Business Irish

Wednesday 28 June 2017

Ryanair profit warning heralds perfect storm for tourism as sterling slumps

Ryanair chief executive Michael O’Leary responded quickly to the prospect of a fall in sterling and the airline ‘pivoted’ capacity from the UK to Italy and Germany
Ryanair chief executive Michael O’Leary responded quickly to the prospect of a fall in sterling and the airline ‘pivoted’ capacity from the UK to Italy and Germany
Richard Curran

Richard Curran

The profit warning issued by Ryanair this week should be seen as the biggest red flag for the Irish tourism industry in a very long time. Ryanair said it was reducing its profit forecast by more than 5pc for this year because of the impact of the fall in sterling.

Ryanair has not issued a profit warning since 2013. The airline expects to carry 119m passengers this year, up from 106m in 2015. However, a near 20pc fall in the value of sterling hits Ryanair's business in two ways.

Firstly, cheaper sterling makes it more expensive for British residents to travel abroad, so they will take fewer trips. Secondly, every £1 Ryanair makes from British holidaymakers is worth less in euros when it translates its profits back to euro.

But also, in order to keep those Brits in the air, it will slash air fares to encourage them to keep on taking flights.

This way Ryanair keeps its load factors high (ie the percentage of seats on each plane that are occupied) and its total passenger numbers as high as possible - even though it means the airline will make less profit per passenger.

Ryanair was one of the first companies to wake up to the implications of Brexit and a fall in sterling. This is because it is a well-run, forward-planning consumer business. It has to be able to see things happening before they actually do.

So what does all this have to do with Irish tourism? Well quite a lot actually.

The British travel abroad a lot more than people visit the UK. In 2015, British residents took 53.9m flights overseas, compared to 26.2m visits to the UK by air.

The opposite is the case here where more tourists come to Ireland than Irish residents leave. In 2015 there were 8.6m visits to Ireland and we took 6.9m trips abroad.

Shortly after the Brexit referendum votes had been counted, Ryanair announced that it would "pivot" airline capacity away from the UK. Michael O'Leary could see the fall in sterling coming and realised he could make more money putting airline capacity into places like Italy and Germany.

Foreign travel out of the UK has been growing very strongly in recent years on the back of a strong sterling. With that situation reversed, British tourists will have to rein in their travel plans.

Last year, visits to Ireland from Great Britain hit 3.5m, accounting for 40.6pc of all overseas visits to Ireland. This country and the rest of the Eurozone have now become 18pc more expensive for those British residents.

But equally, the UK has become cheaper for Germans, Italians, French and, of course, Americans, given sterling's fall against the dollar. Ireland's tourism industry has a huge fight on its hands to cope with fewer British visitors and also to compete more with the UK as a destination.

If you were from Madrid, Lyon, or Rome would you consider a short trip to Dublin, or perhaps London or Edinburgh which have fallen in price by 18pc?

Irish tourism has been on a roll and has come through the economic crash extremely well. It has been helped by the fact that the euro was cheap and the crash forced the industry to abandon boom time price gouging and offer a more competitive product.

It has done that brilliantly and the rewards have been seen. It has benefited from a reduced 9pc Vat rate, which has also helped. However, there are signs, particularly in Dublin, that the lower rate is not being passed on to consumers and prices are ticking up again.

Ireland will now have to seriously up its game when it comes to building on the successes of recent years. Brexit and a cheaper sterling are a real threat to the industry. We have come up with the Wild Atlantic Way - we want people to come and see it.

Take Scotland, for example. It is often marketed as a similar place to Ireland when it comes to a tourist product. Scotland had 14.9m visitors in 2015 but the vast majority of those came from England. Overseas visitor trips to Scotland last year were 2.59m or 17pc of the total. However, the international visitors chipped in 33pc of the total spending.

Scotland's biggest overseas market is North America which accounted for nearly one in four of every foreign visits. We landed 1.5m North American visitors to Ireland last year, Scotland got around 600,000. We landed 629,000 German visitors last year, Scotland got 260,000. But there is no room for complacency.

Many Americans will come to Ireland because of their Irish American family heritage. But equally, many of them want to experience that Celtic myths and legends bit. Irish tourism has a real fight on its hands. Yet, despite these obvious threats to the industry, it was barely mentioned in the Budget. The Government should have jacked up the budget on overseas marketing. It should be targeting the UK in particular.

Unfortunately, because of the nature of this sterling fall, we have to increase our marketing in the US also, and continue to attract continental Europeans.

The retention of the preferential 9pc Vat rate was there in the budget alright, but nothing about the urgent need to retain and grow visitor numbers when we have become 18pc more expensive for our primary market, and face heightened competition from it also.

The long-term implications of Brexit on the British travelling public remain unclear. Once Britain leaves the EU, it isn't known whether it will or can retain access to the single market when it comes to aviation.

Failure to access the single market could mean higher costs and changes to regulation when it comes to flying to and from the UK. On that basis, surely a lot more people will want to avail themselves of a much cheaper visit to the UK before any future regulatory, tariff or other cost changes happen within the airline industry.

In other words, 2017 and 2018 should be massive years for the British tourism industry. We are likely to see a tightening on the numbers coming here from the UK.

Just after the Brexit referendum in June, the International Air Transport Association (IATA), did some research on the possible implications for air travel to and from the UK. Based on a 12pc fall in the value of sterling it estimated a drop of nearly 6pc in outbound flights being taken by the British residents. That is bad news for airlines. But it also envisaged a 3pc to 4pc increase in inbound visits as it becomes a cheaper place to visit.

As an industry, and Michael O'Leary can take comfort from this, airlines will get to carry many of the additional passengers deciding to visit the UK.

Instead of an IATA scenario of a 12pc devaluation, it is at around 18pc - and falling. British visitors to Ireland spent €1bn here last year. A serious fall in numbers from there, and the loss of other visitors to competitors will hit a lot of businesses around the country.

The tourism industry should follow Michael O'Leary's lead. He has issued a profit warning, so they should be gearing up for a storm.

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