Steps to Continued Recovery
In spite of the difficulties faced by the Irish tourism industry during the year the total tourism revenue earned increased by 10% to 5.2bn in 2001 from 4.7bn in 2000. This comes in the wake of a 5% decrease in visitor numbers. The Government earned an estimated revenue of 2.3 billion through taxation of tourism expenditure, of which 1.9 billion came from foreign tourism. It is estimated that for every euro spent by out of state tourists, 52 cent eventually ends up with the government (through VAT, Excise, PAYE etc) this amounts to 1.61bn.
These statistics are a testament to the fact that the measures undertaken during 2001 were effective in overcoming some of the challenges faced by the industry during the year, but they also indicate that further measures are required to ensure that the industry continues upwards on the steps to continued recovery.
During 2001 alone over 5.9 million overseas visitors were catered for, in addition to the rapidly expanding demand from local domestic market sources. Overseas visitor numbers to Ireland fell by 5%, the first year of a decrease since the gulf war in 1991. The main source of visitors is the UK, which supplied us with 3.4 million visitors last year, followed by the United States with 0.9 million visitors. The remainder of visitors came primarily from Europe. Within continental Europe, France and Germany are the largest contributors to Irish tourism, contributing 282,000 and 288,000 visitors respectively.
Revenue generated from foreign tourism increased from €3.6bn in 2000 to €3.9bn in 2001, representing a 10% increase from 2000, despite the downturn in visitor numbers. Revenue generated from domestic tourism alone amounted to €1.2bn, while tourism in total is a €5.2bn industry. Close to 150,000 full and part time jobs are supported by the industry, representing one in 12 jobs in the country, many in places where tourism is the main if not sole source of economic activity. Specifically the West and South West regions geographically peripheral to the Dublin metropolis account for just one quarter of the national population but generate two fifths of total tourism revenue.
The numbers working in Hotel and Restaurants rose from 68,000 in 1994 to 104,800 in 2001. It is currently estimated that each million euro of out-of-state tourism expenditure (including receipts paid to Irish carriers) supports 30 jobs and every million euro of domestic tourism spend supports 24 jobs.
The growth of the industry in the past has been driven by favourable confluence of key factors such as, availability of investment incentives, increasingly competitive economy, expanding market demand, favourable foreign currency movements and improved product offer. As these factors are now becoming less influential we need to examine fresh initiatives to stimulate long term recovery and growth.
In addition to the ongoing effects of the events of September 11th the industry is now facing fresh challenges in the shape of increased costs in areas such as insurance, energy and labour. Insurance costs have increased dramatically by anything from 40% to 200% since 2001, similarly electricity costs have increased by 14% this year and a further 8% was recently announced by the Electricity Regulator.
According to the 2002 Horwath Bastow Charleton hotel survey the average profit per available hotel room for 2001 was €9,555 representing a 5.2% decrease from 2000 levels. However the smaller hotel sector (1-49 rooms), which consists predominately of small family run businesses, experienced a 47% decrease (from €10,611 in 2000 to €5,562 in 2001). This highlights that the smaller family owned businesses have been among those worse affected by the difficulties over the past year. All the indications are that with reduced occupancy rates and ever escalating costs 2002 will be a more difficult year.
The Small firms Association showed a marked slowdown in the creation of new jobs this year, 41% of respondents cited increased labour costs as the reason for not recruiting extra employees. As a result demand for extra labour is set to fall by 29% among small firms this year. Labour cost increases at 7% are more than twice the European average of 2.9% and productivity in the multi national sector is 5 times that of indigenous companies.
Whilst the effects of Foot and Mouth Disease are now behind us, the aftermath of the events of September 11th continue to have a detrimental effect on the number of visitors to our island, specifically the numbers of American visitors, which fell from 1.06 million in 2000 to 0.9 million in 2001, the first year of a decrease since 1991. Furthermore it is estimated that the number of visitors will decrease by an additional 15% in 2002.
The pressing issues of marketing and cost competitiveness require immediate action by the Government through incentives and legislation. These issues combined with the current economic difficulties being experienced by a number of countries that represent our key markets (such as the US and Germany) threaten not only the recovery but also the long term viability of the tourism and hospitality industry in Ireland. Predominantly the smaller family owned businesses within the industry, that represent the largest concentration in the market are those most seriously at long term risk.
1. Long term Response to Decrease in Visitors
- Marketing – Continuation of 2002 funding levels
- Marketing – Special funding for long term recovery
2. Competitiveness:
- Cost Competitiveness
- Level Playing Field - VAT
- Spiralling Insurance Costs
- Energy Costs
- Local Authority Rates Relief
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ISSUES Continued response to decrease in visitors through:
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SOLUTIONS
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ISSUES
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SOLUTIONS
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1. Marketing
1.1 Continued funding for long term recovery
The importance of marketing to enable continued recovery of the industry cannot be overstated. In light of the events of 2001 the task of re attracting visitors to Ireland remains vital. American confidence in air travel has weakened significantly since September 11th. Overall the number of foreign visitors to our shores was 5.9m in 2001, a 5% decrease from 2000. In 2001 America supplied us with 907,000 visitors, a decrease of 14% from 2000, the first time a decrease has been experienced since the Gulf war in 1991. Furthermore a 15% decrease over 2001 American visitor numbers is expected in 2002. It is estimated that on average each US visitor to Ireland spends (in addition to their airfare) €760 while in the country, this amounts to €690 million in revenue, 47% of which ends up with the Exchequer in the form of taxes. This amounts to €324m of Government revenue per annum. This valuable market needs additional resources in order to return to growth with a resultant increase in taxation revenues. Therefore a long term marketing programme is necessary to restore American confidence in air travel and ensure that the number travelling to our Island will increase in the future.
It is essential that the 2002 marketing budget levels be maintained. In addition to this the IHF requests special funding of €20m to readdress the current situation and to tackle the pressing issues faced by the industry. This fund should only be available to support specific programmes with clearly set demanding performance targets aimed at ultimately substantially increasing the number of tourists visiting Ireland and consequentially increasing related tourism revenue and also benefiting the Exchequer.
In addition to the American market there exists huge potential for the expansion of the number of tourism visitors to Ireland from Britain and mainland Europe. The introduction of the euro has now made inter European transactions more transparent and also inter European travel more straightforward for the everyday tourist. The growing phenomenon of late bookings throughout the season provides businesses within the hospitality industry the opportunity to generate additional revenue later in the season. It is therefore vital that the marketing spend be distributed throughout the season and not front loaded as has been the case in the past. In the light of last year the importance of this cannot be over-emphasised.
Many of the national tourist boards of our principal competitor countries such as the United Kingdom, France and Canada have substantially increased their marketing spend in order to recover from the events of 2001 and in doing so have gained a competitive advantage over Ireland. Therefore immediate funding is required to bring our marketing programmes in line with our closest competitors. However if the necessary funds are not available to promote Ireland both in Britain and across Europe we will find that we will loose the business both in the present and the future to our many competitors.
The IHF recommends a Recovery fund of €20 million to augment the activities of Tourism Ireland during the next five years, specifically to fund extra marketing activities and to incentify additional air routes from our key markets of North America, Britain and mainland Europe. A primary objective of this is to return the level of transatlantic flights to pre September 11th levels and should include assisting programmes aimed at restoring American confidence in air travel.
A recent independent survey in the US identified Ireland as the number one holiday destination in terms of customer satisfaction. This glowing tribute highlights the potential opportunity for growth and recovery in this market.
The Recovery Fund is vital to sustain our presence in existing markets, which in the case of the US may not reap benefits in the short term, but is necessary to ensure tourism returns to growth when Americans regain confidence in overseas travelling.
2.1 Level Playing Field – VAT
With greater transparency in European prices, due to the introduction of the Euro, and the growing role of the Internet, transparent competition is becoming common place. The Government must act now to ensure a level playing field with our competitors within the Eurozone.
The domestic level of inflation has accelerated sharply. By June 2002, average retail prices were 16.1% higher than they had been in 1999. Since 1996 inflation in tourism related market segments has been faster than the national average. From a European competitive viewpoint since 1999 Irish inflation has outstripped the rate of price increases both in competing markets and in those countries from which we aspire to attract visitors. By May 2002, average consumer prices in Ireland were 21.7% higher than in 1996, over the same period average retail prices were only 11.3% higher in the Eurozone, 9% higher in Germany and 8.4% in France. In August the annual inflation figure rose to 4.5% from 4.2% in July. Notably the inflation rate for restaurants, hotels & licensed premises actually increased by 0.5% in the month of August and for the year the increase is estimated at 7.5%. While the CPI index increase in respect of Accommodation was 1.2%, a quarter of the overall inflation rate the other elements of our business which were subject to substantial cost increases brought the sector's increase to 7.5%.
Ireland has the second highest standard rate of VAT in the Euro zone, the only country with a higher rate being Finland (22%). While Luxemburg (15%), Germany (16%) and Spain (16%) have the lowest rates.
It is vital to ensure that costs are competitive to our European and non-European counterparts. VAT on hotel accommodation in Ireland is currently at 12.5%, which is the fourth highest in Europe and next to Germany the second highest in the Euro zone. In addition to this our Vat rate for alcoholic beverages are the second highest in Europe next to Finland. In the area of entertainment we have along with Belgium the highest rate in Europe. The accumulation of these statistics means that when a tourist adds up all the costs of a holiday in Ireland it is expected that we will be considerably more expensive that most of our European counterparts. In a recent study of comparative euro prices, Ireland polled poorly and was exposed as one of Europe’s more expensive countries.
Our competitiveness is further eroded in the conference and corporate sector in which we are the only country in the Eurozone with a VAT rate of over 10% where VAT is not allowed as an input for VAT registered businesses.
Hotel and restaurant costs are a valid and necessary expense for many businesses and yet VAT on such expenses are not allowed as inputs. Ireland should follow the example of many other EU countries and allow the VAT element of such legitimate business costs as inputs by registered businesses. Countries that allow such inputs include Austria, Denmark, Germany, Hungary, Finland, Netherlands, Spain, Sweden, Switzerland and UK, all of which are in competition with Ireland.
Source: Hotrec
Source: Hotrec
2.2 Comparative pricing in the Eurozone
Insurance Costs
Hotels and Guesthouses in Ireland like other small to medium sized firms in Ireland have been hit severely by spiralling insurance costs over the last 18 months. A recent survey by the Irish small and Medium Enterprises Association (ISME) of 3,000 members reveals that 18 per cent of respondents have already laid off staff mainly due to higher insurance costs while 40% plan to lay off staff for the same reason. Both the ISME and the Small Firms Association say consistent increases in the cost of insurance cover has now become a serious problem for the Irish economy.
The tourism industry is one of these industries that are suffering the effects of this trend. Considering that insurance is one of the most substantial costs for hotels the effect of this trend is worrying for the future of the tourism industry. Phenomenal increase in the insurance industry has seen costs rise by up to 300% in recent years. This transpires to between 3 –6 times that of the European average. Earlier in the year the Irish Hotel Federation surveyed some 60 hotels and found that on average the increase in their insurance costs over the last year was 41%. The Federation believe that if surveyed now the increase would be even greater, for some hotels it could be as much as 200%.
Legal costs associated with claims have been highlighted as an area that has seen a significant amount of cost increases in the last 18 months; consequently any hotel that is dealing with a compensation claim is facing a huge cost in associated legal costs not to mention increased premiums. These increased costs come at a time when the industry must strive to be more competitive with our European rivals.
Energy Costs
The Irish economy has seen a dramatic increase in the cost of energy over the last few years. According to the Irish Energy centre the total energy spend by the industrial and commercial sectors in Ireland has increased by almost €114 million this year as a result of spiralling fuel costs. Irelands national annual fuel bill now stands at €860 million. Electricity costs alone have increased by 14 % this year with a further 9% increase being announced by the Electricity Regulator in early September 2002. The increased costs are compounded by the fact that Ireland is severely dependent upon imported fossil fuels. We import 86% of the fuel we currently use to meet our energy needs (source Irish Energy Centre). In a Forfas survey of cost competitiveness of consumer goods within the eurozone, Ireland was found to be the third most expensive country in Europe in 1999 for “Housing Water, Electricity, Gas and other Fuels”. In 2000 we were found to be the second most expensive and in 2001 we were the most expensive. To date deregulation in the market has not led to increased competition and prices have continued to rise.
The tourism industry, in particular the larger hotels, would incur a substantial amount of energy costs during the year. In 2000 and 2001 the average energy cost per available room was 3% of total costs including room, food & beverage and salaries or 11% of total overheads. Measures must be put in place to counteract this upward spiral. The greater development of renewable energy resources should be encouraged. The use of alternative renewable energy resources must also be increased. These measures if enacted affectively will serve to achieve a more stable and cheaper energy supply for the long term.
Action 1: Initiate steps to insure that energy costs are reduced to levels comparable with other EU countries.
2.3 Local Authority Rates Relief
In light of the aforementioned difficulties faced by the industry in the last year mostly as a result of the events of September 11th and their repercussions, the IHF would ask the Minister for Finance to examine the area of local authority rates as a means of alleviating some of the negative effects suffered throughout the industry during the year. The IHF recommends that the Minister should allocate to the Department of the Environment an amount of money to enable local authorities to grant a rebate of 25%, on rates for 2002 for hotels and guesthouses that experienced a decrease in turnover of not less than 15% of 2000 turnover (adjusted by CPI). A similar scheme was introduced, earlier this year, in Northern Ireland to alleviate the impact of Foot and Mouth disease.