Committee Reports > List of Committees > Dáil > 1987 > Committee on Public Expenditure > Report No. 23 - Review of Public Expenditure on Tourism

Appendix V

Aer Lingus submission to the Dail

Committee on Public Expenditure

09 October 1986

The prosperity and future growth of Aer Lingus is inextricably linked with growth in inbound tourism. Leisure travellers provide 60% of our scheduled traffic and about 95% of the £16M that we spend abroad on promotion is directed at these potential incoming visitors. We believe that there is considerable growth potential in overseas tourist markets and achieving this expansion is the primary marketing task of the Airline.

There is understandable disappointment in Ireland at the generally poor tourism results in recent years and the very poor tourism season this year. Aer Lingus shares this disappointment.

There is wide acceptance that in recent times the principal reason for the poor results has been the high cost of Irish holidays. In the sixties and early seventies Ireland was perceived by tourists as a country which offered good value for money. However, Ireland since then has had to cope with the effects of higher inflation than our principal overseas markets and competitive tourism destinations. The competitiveness problem was compounded by Irish fiscal policies which taxed goods and services consumed by tourists very heavily - although this trend has now been reversed to some degree.

Ireland became a relatively expensive destination for Overseas tourists and even for Irish people holidaying at home. Tourism to Ireland stagnated with the sole exception of the North American market which boomed in 1984 and 1985 when the huge rise in the value of the dollar made Europe including Ireland good value for American visitors again. Leaving aside the hopefully temporary effects this year of terrorism and Chernobyl the fall in the value of the dollar this year has meant that prices in Ireland have become 35% dearer for American visitors than last year even though air fares have fallen slightly in dollar terms.

So we must find a way of giving better value to our visitors. However, we also have to take into account the other major problem of the industry which is the lack of profitability which has caused a run down in standards and an inability to invest in the new facilities which are needed to attract tourists.

Whether it is a hotel or guesthouse, a car hire company, or an airline or shipping company revenues must cover costs and allow for reinvestment. Selling below cost and losing money as a consequence is no solution. Most of the simplistic suggestions to cut prices come from people who have no accountability for the commercial viability for the businesses concerned. In particular it is suggested that if air fares were cut sufficiently tourism would grow. Let us look at some recent experiences in the different tourist markets.

This Summer we have cut the fare from London to £69 return and increased air traffic by 25 to 30% but Bord Failte’s own figures show that despite this the number of tourists from Britain has fallen. What has happened is that surface travellers have transferred to air in large numbers but few new visitors have been generated.

Continental Europe is another area where air fares are said to be the problem. Yer. when the figures are examined it is the visitors coming in on low cost charter services that have fallen over the past few years while tourists coming on scheduled air services have grown.

In the US market air fares have been declining steadily in real terms over the last eight years yet traffic scarcely grew at all until 1984 and 85 when it surged by 37%. Why? Well the increased strength of the dollar reduced the cost of the other elements of a holiday in Ireland i.e. food, drink, accommodation, car hire etc.

This shows that even where air fares are reduced over a sustained period the effect is limited because reductions possible on access costs do not have sufficient leverage on the overall holiday price to make Ireland appear significantly better value for money.

Aer Lingus could suggest to this Committee that what is necessary to stimulate tourism growth is reduction in the cost of accommodation and car hire as well as access fares. We do not say so because we know the margins of profitability are so thin the tourism plant would become more run down or the enterprises involved would go out of business. This argument applies with equal or greater force to carriers to Ireland whose economics are very poor.

In the case of air holidays the cost of car hire is extremely important and despite the VAT reductions on car hire the tax burden on car hire companies remains very high, with a large excise tax component in the purchase price of the hire car.

Aer Lingus would like to challenge here some of the reported conclusions of the tourism group of the Business Advisory Panel. If the section on access costs is typical of the report as a whole, then in our view it has little value.

The second paragraph P18 said that “uncompetitive air fares principally according to an EIU study have resulted in the loss of some 900,000 visitors between 1975 and 1983”. We understand that what the study actually said was if the total holiday price including both access, accommodation, food and drink etc. in Ireland remained at the 1975 levels we would have had 900,000 extra tourists in 1983. This conclusion has been completely misrepresented in the Press reports which attributed the effect of this alleged shortfall to the effect of access fares rather than the overall cost of a holiday in Ireland. The statement is made elsewhere in the section that uncompetitive air fares are the major negative but no figures are produced. In fact Aer Lingus can assure the Committee that air fares have gone up less than any other element of the tourism product and in some markets fares have actually declined in actual and real terms. Objective studies have shown that Irish air fares compare well with air fares elsewhere in Europe. Both in terms of the levels of our promotional fares and the proportion of our traffic that travels on these fares Aer Lingus has very low yields when compared with other European carriers.

The section on Cross Channel travel is clearly completely out of date. There is talk of loss of traffic to surface. Air has not lost share to surface since 1983 and the Central Statistics Office figures for 1984 show that Holiday travel by air is growing and Holiday travel by sea is falling. All this before we introduced UK£69 return fares from London to Dublin. But again we must point out that the real tourism question is not whether a visitor comes by sea or air but can new visitors be generated?

The Committee quotes a study that says a recent examination of air fares indicated Irish fares were the most expensive of all. The figures are not produced and we are confident that this conclusion is completely inaccurate.

So what needs to be done to give tourism a healthy future? In September 1985 Aer Lingus made a comprehensive submission to Government on tourism issues. We would highlight 3 points:

1.The requirement is to provide a fiscal environment that allows tourism businesses to price their products attractively and still make adequate profits to reinvest and grow. We would draw the Committee’s attention to the IRISH TOURISM INDUSTRY CONFEDERATION study entitled “Tourism and Taxation” which makes a number of significant proposals in this respect.

2.There is also an onus on the industry to develop new products that can be sold profitably and broaden Ireland’s tourist appeal. The Conference and business meeting segments are obvious candidates for further development.

3.On the promotional front, the promotion of Ireland abroad must become more cost effective and professional. The prime target markets where expenditure can trigger the decision to travel must be identified and promoted to effectively. The emphasis must be on advertising expenditure directed at potential visitors rather than heavy overhead expenditures in Ireland or abroad.

We attach a short synopsis of our submission. The full document deals with all of these questions at greater length and can be made available to the Committee should they wish to examine it.

APPENDIX

SYNOPSIS OF AER LINGUS SUBMISSION ON TOURISM ISSUES

The Aer Lingus submission to the Government on national tourism issues (September ’85 prior to the publication of the White Paper) restated the f committment or the national carrier to the development of a healthy tourism sector. The very first sentence of that submission said:

“The prosperity and future growth of the national airline is inextricably linked with inbound tourism”.

Our submission described the pioneering work of Aer Lingus in most tourist markets and gave details of our £16M. annual expenditure on tourism promotion abroad. We described also our successful pricing initiatives geared to the incoming tourist and explained how our emphasis on quality of service ennanced the Irish tourist product.

We went on to make a series of recommendations on fundamental issues of tourism policy which may be summarised as follows:

(1)The promotion of Irish tourism must be improved. Low awareness of what Ireland has to offer is still a serious problem in most markets. The cost effectiveness and allocation of existing promotional expenditure is questionable;

(2)Fiscal policy in relation to tourism needs to be drastically revised. Coach and car hire prices have been increased to highly uncompetitve levels by a combination of excise taxes and VAT. Other basic components of the tourism mix such as hotels and restaurants have suffered similar impositions. The necessary investment in ing and developing these basic services is not being made because of lack of profitability;

(3)The product the visitor finds on his arrival has become increasingly shabby and inadequate.. With some honourable exceptions decor and service in hotels and restaurants have deteriorated; pollution of the environment is spreading; uroan and even rural crime against tourists is increasing; good quality wet weather or evening entertainment is a scarce commodity; modern conference facilities are also lacking. Remedial action is overcue in all these areas;

(4)The Irish consumer price index has risen by almost 70% since 1979 compared to an OECD figure of 32%. The cost of the goods and services bought in Ireland has been increasing more rapidly for the British and European visitor than almost any other destination. The rate of increase of this portion of a tourists expenses has clearly outstrippec access transport costs, but little attention has been focussed on this point;

(5)A healthy tourist industry requires that efficient operators in each sector, be it the hotelier, transport company or the firm involved in car hire, boat hire caravanning etc, must earn reasonable profits and an adequate return on his investment. The same criterion applies to access transport companies. Without profits the industry will be flawed by unreliability or gaps in key sectors.

(6)The best interests of Irish tourism are served by access transport firms who provide regular year-round efficient reliable service. These films also must be allowed to earn a commercial return on investment. Access transport prices to Irish co with those changed on similar routes in Northern Europe. Assertions that substantial reductions in air or surface fares would produce a surge in tourism ignore the fact that access cost is a relatively minor proportion of the total (Irish) holiday cost. The fallacy of such claims has been come out by recent experience. The “fares war” on the Dublin/Longon route failed to stimulate any increase in total visitors from the UK.

To be really effective tourism policy must address these fundamental issues of promotion, fiscal policy, product quality, cost control and profitability.

The Impact of Fare Competition on the British Tourism Market

Principal Points

-Air traffic by British residents to ireland has grown 12% in 1985. While sea traffic has fallen this decrease has been to a large extent accounted for by car traffic which has been affected by major fare increases which discourage family holiday traffic.

-A considerable volume of sea foot passenger traffic has switched to air. In the peak air has gained over 23,000 extra passengers. On existing trends approx. one quarter of these passengers may be ‘new’ i.e. not just switching from boat and train.

-Comparisons based on one month’s data only are invalid and should be supplemented by an analysis of how each of the major traffic categories has performed.

COMMENTARY

Any analysis of changes in the volume of travel between Britain and Ireland must look very carefully at the categories of traveller which make up the total. For example, if in a particular time period there are, say, 20,000 fewer sea travellers than in the previous corresponding time period while, by contrast, there are 20,000 more using the air services it is simplistic and potentially erroneous to conclude that people simply switched from sea to air.

Similarly one must be very careful in comparing data based on two very short time periods. To take an example, September 1985 had five Sundays (a peak travel day for those on non-package holidays) whereas the same month in 1986 had only four. Given that holiday traffic is very much peaked at weekends, one should always compare at least three months to avoid such distortions.

A third important factor to consider is the time lag which occurs between changes in the real cost of travel and public awareness of these changes. In Ireland the public quickly become aware of fare changes for travel between Ireland and Britain given the massive news coverage such developments receive. In Britain the same developments do not receive headline coverage and the time lag is often considerable before potential travellers (particularly those who might take ‘extra’ or unplanned trips) learn of reduced fares to Ireland.

Allowing for these factors the Bord Failte Marketing Department has analysed the changes in traffic patterns for visitors to Ireland from Britain (‘British Resident’ visitors) in the first nine months of 1986 compared with the same period in 1985, using data gathered by the Central Statistics Office (C.S.O.).

The major developments in air fares between Britain and Ireland commenced in the last days of May 1986 when RyanAir’s services from London (Luton) to Dublin began, with another major round of fare-cutting by the established carriers in July. It is best therefore, to separate the year-to-date into a pre-June and post June period since there were no major fare changes in the first five months of the year.

There are three principal traffic categories between Britain and Ireland. Air, Sea-Foot and Sea with Car. The first two categories represent for many travellers alternatives to be selected primarily on price grounds. The third category is not so often an alternative to the first two, since people on family touring/motoring holidays do not generally have the flexibility to come to Ireland without a car.

The comparative figures, for each of the two time periods and the three categories of traffic for British-Resident visitors to Ireland on cross-channel routes, are as follows:

The figures show that the growth in air travellers has been slightly greater than the loss in sea-foot passengers for the year to date (to end September). However, sea foot passengers were already in decline in the January-May period (-7%) before the air fare changes came into effect, so the real loss attributable to a switch to air is likely to be around 17,000 passengers in the peak months to date. However, the growth in air passengers during June-September was 23,000.

The decline in sea traffic by car over the peak months of 1986 was over 7% compared to 1985. This primarily reflects ‘real term’ fare increases of between 7% and 10% compared to 1985. While a small amount may have transferred to air, by and large this traffic cannot easily switch from sea to air.

Bord Failte

Research & Marketing Department

11 November 1986

TABLE 2

RATE PER MILE - PEAK FARES IN IR£ - SUMMER 1986

*The bulk of the Frankfurt/Dublin holiday traffic travels on an inclusive tour fare available only to tour operators (rather than a public promotional fare). This fare is 0.18 pence per mile. The large proportion of full fare business traffic travelling between Frankfurt and London produces an average yield per mile 30% higher than between Frankfurt and Dublin.

Lowest Public Fare Comparisons - Peak Season 1986

FROM LONDON

FROM PARIS

Source: ABC World Airways Guide plus British Airways and Air France tariffs, cheapest public scheduled fares for July 1986 (generally Apex or SuperPex), excluding fares allowing weekend stays only.

TABLE 1

FARES AND RATES PER MILE COMPARISON SUMMER 1986

TABLE 2

RATE PER MILE - PEAK FARES IN IR£ - SUMMER 1986

*The bulk of the Frankfurt/Dublin holiday traffic travels on an inclusive tour fare available only to tour operators (rather than a public promotional fare). This fare is 0.18 pence per mile. The large proportion of full fare business traffic travelling between Frankfurt and London produces an average yield per mile 30% higher than between Frankfurt and Dublin.

STATISTICAL APPENDIX

1. AER LINGUS PROMOTIONAL EXPENDITURE

A.1984/85 Annual Report claims IR£15.7 million “spent abroad promoting and selling Ireland”.

B.The Annual Report lists seven categories of expenditure, but does not give staff costs separately. Sales and Publicity amounted to £25.9 million Aer Lingus (short haul) and £19.0 million Aer Linte (North Atlantic).

C.Independent media research (M.E.A.L.) shows Aer Lingus spend UK£337,400 on all print media advertising in Britain in 1985. They engaged in virtually no radio/TV/outdoor advertising.

Information provided by Aer Lingus-North America to Bord Failte-North America shows Aer Lingus expenditure on U.S. advertising in 1986 to be $990,000 of which £400,000 is primarily oriented at business travellers.

In Europe, Aer Lingus are contributing IR£208,000 to joint-advertising with Bord Failte. We understand their other advertising spend would at most approximately double this.

D.Bord Failte expenditure in markets 1985, £13.8 million of which pay was £2.8 million.

2. SEASONALITY OF IRELAND

A.Proportion of Air Travel October-March Inclusive

B.Winter Six Months as Proportion of Annual Scheduled on Atlantic

2

Cheapest Publicly Available Scheduled Fares ex London - July 1985

Source: ABC World Airways Guide