down 23%. The impact was most apparent in a steep decline in holiday and business visitors, with hotels and other paid for accommodations suffering up to a 30% drop in demand from Britain compared to a year earlier.
Past experience unhappily demonstrates the impact of currency volatility on demand from the British market. Several economists see the current currency shift as a structural change that may well become the new norm as the movement is the result of political decisions rather than a cyclical volatility in the past due to economic and market factors. Only time will tell on this front but it has become increasingly important for the Irish tourism industry to offer enhanced value for money to mitigate against sterling’s weakness.
Of equal importance is the fact that Britain – as a result of an inverse of the exchange rate swing – is now significantly more attractive to visitors from around the world. Ireland is competitively disadvantaged with sterling at a 31 year low against the US dollar and the euro buying significantly more sterling than a few short months ago.
The real danger of the UK slipping into recession, and its corresponding impact on travel and tourism, is also of significant concern to Irish tourism businesses. In a recession discretionary income is hit and often travel and tourism feels the pain first.
The medium to long term impact – implications of a ‘hard Brexit’
Over the medium to longer term, as a new trading agreement is put in place, the best outcome for Irish tourism would be a “soft Brexit” and this is what ITIC urges the Government to try and secure.
At the upcoming All-Island Civic Dialogue on Brexit on November 2nd ITIC’s contribution will be centred on 4 primary pillars: Border Concerns, Aviation Access, Regulatory Regimes, Cross-Border Co-operation.
Dangers of a new border
A “hard Brexit” which has been signalled by Westminster, as well as certain elements of the Northern Executive, would lead to the UK exiting the EU and losing access to the single market with the introduction of controls on the movement of people and goods; this would be unequivocally damaging for business and tourism in Ireland. While it is difficult to envisage how an external EU land frontier can be secured without the interruption of current arrangements, the retention of the Common Travel Area (CTA) is critically important for business and tourism on the island. The idea of a hard border and border controls would be a retrograde and costly step and would undoubtedly hamper the island of Ireland’s tourism potential.
What is clear is that when the UK leaves the EU, the border between the Republic of Ireland and Northern Ireland will become an external border of the EU. As such it is difficult to foresee how the erection of a more visible border can be avoided. A ‘soft border’ would appear to be incompatible with the UK’s stated exit objectives and with the responsibility of Ireland as a member state to protect the EU frontier and control the movement of goods and people.
The current Common Travel Area is in effect an open borders area comprising Ireland, the United Kingdom of Great Britain and Northern Ireland, the Isle of Man, and the Channel Islands. Its origins go back to the 1920s, although suspended during the Second World War into the early 1950s. Based on legally non-binding arrangements, the internal borders of the Common Travel Area are subject to minimal or non-existent border controls and can normally be crossed by British and Irish citizens with minimal identity documents. However, since 1997, the Irish government has imposed systematic identity checks on air passengers coming from the UK and selective checks on sea passengers, and occasional checks on land crossings.
Ireland and the UK negotiated opt-outs from the Schengen Agreement, subsequently incorporated into European Law following the Treaty of Amsterdam (1997), which brought about the abolition of internal border controls and a common visa policy between member states.
Common visa arrangements for short stay visitors to travel to Britain and Ireland on a single visa have since 2014 facilitated tourism to Ireland from several new source markets. The system was first applied to tourists from China and India, expanding to include up to 18 new source markets for travel to Ireland. The reciprocal scheme has delivered benefits for tourism gaining access to larger numbers of visitors who visit Britain, as well as providing a wider consular reach through the UK’s diplomatic service in countries where Ireland’s presence is limited or nonexistent.
In a post Brexit situation should a hard external EU border be introduced between Northern Ireland and the Republic, thereby devaluing or negating the Common Travel Area, it could be in Ireland’s best interest to join Schengen. From a tourism perspective the benefits of joining the common borderless EU travel area could be more beneficial for tourism than a bilateral arrangement with the UK. Besides it may not be feasible for Ireland to reciprocate a common visa scheme with a post Brexit UK.
It is possible that in post hard Brexit scenario, the British could unilaterally decide to allow Irish people to travel to the UK. However, Ireland would be prevented under EU rules from reciprocating on the basis of a bilateral. Any agreement would require the approval of the EU’s 27 member states.
ITIC’s position is that the Common Travel Area must be maintained and that should any border controls be imposed, to allow the UK to manage migration, these should be on the British mainland and not within the island of Ireland.
Single Aviation Market
Brexit has potential implications for the liberalised single European aviation market which has been a driving force of inbound tourism to Ireland. The EU Open Skies regime, establishing the Single Market in aviation, allows for unrestricted access to airlines of Member States to operate within the EU subject only to the condition that at least 50% ownership and effective control is in EU hands. Should the UK be outside the single aviation market, as a result of leaving the Single Market, this could have significant implications for Irish tourism. There would be potential repercussions for the shareholding of Aer Lingus (owned and controlled by IAG) and Ryanair to ensure that they conform to the 50% EU ownership and control requirements. The non-EU shareholding of both airline companies would exceed 50% in the event that UK based shareholders were designated as ‘foreign’, post a negotiated Brexit.
Brexit could see the termination of the current basis on which UK airlines operate within the Single Market and the ending of traffic rights for other European carriers to fly unimpeded to/from UK. The situation of pre-existing, generally restrictive, bilateral air service agreements post Brexit is unclear. Potential solutions could include a UK accession to the European Common Aviation Area (ECAA), which already includes non-EU members such as Norway, although it would involve Britain accepting all EU aviation law without any say in their formulation. Other solutions in the frame could include the UK negotiating to join European Economic Area (EEA) or European Free Trade Area (EFTA).
The impact of Brexit could be potentially very significant on air services between Ireland and Britain unless an alternative agreement is negotiated to avoid disruption. Any rolling back of liberalised air travel between the two counties is almost impossible to countenance. The existing network of routes and airline flexibility constitute essential infrastructure for tourism. Any arrangement that diminishes the open market between Britain and Ireland would be seriously detrimental to the country’s tourism economy.
ITIC’s position is that the preservation of the current aviation regulatory regime of open market access for airlines between the two countries is critical for tourism and trade. Therefore should Britain exit the Single Market a political agreement between the UK and EU must be put in place to ensure that existing aviation traffic rights remain in place.
The withdrawal of the UK from the EU has potential implications for changes in the regulatory environment under which business is transacted across the island of Ireland. Currently governments and businesses on both sides of the border subscribe to a common set of EU legislative and regulatory regimes. The removal of this common basis could result in serious disadvantages for tourism businesses in the Republic if enterprises in the North were to gain a competitive advantage due to a lightening of regulations or an easing of the compliance cost burden.
Inevitably there would be areas where businesses in the travel and hospitality sectors could find that different regulatory regimes operate on each side for the border, for example in regard to working conditions, industry standards or consumer protection.
An area where one could potentially see tourism in the south being disadvantaged would be that of Northern Irish state aid to businesses. In a post Brexit era the administration in the North could conceivably support tourism with state funding for product development without any restrictions or provide financial assistance to airports and airlines.
ITIC’s position is that the regulatory standards should be harmonised, where possible, on the island of Ireland so that tourism businesses North and South are on an even competitive keel.
Cross border co-operation
Taoiseach Enda Kenny and Northern Ireland First Minister Arlene Foster have both committed to the all-island agencies after Brexit. It is important for tourism that this remains the case and that there is no dilution of this commitment. The future sustainability of cross-border current co-operation, including implementation bodies such as Tourism Ireland and Waterways Ireland, is important to be maintained.
Following on from the Good Friday Agreement tourism was one of the areas identified for co-operation but implemented separately in each jurisdiction. However, Tourism Ireland was subsequently established as a ‘de facto’ seventh implementation body, in addition to the six specified in the legislation. Its provenance comes under the policy cooperation area of the agreement as a compromise agreed by the Irish Government and the Northern Ireland Executive that a publicly-owned limited company would be established by the two existing tourism agencies to promote inbound tourism to the island in an integrated way.
Although a combination of two national jurisdictions with different currencies, the mutual membership of the EU and the Common Travel Area provide the cement to facilitate the joint marketing of the one geographic destination while mitigating the visitor’s experience of travelling between two jurisdictions. A hard Brexit risks damaging this and without early resolution some businesses might form a view, however erroneous, that they could be competitively disadvantaged by continuing with all-island marketing.
ITIC’s position is that tourism has been well-served by an all-island approach to its marketing and promotion and there needs to be a strong commitment to this by the Dáil and the Northern Ireland Assembly by supporting Tourism Ireland and committing appropriate resources to its work.
There are no ‘certainties’ in regard to Brexit other than negotiations are set to commence by March 2017 and the current impacts of exchange rate volatility. The likelihood is that the process of the UK’s withdrawal from the EU will be complex and lengthy. The provision of a two year period for such an exit is probably unrealistic and the process could drag on beyond 2019. Uncertainty has the added negative effect of being damaging to business investment decisions and consumer confidence.
Ireland must play a central, collaborative and constructive role in what is likely to be a tough and lengthy process. The political settlement in the North needs to be afforded a special status. However, any agreement will be on the basis of approval by the 26 fellow Member States, not on a bilateral basis. Thus an intense diplomatic effort with our EU colleagues on the part of Ireland over the coming months will be required.
It must be remembered that tourism is Ireland’s largest indigenous sectoral employer providing 230,000 jobs nationwide. It is critical that tourism is acknowledged as an export industry which is particularly exposed to a hard Brexit. A hard Brexit – with border controls and restrictive rules on migration disruption of trade, investment and the regulatory environment – would undoubtedly be very damaging to the tourism sector. It is vital that tourism as an indigenous export industry is recognised centrally by Government and the EU in all negotiations.
Priorities must be the preservation of the Common Travel Area between the UK and Ireland and the preservation of the current open skies single market aviation regime. While the challenges as outlined in this paper – Border Concerns, Aviation Access, Regulatory Regimes, Cross-Border Co-operation – may not all come to pass, it is highly probable that in the short term the uncertainties, allied to the weakening of sterling, are likely to dampen demand from the British market. As a result policies must be implemented to ensure that Ireland remains competitive and that appropriate marketing and product investment is committed to tourism.