Irish Tourism Postcard – March 2020


October 2019 Industry Postcard

INTRODUCTION

CURRENT MARKET CONDITIONS & OUTLOOK

TOURISM INDUSTRY NEWS

CURRENCY WATCH

TRANSPORT UPDATES

ECONOMIC UPDATES


IRISH TOURISM INDUSTRY CONFEDERATION VIEWPOINT

March traditionally marks the start of the tourism season. This year, of course, the coronavirus and its serious implications on the travel and tourism sector loom large. Real uncertainty surrounds the St. Patrick’s Festival which brings in many thousands of overseas visitors to Ireland.

While this is ultimately a public health issue, the business and economic implications of coronavirus are stark. ITIC’s view is that public health decisions must be prudent but crucially proportionate. While the ultimate extent of the spread and intensity of the virus throughout Europe is unknown, it is safe to assume that there will be weaker travel demand as the peak summer season approaches.

2020 was already shaping up to be a challenging year for Irish tourism with official sights set on a modest increase following a year when growth stalled.

The travel and tourism industry in the past has proven itself to be especially resilient. Businesses have recovered from global external shocks in the past – Foot & Mouth, 9/11, SARS and the 2010 Ash Cloud – with travel demand rebounding within months of the crisis.

In the interim, the tourism industry will responsibly follow advice and any directives from health authorities to deliver a measured and calibrated response as the situation develops. At this key time, as an incoming government slowly emerges, pro-tourism and pro-enterprise policies must be at the heart of any new administration. Destination marketing budgets will need to be increased and allocated in a timely fashion to markets with best prospects. Meanwhile business costs – from VAT to insurance to rates – must be curbed to help stimulate demand for tourism, Ireland’s largest indigenous industry and biggest regional employer.

As always, your comments are most welcome by emailing info@itic.ie.

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Covid-19 hits travel across the globe

The impact on travel is already apparent across the world. Travel demand has been severely dampened on fears that the outbreak could get worse as it spreads to Europe and the United States. Airlines are cutting services to/from infected areas, the stock markets on both continents have taken a hit, most marked in the travel, hospitality and tourism sectors. Companies have introduced restrictions on business travel, large business events, including ITB Berlin have been cancelled, while organisers of major sporting events and festivals review the situation and cruise lines reassess itineraries. Forward bookings are being checked for cancellation policies, while new bookings for both business and leisure travel are stalled. Aer Lingus and Ryanair are amongst several airlines which have reduced service to Italy for the month ahead in the face of cancellations and falling demand.

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It is impossible to forecast the potential impact of Covid-19 on tourist arrivals in Ireland this year so long as the spread and intensity is unknown. The universal experience suggests that disruption of travel by extraneous events is short lived over the duration of the crisis with a relatively speedy recovery. For example, the discouragement of travel following the outbreak of the highly infectious animal Foot & Mouth disease in February 2001 caused the cancellation of the 6 Nations games, St. Patrick’s Festival and many other events. This resulted in a drop of close to 10% in arrivals in Q1 and Q2, with a knock on impact of low double digit decline in arrivals in Q3 (including the impact of 9/11) on arrivals from Europe and North America.

Depending on the extent of the spread of the virus and its fatality rate, demand for travel to Ireland will most likely vary by source market and by segment. While hopefully the crisis will be short lived, the immediate damage will be cancellations of visits in the short term, and postponement of forward bookings for the peak season. Currently the airlines, principally Aer Lingus on transatlantic routes and Ryanair on the short haul network, are scheduled to operate increased capacity over the summer season – any change in this would undoubtedly damage tourism prospects.

It is difficult to see demand recover this year from China and other Asian markets – a market relatively small by volume but with good growth potential and an increasing source of high spending tourists – due to the economic impact on the region and the loss of airlift to Ireland.

A major concern for Irish tourism will be the response of US travellers to the crisis, as the market has been the prime driver of growth in tourism receipts in recent years. American visitors are a critical high value component of demand for tourism enterprises across the country, underlining employment and business viability. The longer the crisis persists, and the extent of the spread in both the US and Europe, will be critical determinants of demand. In previous crises the American tourist has been shown to be especially risk adverse to exposure to health or safety concerns.

The larger and nearer markets of Britain and Europe are important sources of demand for both short breaks and main holidays to Ireland but thankfully with a relatively shorter lead in booking time. Hence the window of opportunity is wider and recovery opportunities much greater.

Across all markets past experience indicates that there will be pressure on price as a driver of recovery.


BREXIT not done yet

Last week saw both the EU and the UK set out their respective negotiation mandates as talk get underway in Brussels. The initial exchanges suggest increasing tensions between the sides. The main hurdle appears to the EU’s precondition for a free trade agreement is that the UK be willing to abide by some EU laws and regulations following their departure in December. The UK’s response was to dismiss the prospect of abiding to EU laws, and instead threatened a ‘no deal’ departure. The news coming from No.10 suggests that the UK is prepared to walk away from some elements of the Political Declaration which accompanied the Withdrawal Agreement. This position would be contrary to the legal agreement entered into last year and would not be in Ireland’s best interests. The sheer complexity of the Brexit negotiations will mean a long and difficult road ahead for the two sides.

Assuming that the common travel area is secure, and a benign aviation agreement to facilitate an open market is put in place, the key aspects of the Brexit outcome include ensuring no introduction of a border on the island, and a level playing field between both jurisdictions. A bad outcome or a no deal Brexit would be damaging to tourism businesses. The prospect of less stringent regulations in Northern Ireland governing employment, transport, food and other inputs to the travel and hospitality sector, would seriously hurt Ireland’s competitiveness and investment attractiveness. The removal of restrictions on State Aid in the UK could have significant adverse impact on tourism in Ireland. ITIC, together with other business interests, will continue to make representation to Government and its agencies as the negotiations progress to protect the sector.

Over the coming months the chance of a ‘no deal’ Brexit will be a significant reality as historically this has been the main driver in sterling’s weakness and the downturn in demand for travel to Ireland.

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Aer Lingus reports €276m profit

Aer Lingus’ operating profit for the year to December 31, 2019 was €276 million, a decrease of €35 million over the previous year. Passenger revenue grew by 6.1% to €2.06 billion. Capacity increased 4.2% and achieved an 81.8% load factor. Passenger unit revenues were up, with strong long-haul performance from the addition of a new route connecting Dublin and Minneapolis and increases in capacity to San Francisco, Seattle and Philadelphia, despite challenging European market conditions.

Aer Lingus’ operating margin was 2.5 points lower at 13.0%. Aer Lingus non-fuel unit costs were up, primarily driven by increased maintenance and handling costs as well as pay inflation increases, partially offset by continued cost saving initiatives and efficient growth. Fuel unit costs were up versus the previous year, reflecting higher market prices.

International Consolidated Airlines Group (IAG), Aer Lingus’ parent, reported an operating profit before exceptional items for the year to December 31, 2019 of €3,285 million, down 5.7%, while profit after tax before exceptional items €2,387 million down 1.4%.

Aer-Lingus-Uniform-0320

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£ Pound Sterling

The British pound has strengthened against the euro in recent weeks, on the back of the result of the general election and clarity on the UK’s position on Brexit. On average the pound brought €1.19 in February, almost 9% ahead of its value in August 2019.

However, in the final trading days of the month the pound to euro exchange rate fell from a high of €1.198 to €1.16 after details of the government’s post-Brexit negotiation plan was revealed and as the euro made gains following reports of the German fiscal stimulus.

The short term outlook for the pound will be subject to pressure from the extent of the coronavirus and its impact on the UK economy together with sentiment emerging from the EU Brexit negotiations. The latter will potentially be a factor for several months to come.

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$ US Dollar

The US dollar gained in strength during February reaching just over €0.92 in mid month as weak German data weakened the euro, before falling back to closer to €0.90 at month end. The short term outlook will be governed by the extent of the coronavirus outbreak in the US and the decision by the Fed to lower interest rates.

GraphUSDollar-0320

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Summer 2020

New gateways of particular interest to inbound tourism include:

El Al

Tel Aviv – Dublin from May 26, with 3 flights per week.


Egypt Air

Cairo-Dublin from June 05, with 4 flights per week.

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Transalantic lift up on last summer:

Aer Lingus

Aer Lingus continues its expansion of service with 1.9m seats this summer, 10% more than last year, with an expanded fleet including new Airbus A321neoLR aircraft. The airline’s schedule includes increased frequency from Seattle, Miami and Orlando to Dublin, with more seats from Minneapolis to Dublin and from JFK and Boston to Shannon.


American Airlines

American Airlines has extended the season on its service from Dallas Fort Worth to Dublin.


Delta Air Lines

Delta Air Lines is adding capacity from New York and Boston on larger aircraft.


United Airlines

United Airlines is adding a daily San Francisco-Dublin service from June 05.


Air Canada

Air Canada is deploying larger aircraft on selected routes.


Air Transat

Air Transat latest fleet adds 10% more seats on its Ireland service


Far East/Asia – Ireland

Cathay Pacific plans to resume service in July

Reservations are now open for the airline’s Hong Kong-Dublin service from July 13. Resumption of the service has been postponed from March 29 due to the coronavirus. In common with other carriers in the  region the airline has been temporarily suspending or reducing frequency across its international network – with services between Hong Kong and Europe currently cut on 10 routes and suspended to Rome, London Gatwick and Barcelona.


European/UK – Ireland

This summer see some new routes and services with good inbound potential, including:

Aer Lingus

To Shannon: Paris CDG (4 flights per week); and Barcelona (3)


KLM

New Amsterdam-Cork service


Ryanair Group (incorporating Lauda Air and Malta Air)

To Shannon: Vienna (2 flights per week)
To Dublin: Billund (2); Toulouse (4); Marseille (3); Verona (3)
To Kerry: Manchester (2)


In addition: Aer Lingus, Ryanair, Lufthansa, Finnair, Air France, and Transavia are adding frequency on selected routes to Ireland.

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Global Growth to Slow Sharply as Virus Takes Heavy Toll

The fast-spreading coronavirus is having a serious negative impact which could see the global economy posting its worst year since the financial crisis as growth momentum was already soft even before the coronavirus shock.

The latest projections from the OECD suggest that the ‘best case’ scenario would see the global economic growth slow to 2.4% down from the 2.9% forecast before the outbreak, with the possibility of growth falling by almost half to 1.5% The outbreak has the potential to send several economies into recession. The partial shutdown of the world’s second biggest economy is having an effect elsewhere by weakening trade, fraying manufacturing supply chains, reducing tourism and fanning investor uncertainty. The question remains open whether it will be V-shaped with a quick recovery of the world economy, the most likely scenario, or whether it would lead to a persistent slowdown in world growth.


Europe’s economy facing a sharp hit?

A sharper than expected decline in industrial production in Germany, France and Italy has weakened the prospects of a recovery in the eurozone economy. In the year to December, eurozone industrial production was down 4.1%, its weakest performance since the sovereign debt crisis in 2012.

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Improving sentiment in recent surveys of eurozone companies had fuelled hopes that the region’s industrial sector was set to rebound from its two-year downturn. That was before coronavirus outbreak started to disrupt European manufacturers’ exports and supply chains.

The disruption is evident from a fall in industrial production in Germany and France. The euro has fallen to the lowest since 2017 against the dollar, and German 10-year bond yields remain well below zero. There’s even talk of a recession risk in Germany, Europe’s largest economy, and in Italy.

That would be a further blow to the euro zone and could renew the pressure on German politicians to increase spending.

Consumer confidence in the euro area improved in February (+1.5 points) thanks to households’ much brighter expectations in respect of the general economic situation, which outstripped slightly more upbeat appraisals of their past and future financial situation, as well as their intentions to make major purchases. [EU Commission’s Consumer Confidence index]

The EU Commission is closely monitoring the impact of the coronavirus on the economy, although the ongoing uncertainty makes it hard to quantify at this stage. The effect of the coronavirus is beginning to impact different sectors of the economy, including reduction in travel and tourism as consumers defer trips and events are cancelled while other industrial sectors suffer a setback due to supply chain disruption.

Outlook: Any economic recovery will be slower than expected in 2020, while consumer intentions to travel will be dampened at least in the short term by the extent and intensity of the spread of the coronavirus.


UK economy rebounds in advance of difficult Brexit negotiations

Recent snapshots suggest a bounce in the economy since the Conservatives’ decisive election victory. The latest PMI survey reports a rebound in the economy in January driven by growth in domestic demand. Business activity was up for the first time since last August as services sector experienced an increase in consumer spending and an expansion of business investment and staff hirings. U.K. businesses sentiment is at a 14-month high, according to a separate index from Lloyds.

U.K. consumer confidence climbed to the highest since August 2018 with retail sales reporting the highest increase in almost two years in January. The GfK index shows improved optimism about the economy boosting households’ willingness to buy big-ticket items.

However, the coronavirus can be expected to impact behavior and spending depending on the extent of the spread of the disease. This will add to the impact of Brexit negotiations on business and consumer sentiment in the second half of the year.

The value of sterling – a key determent of travel demand to Ireland – has shown some volatility over the past few weeks. The pound sterling ended the month on a low not helped by the UK Government’s threat to leave the EU without a deal if there is no prospect of a trade deal by June.

Outlook: Ireland may continue to face serious competitive challenges in attracting British visitors as Brexit negotiations get under way and exchange rate volatility.


US FED makes emergency rate cut but markets continue tumbling

The central bank cut interest rates by half a percentage point, its biggest single cut in more than a decade, as a pre-emptive move to protect the economy from the coronavirus. U.S. financial markets dropped into correction territory as all three major US indexes posted deep declines after a brutal week of losses. The Dow Jones industrial average plunged almost 4,000 points on Friday, February 28 capping its worst week since the 2008 financial crisis.  The immediate response of the markets saw stocks and bond yields tumble after the Fed’s rate cut suggesting that investors are not convinced the measure will contain the economic impact of the coronavirus.

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The US economy, in its 11th year of a record expansion, started the year in a good place, with a strong labour market and economic activity increasing at a moderate pace. Wages have been rising broadly in line with productivity growth suggesting little evidence of excessive pressure on price inflation. In short, the fundamentals supporting household consumption were solid.

Before the advance of the coronavirus, the risk factors to 2020 economic growth included the the US-China trade war and uncertainty around the upcoming US presidential elections. However, in recent weeks the virus outbreak has visibly impacted the US economic environment. Goldman Sachs suggest that corporate profits, which had been expected to rise close to 8% this year, now could be wiped out by the damage the coronavirus will do to global supply chains.

Consumer confidence rose in February to a 6 month high, according to The Conference Board’s Index, driven by solid job growth, low mortgage rates and falling gasoline prices with consumers plans to buy autos, homes and major appliances within the next six months all improved.  However, given the strong correlation between the financial markets and consumer sentiment in the US, it can be expected that consumer confidence will take a knock.

Outlook for travel: Based on past demand patterns for outbound travel at times of crises, the market is cautious in respect of exposure to any dangers. Therefore, the extent of spread of the virus in Europe over the coming weeks is likely to be the main determinant of transatlantic travel demand this summer.

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