Economics 28/12/2009: More evidence against Ireland's travel tax

Updated

My favorite topic is back... travel figures. RTE reports on industry estimates of 12% fall off in the number of foreign tourists (not visitors) to Ireland (here). More interesting data is courtesy of Ryanair release (these guys really should win a transparency award for publishing the data that some parts of the public sector do not want us - the public - to know).


Dublin Airport’s seat capacity has slumped from 10 to 17 ranked in a league of EU airports this winter. The report, by RDC Aviation, also shows that Dublin Airport has suffered the largest capacity cuts of any of Europe’s 25 largest airports. This slump proves that the Govt’s €10 tourist tax has devastated Irish traffic and tourism in 2009 and disproves the Dept of Transport’s false claims that Dublin Airport’s traffic collapse is “an international phenomenon” (per Ryanair statement).
Notice that table above (reproduced from the RDC raw data) clearly shows that Dublin Airport traffic fall off in 2009 relative to 2007 is also out of line with other leading airports. Table below stresses this point:
Notice airports that outperformed Dublin (in blue above) - all selected on the basis of their traffic similarity with Dublin - localized, regional traffic with smaller share of transit passengers for international connections.

Now, ANOVA for the above: while Dublin numbers changes do belong in the sample for 2008, the same is not true for 2009. This tends to support the argument that changes in Dublin capacity are not consistent with overall deterioration in economic conditions internationally.
So here we have it - another source of evidence to support 'Gurdgiev-Ryanair' conjecture that airport taxes and charges are undermining Irish airlines and travel sectors. Note - the fact that airlines are being hurt is evidenced by the fact that all major airlines present at the Dublin Airport - not only Ryanair, but also Aer Lingus, EasyJet and BMI - have made such a claim to the Government.

Per Kevin's very incisive comment (see in comments section) several points worth addressing:

"First of all you have to consider the timing of the tax, to what extent does it coincide with the fall in numbers."

This is precisely what is addressed in 2007-2008 and 2008-2009 growth rates that I added to the data. Full impact of travel tax took place in 2009. Notice the discrepancy in the rates of decline at Dublin and the differences in the Anova table - they show that 2009 regime was completely different from the 2007 and 2008 regimes.

"Then you need to allow for any other taxes/charges in these other places and their change."

Actually, no - I do not need to do so. If other places had any change in their travel tax rates, there will be an effect on these airports in the first order, and on Dublin airport at the very best in the second order. The first order effect, I would assume, will be simply much larger. Furthermore, several airports on the list have lowered their charges and several governments have repealed their travel tax. I do not control for this precisely to err on the skeptics side. Re-weighting figures by removing from the sample those airports where charges and taxes were reduced in 2009 actually changes the Anova bands by less than 0.2 points, without altering the conclusions.

"And of course you need to control for any other factors that differentially impact on capacity which may or may not be correlated with the variable you are interested in."

True. But what these might be? Macro shocks are suggested. Ok, take the logic here - the figures are bi-lateral capacity. So, if, say, potential Italian tourists to Ireland were less adversely impacted by macro shocks, their propensity to travel to Ireland would be less adversely effected by income shocks. Since Ireland experienced the worst 'macro shocks' of the entire Eurozone, then the differences in macro shocks will act to improve traffic through Dublin Airport.

What other forces can be acting here? Higher airfares? Not really - Dublin offers some of the lowest airfares, net of taxes and charges in the EU15. And it is being compared against other full cost (not low cost) airports. So price effects, again, are acting to strengthen my argument, not to weaken it.

Optimally, an econometric exercise should be carried out, alas, two obstacles prevent this from being performed:

1. lack of coherent data across various airports; and
   
2. lack of time dimension post-tax introduction.

So we can wait for another 10 years to get the data sufficient to test causality (if we do get it - remember - Dublin Airport alongside Tourism Ireland and DofT are actively attempting to suppress public releases of data on tourism flows through Dublin). Or we can just settle for the second best - an Anova.

Finally, as in medicine, economic policy should always err on the side of upholding the principle of inflicting no harm. this means, that absent full analysis of economic feasibility, no tax policy change should take place. Can anyone point me to such analysis in the case of our travel tax?

Economics 21/11/2009: Travel figures

Just the facts... so as not to be too controversial.

CSO's travel to Ireland data for September 2009 released yesterday:

Chart 1: 

The above shows a significant month-on-month fall in September. But it does not show the underlying trends:

The difference between trips to Ireland less trips from Ireland revels two things. First - a general downward trend in the series over time. Second, in terms of annual averages: a drop from pre-2008 average to 2008 average was followed by a further drop in 2009 average to date. If the correction was due to a recession, one would expect to see some stabilization in 2009, especially per summer months. This would have pulled the average line for 2009 above 2008 line. But it did not happen. Something other than a recession is working through our travel data. May be, just may be, it has to do with the overall cost of traveling here?.. If so, the Rip-off-Republic surely starts at the point of entry - the taxes and charges feeding into airfares (not airfares themselves, with or without baggage fees, Irish airfares are relatively cheap compared to other countries).

The same patterns are showing through in trips taken to Ireland by main countries of origins. Note that I did not show linear trend lines, but it is negatively sloped only for Great Britain, while sloping up for Other Europe and North America. The fact that current annual averages are completely out of line with general longer term trends and that 2009 represents continued deterioration on 2008 suggests once again that something more sinister than a recession is working through our figures.

I can't resist doing some analysis here. Chart below shows linear trends in travel data (difference between trips to Ireland and from Ireland) over time periods concerned.

So what do these lines tell us? The blue line reproduces the results from the second chart above - this is the historic trend toward secular decline in net trips from abroad to Ireland. Yellow and pink lines show linear trends for 2008 and 2009. These lines are parallel, but 2009 line is below 2008 line, which means that the rate of change in the number of trips to/from Ireland did not change between 2008 and 2009, but the intercept declined year on year. In other words, this deterioration in trips to/from Ireland has nothing to do with continuous recession (slope effect), but everything to do with a consistent travelers' selection against Ireland as a destination. The same is confirmed by comparison of the yellow line (2009 trend) against the green line (2008 & 2009 trend), as well as by comparison of pre-2008 trend line (blue) against the 2008&2009 trend line (green).

Economics 15/11/2009: When Ryanair gets serious...

Per my continued opposition to absurd tax measures, see the following statement from Ryanair and my comment below:

Apart from landing another rainy cloud on Mrs Coughlan's fine parade (after all it does call Tanaiste out as being somewhat disingenuous in her claims), this statement is worth looking at a bit closer:

If the Irish economy is losing €600mln in tourism revenue, the VAT on this loss will likely be ca €80-100mln (as some services bear reduced VAT). This is the first round of losses to the Exchequer.

But every euro spent by a tourist in this country goes to pay for goods and services here, which in turn generates banks deposits and payments to suppliers. These payments are then used to generate new economic activity, thus triggering a second round of tax receipts. And the merry-go-round then goes on to the third round and so on. 

Given the average OECD private spending multiplier is approximately equal to the M1/M3 multiplier, which is roughly 3.8-6 (depending on the range of years chosen, with the lower number coincidentally referring to the years of the most recent global markets boom), then these losses are indeed much greater than those claimed in Ryanair note. 

Back of the envelope calculation suggests the Exchequer will be foregoing some €120-250 million more in revenue on top of the first round losses. And this is before we factor in income taxes and other taxes, such as charges on fuel that foreign motorists might pay while touring Ireland.

So we are now back to the old equation: put a €10 tax in place, lose some €100-230 million in revenue. Good luck running the country with these mathematics...

Note: that article attacking my and Ryanair analysis of the travel figures that predicted the yet-to-materialise substitution effects of Irish travel tax is available from the Irish Times site (here).

Economics 09/10/2009: A small win for free trade?

Per our stockbrokers report this am: government commissioned report from the Tourism Renewal Group stated that Minister Lenihan should repeal the Air Passenger Departure tax because of its damage to the tourism industry.

In what was termed, by the Irish Times editorial a 'Gurdgiev-Ryanair' (Irish Times editorial term) campaign (see here) sane economists and industry participants have waged consistent analysis-based factually grounded argument against the tax-driven protectionist scheme that was conceived to support domestic tourism. The scheme, harking back to the dark age of protectionism was aiming to force more Irish people to stay at home instead of traveling abroad. It did not work. Instead, the numbers of Irish people vacationing at home has continued to decline, while the number of foreign visitors to this country has collapsed - tourism is now down 20% in Ireland, while tourism is down under 10% across Europe. More businesses clawed back on international travel amidst recession. All decisions, on margin, were not helped by a completely gratuitous Departure tax.

The Tourism Minister (I am not sure why even have one) now says that the government “will consider its response within the wider context of fiscal sustainability”.

Bloxham's description of the tax effects: "the domestic tourism industry has been disemboweled by a consumer recession, strong euro and this Monty Python air tax... Someone replaced their brain with an abacus to invent this moronic tax (aping the UK) for an island economy dependent on tourism. It requires an adult to stop it. Instead of considering, fiscalising and consulting the Minister needs about one minute to conclude that this regressive tax, that harms lower income passengers most, deserves the boot. It might even re-ignite services to Irish airports, some of which (Cork ?) appear to have been hit by a neutron bomb (undamaged and pristine buildings, no people)."

One fact: the BAA reports a -5.7% year-to-date decline in volume in September at its seven UK airports, compared to 15% decline in Dublin Airport traffic to August 2009 (here).

'Gurdgiev-Ryanair' campaign check-mate to a ridiculous tax policy? One hopes.

Economics 06/08/2009: Travel Figures, Budget, ECB

Travel figures are in - abysmal showing for tourism and leisure industry here. As predicted, the fall off in foreign visitors to Ireland continues, while the number of Irish people traveling abroad is showing signs of stabilizing.

Per CSO:

• Overseas visits to Ireland fell 15.1% to 636,600 in June 2009 compared to the June 2008.
• Visits by residents of the two main visitor markets declined substantially, Great Britain was down 19.8% to 260,700 and Other Europe fell by 12% to 219,600.
• Irish residents made 709,900 overseas trips in June 2009, 7.6% fewer than in June 2008.
• In the first six months of 2009, overseas trips by Irish residents totaled 3,439,300 or 9.8% less than in the same period in 2008.
  
• Six months total visits to Ireland from abroad fell by 10.7% to 3,304,100.

So here we go - jobs are being lost, hotels are shutting down, airlines are cutting services (and revenue), while DAA is raising charges, the Government is raising taxes and our venerable retired bureaucrats (the ones with IMF appointments on their CVs) are penning idiotic missives about how the crisis is the fault of the ordinary folks (SBPost) and how tariff protection of internationally trading sector is a great way to build Irish economy.

Sadly, Michael O'Leary is on vacation or I would have brought to you his explicative in the address of the Leinster House on the latest CSO release. Instead - a picture:

Market to watch: RWR-Reit index and US financials.


How long the circus of our Exchequer meltdowns can continue, one of you asked.

In May this year I wrote in a related note (here): "Cowen also stated that "we have a way out that is working". Remember the brilliant German movie Downfall about the last days of the Third Reich? (See a reminder/spoof here). Say no more... our unbeloved leader is in a state of delusion that is equivalent to awaiting the arrival of a miracle weapon (which does not exist) as the real enemy tanks are crushing your city."

That was then. Now, we pretty much know that the Government has deployed all its imaginary weapons and divisions against the enemy. The latest signs from the Cabinet pronouncements (and this includes their advisers) suggest that the Government has assumed the enemy away.

They have borrowed up some €25bn on the estimated liability of of over €35bn (counting recapitalization demands) that in their view will get them (alongside NPRF cash and left-overs from 2008) through this year. The Government is so short-termist that they have no clue / plan/ idea as to what happens after.

From this vantage point - anything is possible. Note the latest ECB statement today:

ECB stated that there are “increasing signs that the global recession is bottoming out”. Eurozone economy's pace of contraction is “clearly slowing”. Compared to July when it was noted that the activity “should decline less strongly” than in Q1 2009 - the latest statement suggests the ECB is already pacing potential interest rates increases in months to come.

And then in Q&A, Trichet did leave open a possibility that growth outlook for the Eurozone might be revised upward in the forthcoming ECB Staff Macroeconomic Projections before September meeting. The forecast update might move growth from current -0.3% expected for 2010 to 0% or even the consensus level of 0.4%. Another issue is timing - the ECB used to forecast return to growth for Q2 2010. This time around, no mentioning of Q2 anywhere, suggesting they are moving for growth to resume in Q1. And then there was Trichet's view that deflation is temporary and that by the end of this year we shall see inflation.

All of this points to a rising interest rates environment sometime in 2010, possibly as early as the end of Q1 2010 if inflation firms up and growth resumes in Q1. Remember, all that quantitative easing will have to go somewhere - i.e into price increases. When that happens, Mr Cowen will be sweating profusely in his air conditioned Merc, because the la-la land of endless borrowing will be over in a second.

Before then, he will pile cash reserves through aggressive borrowings from the ECB to make sure he can pay public sector wages and keep unions from completely imploding. The ICTU/SIPTU have already sensed the weakened leadership and are ganging on Mr Cowen's positions left, right and center. The problem is that comes Q1 2010, the QE will be over, as will be the Lisbon vote, so Mr Cowen will face the real problem of having no cash left by, approximately Q2 2010 or possibly the end of Q2 2010 - depending on how his borrowing will go down in the next few months.

What bothers me most, however, is why on earth no one in the markets realising this?

Economics 02/08/2009: An idiot's guide to tax policy

Remember that senile reply that the Irish Times has published to my conjecture that higher taxes in Irish airports will hurt Irish tourism and ultimately will cost the Exchequer? Feel free to refresh this case here and here - the original piece that caused the Irish Times editorial page implosion).

Well, don't take my word for it, or CSO's figures - these are not sufficient for our wise ex-IMF Directors. Here are the hard jobs...

"Ryanair, the World’s favourite airline, today (30 July 09) announced 20% flight cuts at its Dublin base for the coming winter schedule (09/10). Compared to winter 2008/09, when Ryanair based 18 aircraft, and operated 1,200 weekly flights, Ryanair’s Dublin schedule this winter will be cut by 22% to 14 based aircraft with 20% fewer flights at less than 1,000 each week. Ryanair estimates that its Dublin traffic this winter will decline by a further 250,000 passengers compared to last winter’s figures, as Dublin Airport loses over 2m passengers overall in 2009.

Ryanair’s decision to cut based aircraft flights at Dublin Airport is for the following reasons:
a) Dublin is one of Ryanair’s two most expensive base airports (Stansted is the other).
b) Costs at the DAA monopoly continue to increase at above inflation rates.
c) The Aviation Regulator continues to rubber stamp unjustified Dublin Airport cost increases while costs at most other UK and European airports are falling.
d) The Irish Govts €10 tourist tax makes Ireland an uncompetitive tourist destination at a time when other European Governments have scrapped their tourist taxes.
e) Traffic at Dublin airport is collapsing (down 11% or 1m fewer pax in the first half of 2009) under the weight of these high airport fees and this stupid tourist tax.

The fact that the DAA monopoly are proposing further price increases at a time when most other UK and European airports are reducing their prices, highlights the damage being done to Irish aviation and tourism by this high cost, inefficient, badly run airport monopoly. Ryanair has repeatedly called on the Government to scrap the €10 tourist tax which has had an equally devastating impact on Irish tourism. Ireland cannot grow tourism by taxing tourists. The Belgian and Dutch Governments have recently scrapped their tourist taxes, and the Spanish and Greek Governments have reduced their airport fees in some cases to zero this winter in order to reverse traffic declines.

Ryanair’s Michael O’Leary said: “...The high and rising costs at Dublin Airport, combined with an insanely stupid €10 tourist tax, are devastating tourism here in Ireland. These cuts come just one day after Ryanair announced 39 new routes to the Canaries this Winter where the Spanish Government has reduced airport fees to zero. Last week Ryanair announced 11 new routes to Oslo airports this winter where again airport fees have been substantially reduced. The response of the Government owned DAA monopoly to this 11% traffic collapse is to seek yet further price increases! The incompetent Irish Aviation Regulator has already proposed that Dublin airport charges for 2010 onwards will be “18% higher” than they would be if the DAA’s traffic was not declining. Sadly the DAA gets rewarded by the regulator with price increases for its abject failure to grow and stimulate traffic."

So how much revenue to the economy and the Irish Exchequer is being lost? May be Michael O'Leary can sum it up.

I have nothing to add, other than perhaps to ask the Irish Times editorial team to filter economically illiterate arguments out of its pages in the future - just because someone writing an article signed 'ex-director of IMF and career ex-civil servant from Ireland' doesn't mean that they actually have much to say that is valid. Quite likely, it means the opposite...