Friday 30 September 2016

Michael Cawley: Future strategy must recognise that tourism depends on aviation to bring in passenger numbers

Europe is losing out on increasing tourist numbers because EU regulations do not permit airports to take account of wider economic benefits when making pricing expenditure decisions. This must change

Michael Cawley

Published 12/07/2015 | 02:30

Michael Noonan's move to abolish the aviation tax was a positive move for the tourist industry
Michael Noonan's move to abolish the aviation tax was a positive move for the tourist industry

At the recent annual conference of Airports Council International (ACI), the representative body for Europe's airports, the organisation's Director General, Oliver Jankovec, revealed that the return on capital employed for all member airports in 2014 was a mere 5pc.

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Furthermore he claimed that over 60pc of ACI's member airports made a loss.

Taken together these two outcomes imply that the top 40pc of European airports are making a return on capital which is substantially in excess of 5pc and maybe even 10pc.

The second conclusion which one might draw from Mr Jankovec's analysis is that many smaller airports in Europe are unviable and should not be supported with additional funding and resources. However, in this regard, ACI's superficial report is incomplete and seriously misleading.

Firstly, many European airports, most notably in France, Germany, Italy and the UK, are burdened with collecting government taxes which can represent as much as 80pc of the total charge levied by airports.

For example, readers will be surprised to learn that all Italian airports are required to levy (among other taxes) a €6.50 fee to pay for retired Alitalia pilots.

These types of taxes can neutralise hard-won cost savings at smaller European airports where a 50pc cost advantage against Mr Jankovec's select few can be reduced to as little as 10pc. Similarly, air passenger duty in the UK and Germany is fixed regardless of ticket price, thereby unduly penalising the low-fare offerings necessary to drive growth to peripheral regions.

When expressed as a percentage of the airport's own revenue, in many cases the level of taxation exceeds that on tobacco and alcohol. Is that really what some European governments think of aviation and its consequential benefits for tourism?

In this context, I should pay tribute to this Irish Government and in particular Michael Noonan's decision to abolish the aviation tax in 2013, an action which has led to substantial growth in access and tourism in 2014 and 2015.

Furthermore, Finance Minister Michael Noonan's initiative has been proven to be revenue positive for the Exchequer in terms of the taxation generated on the incremental economic activity, in addition to the thousands of jobs it helped create.

Secondly, for any legitimate assessment of the economic return of Europe's airports we must look beyond the limitations of conventional accounting which would have us confine the revenue attributed to the airports to that which they collect from airlines (aeronautical income) and passengers (non-aeronautical income) in the shape of car-parking, retail and food and beverage sales.

This analysis fails to recognise the revenue arising from incoming tourists who pass through an airport and whose existence (and consequential benefit to the local economy) is entirely due to the airport and its customer airlines.

The following slide shows the structure of the airline industry with a single revenue source, the passenger, funding the airline directly and all the airlines suppliers, partners and staff indirectly. The annual accounts for Ryanair for year ended March 2015 shows an average fare of €47 per passenger.

If, however, we confine our examination of the importance of our airports to this €47 which Ryanair collects from its customers and effectively redistributes to its partners and shareholders, we have a misleading and incomplete picture. A more comprehensive and accurate assessment of the economic return from Europe's airports (and airlines) is set out in the other table.

The real economic return must reflect the fact that once a passenger is prompted or motivated to travel by the €47 fare, tourist authorities around Europe confirm that he/she will spend an average of 10 times that figure at the destination. This tourist revenue must be included in any assessment of the economic return made by airports. Why? Because in the absence of these airports and the airlines which serve them, the incoming tourist would not exist and the financial benefit and job creation which accrues to the regions served by the airports would go elsewhere.

As an island with over 90pc of its foreign tourists arriving by air, this is particularly relevant for Ireland. In assessing the viability and overall financial performance of our airports it is vital that we assess the return to the regions served by each airport and not merely the revenues which accrue to the airport itself. This analysis is particularly relevant when we are making decisions in relation to capital expenditure or pricing of services at those airports.

The optimum approach involves the integration of our tourism and aviation policies so that the overall benefit to the country is assessed in any decision on resource allocation to our airports. Ireland's airports are critical to the success of our tourism industry and no decision about their future should be taken without an accurate recognition of the consequences for tourism. As a sector which currently employs 205,000 people and which is targeting to grow to 250,000 by 2025 the tourism industry deserves no less.

The best example of this integrated approach to aviation and tourism policy can be seen in Dubai. The government of Dubai has successfully developed a world class airline in Emirates and a world class airport specifically to put Dubai and particularly its tourism industry on the map.

Every decision made in relation to the aviation industry in Dubai is designed to boost tourism and related businesses in that country. This holistic approach has yielded spectacular results, with Dubai emerging literally from nowhere to become one of the world's most popular tourist destinations.

Who would have thought 10 years ago that Dubai would have replaced Dublin or Amsterdam as the biggest air route from many British cities such as Manchester, Birmingham and Edinburgh or that upwards of 1000 people would be travelling daily between Dublin and Dubai.

The ACI conference also heard that 100pc of the growth in intra-European airline passenger traffic (foreign tourist potential) between 2015 and 2020 will be provided by low cost carriers. Almost 40pc is expected to be as a result of Ryanair's growth with the airline having recently placed orders for well over 300 additional aircraft.

By definition, this passenger traffic is price sensitive and its very existence is dependent on the low fares charged by the low cost carriers. These low fares in turn can only exist in the context of efficient airports, airlines, ground handling companies and other partners. Given that the payback from tourism is enormous it is vital that the decisions made to secure this business for Ireland are not made in the narrow context of airport revenue alone but rather by taking account of the total income generated for the region served by the airport.

It is regrettable that current EU regulations do not permit airports to take account of these wider economic benefits when making pricing or capital expenditure decisions.

Consequently Europe, and particularly its peripheral regions which are hugely dependent on air access for growth, are losing out on the substantial increases in tourism which countries such as Dubai, with its integrated aviation and tourism policy, are enjoying.

Tourism is the second largest industry in the world in employment terms and ranks very highly in terms of financial contribution and regional development. As the world's major economies continue to develop tourism's continued growth is assured.

For Ireland to maintain and grow its share of this important sector of economic activity we must pursue a strategy which recognises the dependency of tourism on aviation and the benefits which flow to the country if such a co-ordinated policy is implemented.

Michael Cawley is the former deputy CEO of Ryanair and now chairs Failte Ireland

Sunday Indo Business

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