Tourism industry is in for enduring rough ride after international travel resumes

Anyone who has come off a bike knows it is painful. One minute you’re hurtling along at speed with the wind whistling in your ears, the next you’re lying in a twisted heap on the road. Everything hurts. After limping home while dragging the squeaking and clunking bike along, you reach for something to make the hurt go away – painkillers.

Certain brands are particularly effective because they contain a combination of painkilling ingredients, such as paracetamol and codeine. So you drop the bike and swear at it, knock back the capsules according to the recommended dosage, and soon afterwards the pain recedes all over your body.

It is illusory, of course. The cause of the pain is still there, masked by the paracetamol and codeine. Also, the patient information leaflet warns against prolonged use of the capsules because the codeine can be addictive.

It is only when you stop taking the painkillers that you know where you have been truly hurt, because that pain always comes back.

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This is where Ireland’s tourism and hospitality industry is now. There it was at the beginning of 2020, hurtling along in lycra after yet another record-breaking year for inbound tourism. Then, splat. The economy hit a pandemic pothole and it flew over the handlebars, landing in a heap of indignity and howling in pain. It was not a soft landing. This part of the economy struck pure concrete.

There is some modest optimism in the tourism and hospitality industry at the moment because the Government is due to announce further details of the reopening schedule, while many of us also have domestic tourism on our minds as we contemplate upcoming summer holidays.

But some of the positive feeling is also down to the paracetamol and codeine that is coursing through the industry’s veins in the form of taxpayer subsidies, the painkiller that still masks where the sector has been truly hurt.

There are CRSS (Covid Recovery Support Scheme) payments of up to 10 per cent of lost weekly turnover; wage subsidies for workers who remain employed and PUP (pandemic unemployment payments) for those who don’t; reopening grants; grants for outdoor dining equipment; rates waivers; sectoral funds; a 36 per cent rise in the Department of Tourism’s budget. It is all needed to cope with the pain.

The ministers responsible for the various parts of the industry will administer this heady cocktail for as long as they can. Not simply because it masks pain, but also because it stops the howling that assails their political ears. But eventually, State money mandarins will begin waving the patient information leaflet, shouting: “We can’t afford these expensive painkillers anymore and, besides, they are addictive. We’ve got to stop.”

It is only when the subsidies are withdrawn that tourism will know true pain – what was simply bruised and will heal in time and what parts of the industry are actually damaged beyond repair.

Consolidation

Insolvency data shows there has not yet been any spike in business failures. But it is inevitable that there will be a wave of insolvencies in the tourism industry at some point. The moment of its eruption depends on the – again, inevitable – timescale of the withdrawal of State subsidies. Everything depends on the continued weakening of the pandemic, but it is possible this will happen after the winter in early 2022, when the State returns to a mindset of fiscal consolidation.

It is simple mathematics. You cannot go from almost 10 million annual visitors to barely a trickle overnight, and then expect that to rev back up again immediately, after every scientist has been assuaged about every potential virus variant. It will take years to recover, and many businesses skewed towards foreign visitors – coach tour operators, for example – won’t survive the wait.

You don’t go from the fifth-most extensive aviation network between Europe and the US, which Ireland possessed, to a virtually closed shop without causing long-term damage. It will wash up on the balance sheets of businesses geared towards US visitors in sub-sectors such as golf or diaspora tourism. When the subsidies wear off, some of these businesses sadly will fold.

Ryanair and Aer Lingus are blue (or green and white) in the face warning that they will be forced to redeploy aircraft out of Ireland to avoid our travel restrictions, which are the toughest in Europe and send out a signal that will linger. It's fine to be cautious. But when you are more cautious than everybody else, there inevitably will be consequences. Reduced air capacity will choke off the supply of visitors further, which can only result in downstream SMEs going under.

Banks are, for now, showing forbearance with struggling businesses in the sector. That isn’t going to last forever. Nor should it, or lending costs will increase across the economy. Many hospitality businesses invested heavily in recent years in physical capacity upgrades such as bedroom wings or bigger restaurants. Some of those newly-indebted businesses, their repayment capacity diminished, are due a reckoning that no amount of political platitudes will stop.

Even when businesses open, capacity constraints due to social distancing or an enduring reluctance among some customers to mix indoors will turn the economics of the sector upside down. That negative pressure will be forced to the surface somewhere else in the industry, because it is a closed loop system. Its only escape is through a valve of insolvency opened by impatient creditors.

Taxes

The climate change debate is likely to result in a new wave of flight taxes aimed at reducing the frequency of travel and end the era of cheap flights. This island will be the worst affected in Europe by this trend, much more so than the extensively rail-linked continental countries leading the tax charge. How can this happen without choking off some of the supply of tourists sustaining Irish SMEs?

Industry-leading corporate players can ride out the uncertainty by tapping capital markets, as stock market listed hotel operator Dalata did with a €94 million share placing last September. But how will smaller tourism-focused businesses replenish the capital that will be sucked up covering losses over the next few years? CRSS payments won't plug holes in balance sheets.

The tourism industry, dependent on the codeine of State supports, is in for an enduring rough ride even after international travel resumes. It feels like a throwback to a different era, with the whole sector on one big taxpayer-funded Fás scheme. Somebody had better draft an exit plan. Even then, it will hurt.