5 minute read 30 Apr 2020

Potential impact of Covid-19 on Irish Tourism

Authors
Yannick Cabrol

Assistant Director, Economic Advisory Services, EY UK&I

Focused on FDI, hospitality, tourism, sport and culture.

Simon MacAllister

EY Ireland Strategy and Transactions Partner. Head of Valuation, Modelling and Economics and Brexit Lead

Dad and husband. Corporate finance professional. DIY bodger. Enthusiastic but only modestly talented hockey umpire and triathlete!

5 minute read 30 Apr 2020
Related topics COVID-19

Tourism is crucial to building a sustainable economic model in Ireland

Forecasters and economists continue to debate and study the impacts of COVID-19 on the global economy. They are debating about what shape a recovery may take: the most optimistic scenario, a rapid bounce back (a ‘V’ curve), a longer recovery (a ‘U’ curve) or a double-dip crisis (a ‘W’ curve). It is increasingly apparent that a V curve is now unlikely.

Discussion of curves and deficits can seem far-removed from the real, human impacts of what is happening. Behind all of this terminology, all sectors of society - families, business leaders and workers - are worrying about their health today, and their livelihoods tomorrow.

During these highly uncertain times, sectors are not feeling the burden equally. Tourism was hit first and is likely to be the last one to get out of the crisis.

This job-intensive sector supports many pillars of our economy such as aviation, hotels, B&Bs, pubs and restaurants, festivals, sport, exhibitions, and business conferences. It is a sector that provides joy and inspiration, it helps to energise us and is a gateway for people to experience our society and all it has to offer. If it fell, the tourism domino could knock many others.

Not only is this sector vital for our economy, but its development is at the heart of the Project Ireland 2040 aspirations to build a more sustainable and resilient economic model, less dependent on Dublin and with a higher focus on indigenous rather than a multinational business.

Rural Ireland relies heavily on the viability of the tourism sector

Thanks to the ambitious investments and marketing campaigns over the last decade, Ireland became an attractive destination for both leisure and business tourists, from mainland Europe and the US in particular.

This has led to unprecedented growth, with a 56% rise in overseas trips to Ireland by non-residents recorded between 2009 and 2019.

Tourism growth has benefited not only Dublin but also the rest of Ireland. Today, an estimated 18% of jobs in Kerry and 13% in Donegal are directly dependent on the success of the tourism and hospitality sector, compared with 10% in the capital with many more supported through the supply chains and associated wages.

As a result, these rural regions are markedly less resilient than others to COVID-19 shocks and will be directly impacted, with fewer alternative sectors that could compensate for job losses.

The impact on tourism demand will continue beyond the COVID-19 pandemic

The current impact of COVID-19 is hard to quantify accurately with many of the flights that did fly almost empty but the number of flight departures from Dublin Airport was down 90% between 18 March and 16 April. With widespread lockdowns, closed borders and calls for those abroad to return home urgently, an entire industry has been stopped in its tracks.

It is inevitable for a pandemic as far-reaching as COVID-19 to have psychological effects. Fear and uncertainty tend to trigger irrational behaviour - witness the stockpiling of household items such as toilet paper and pasta. People’s psyches centre on survival, encapsulated in this hoarding of basic necessities, rather than leisure and luxuries such as their next city break. Symbolically, Lonely Planet halted the publication of its magazine this month.

Tourist behaviour will undoubtedly be impacted in the long-term by this pandemic, for geopolitical, economic and psychological reasons:

1. People have been explicitly forbidden from travelling

Many borders are closed and reopening dates remain uncertain. Summer bookings are usually made by April. Whilst intra-EU bookings can be made on a “last minute” basis, this is unlikely for American tourists, who represent over a quarter of overseas visitors to Ireland every year. The loss of this lucrative market is worrying, given their typically higher length of stay and daily spend than tourists from other countries.

2. People cannot afford to travel as disposable incomes are already affected by the COVID-19 crisis

For the first time since 2009 (in the wake of the financial crisis), disposable income will drop in 2020, especially for Ireland’s key tourism markets including the Eurozone (-2.6%), the US (-1.8%) and the UK (-1.6%) which will be more affected than emerging countries such as China (-0.7%) according to Oxford Economics April 2020 forecast. Even as incomes stabilise, the current uncertainty and crisis mentality may make consumers less likely to spend extravagantly, preferring to instead save for a rainy day.

3. People will become reluctant to travel

People will fear for their health and safety in the context of COVID-19 and a potential additional surge in the pandemic that could occur later this year. Previous crises of different natures (e.g. H1N1 in Mexico, SARS in Thailand or EU terror attacks) demonstrated that the countries affected took between six and nine months to return to pre-crisis activity levels. Given COVID-19’s scale and impact on global travel, just before the peak tourism season, current forecasts expect the effects of this crisis to last more than two years, although this could vary from one country to another. The effect will inevitably differ between demographics and traveller segments, with the elderly and those with underlying health conditions more wary of exposing themselves to contagion. It will also be more difficult for these demographics to access suitable travel insurance.

4. People will not have a reason to travel

The events industry is a key driver of leisure and business tourism (festivals, conferences, sports events), and is likely to be negatively impacted in the long term. Events have already been cancelled and the fear of a second peak will lead the authorities to take further restrictive measures. Even as lockdown measures are eased, it is widely accepted that mass gatherings will be the last restriction to be lifted.

Jobs will be hit and business models will be transformed by this pandemic

The tourism and hospitality sector as a whole has been placed in a difficult situation.

In Northern Ireland for example, 90% of staff at hotels have been furloughed or laid off, according to the Northern Ireland Hotel Federation.

In the Republic of Ireland, over 12% of employees in the accommodation and food sector are already on the Temporary Wage Subsidy Scheme¹.

This sector is at the heart of a job-intensive eco-system which creates opportunities locally. Several sectors will be affected by its slowdown which could lead to a domino effect presented in the table below.

Firms within this sector will be forced to adapt their business plans to:

  • Respond to fast-evolving government restrictions
  • Target new markets, especially locally
  • Change their offering to meet customer expectations and health authority guidelines
  • Negotiate revised funding structures with lenders
  • Invest to adapt their operations

Insights from David Martin Head of Debt Advisory, EY

"From a debt perspective, most lenders, whether they are banks or alternative lenders, are working closely with their hotel clients in order to help them through the current crisis. Funding proposals that go to a lender should clearly demonstrate the impact of COVID-19 on revenue and the steps taken by the business to respond.
The lenders need to see both short and medium-term cashflows that are based on grounded assumptions. Scenarios must reflect different levels of sensitivity and duration of closure. Your request regarding the proposed funding structure must be clear and demonstrate an ability to service the debt over time.”

 

A coordinated plan is needed

Public decision-makers are between a rock and a hard place. On the one hand, they are facing a decrease in taxes generated or supported by tourist spending. On the other hand, the cost to supporting affected businesses continues to grow if those businesses are to survive. Finally, they have to prioritise health spending during the worst pandemic the country has seen for a century.

A similar situation is faced by businesses which still have bills to pay, while having no revenues. Looking ahead, they know the investments required to manage new sanitary or health requirements could be substantial and will impact their profitability. In this context, many are wondering if it will be worth reopening this summer or if they should wait until the end of COVID-19. But can they?

Ultimately, the ability of the industry to retain its accommodation capacity and skilled workers will depend on an ambitious and coordinated plan from public and private stakeholders. Strategic and evidence-based decisions will need to be made before the summer season to give clarity to tourism businesses and these actions could need to be maintained for at least two years.

Short term success factors - To stop the house from burning down:

1. A considerable, rapid and sustainable financial support package, tailored to the needs of each tourism sub-sector (e.g. accommodation, attractions, live events, business tourism, pubs and restaurants)

2. Responsive operational support to tourism businesses (e.g. strategy, liquidity, HR, insurance, debt)

Long term success factors - To build more resilient foundations:

3. A forward-looking plan to address the challenges and capitalise on the opportunities of this crisis for the Irish tourism offering

4. A coherent ‘Team Ireland’ approach to keep building on the attractiveness of a destination that has consistently been punching above its weight for the last decade

A resilient and sustainable tourism model could be the answer to a globalisation crisis

To a certain extent, this public health crisis is also a globalisation crisis. It should allow us to think about a more resilient model of economic development. On one hand, tourism is an integral counterbalance and armour against protectionist attitudes which inevitably result from global crises. We must continue the longstanding Irish tradition of welcoming visitors with open arms and our famous hospitality in order to fight this.

An alternative aspect is that, as citizens, and also as tourists, we tend to believe in the elusive idea that the grass is greener elsewhere. This crisis is beginning to challenge that for many of us. As we see small businesses and the hospitality industry suffer, many are turning their thoughts to how we can better capitalise on our national heritage and natural beauty, whilst at the same time supporting local businesses.

EY’s Simon MacAllister was interviewed on RTE Radio One’s Morning Ireland about the impact Covid-19 will have on Ireland’s tourism sector.

Listen back here

Summary

Tourism was one of the first sectors hit by Covid-19 and is likely to be the last one to recover.

About this article

Authors
Yannick Cabrol

Assistant Director, Economic Advisory Services, EY UK&I

Focused on FDI, hospitality, tourism, sport and culture.

Simon MacAllister

EY Ireland Strategy and Transactions Partner. Head of Valuation, Modelling and Economics and Brexit Lead

Dad and husband. Corporate finance professional. DIY bodger. Enthusiastic but only modestly talented hockey umpire and triathlete!

Related topics COVID-19