Business Survival – Its more than just Covid
Seán O’Driscoll – CEO of hotel group iNua Hospitality – is working hard to be optimistic about how the tourism sector will fare over the coming year and thereafter. While there have been some great steps in the process of the return to normality, there are still grey clouds on the horizon.
The Government is far from finished with worrying about Covid-19 and the same can be said for a number of other countries. On the plus side, travel to and from the USA has opened and there has been a visible presence of foreign tourists on our streets and country roads since July.
Apart from Covid worries, however, there is an even larger elephant that has barged into the room – inflation. According to Seán, this is a problem that will take an even longer time to resolve in any meaningful manner and he questions the Government’s commitment in tackling the issue of rising business costs.
“I’m relatively optimistic,” says Seán. “The signs in September and early October were positive in terms of corporate business returning – people were starting to book conferences again, but the winter is still going to be a pretty uncertain time for the industry – in terms of Quarter Four and Quarter One – but I would hope that by Quarter Two, we’ll be seeing some signs of normality.”
From a corporate and conference point of view, however, Seán thinks that we won’t see a more normalised trade until Quarter Four of next year. One hurdle is the lack of connectivity, particularly compared to competitor countries.
Irish Airline Traffic
“I was concerned that Ireland was behind in terms of winning back airline routes – I think that a lot of other European countries were back at 70% of their 2019 capacity back in September-October, whereas Ireland was back at around 50% of our 2019 capacity. That’s concerning in terms of knowing what stage we’re going to be at next year – do we have 60% or 80% or what percentage of the airline seats that we had in 2019? When we look at routes for the North American market, we would have had 25 routes pre-Covid and we have 15 routes at the moment.
“I think that there’s good demand for people who want to come to Ireland. Tourism Ireland are getting a lot of positive feedback from the markets but the question is, do we have enough airline seats coming into Ireland? I think that there’s still a bit of work to do to see what that picture looks like and I don’t think we’ll know until March or April of next year.”
The domestic market has been the mainstay for all businesses in the catering sector who’ve been limping along over the last two years. However, with the possibility of foreign travel, there also comes a strong appetite for foreign travel. For anyone that travelled by aeroplane during the latter part of the summer and early autumn, that appetite was very apparent.
“There will be an appetite for people going abroad, although there will still be a demand for short leisure breaks in Ireland – a lot of money was saved during Lockdown.”
Fears of Business Closure
The feeling amongst many observers and players within the hotel and catering sector is that the scheduled removal of supports during the first quarter of 2022 will result in a rash of closures that will have a very direct impact not only on the employment situation but on the look of our town centres. There is already a strong degree of dereliction on main streets up and down the country, with cafés and restaurants usually amongst the few small businesses left. If the predicted wave of closures comes to pass, the levels of visible main-street dereliction will be even higher.
“I am concerned about that,” says Seán. “The wage supports drop 40% on the 1st of December and I think it’s obvious at this stage that business demand will be dampened because of Covid being still quite high and the supports drop by 70% on the 1st of March. The Government supports do end quite quickly – in Q4 and at the end of Q1 next year.
“I’m very concerned about inflation. The estimates in terms of energy costs next year are scary at the moment – they’re anything from 30% to 40% increase. We know that with consumables, the price of coffee has gone up 10% in the last couple of weeks. Linen is going 15%… food and beverage costs are going to rise and then labour costs are going to rise dramatically because of the shortfall of labour in the market.
“In 2019, the regional hotel market would have had about 17% profit before they paid their bank debt or before they would do any refurbishment. But in the independent restaurants, cafés and bars – a lot of them would have been running on single-digit profit so if you add in energy costs, wage inflation, higher food-and-beverage costs to those businesses, I’d be concerned that a lot of those won’t survive. And then, we only have the reduced VAT rate until the end of August.”
VAT a Source of Anxiety
That the red-letter date of the potential end of the current 9% VAT rate is a matter of months away is a source of anxiety that the recovering sector can do very well without. An additional 50% hike in the VAT bill of restaurants and hotels could be the cherry on top to create a perfect cost storm to submerge smaller businesses. In common with so many in the tourism industry, Seán is frustrated by Government intransigence in with the VAT rate – looking upon the 9% rate as a cost to the exchequer rather than an industry builder.
“Tourism is not going to be back to normal on the 1st of April next year,” Seán points out. “The damage done to the Irish tourism sector is probably going to take two or three years to rebuild and we needed medium-term and longer-term measures in the Budget that were going to support tourism… the supports turn off in March/April and it’s a bit like ‘You’re on your own, lads!’ from there. I think that’s a very short-term decision because tourism will not be able to create the jobs that it could have created if the 9% VAT rate had stayed in place…the international market will respond very badly to prices going up – tour operators are already giving us that feedback.”
Given the severity of the downturn that the tourism industry has suffered, the continuing uncertainty about its full recovery over the coming year and the prospect of rampant inflation returning to the sector, should the Government not be thinking more in terms of a 6% VAT rate?
Did the Government get it all very Wrong?
“We’re realistic,” says Seán. “A 9% VAT rate puts us on par with the rest of Europe – most of the VAT rates are between 8% and 10%… I don’t think that they’re looking at the bigger picture in terms of what international tourism brings in exchequer receipts to the country, not to mention the 270,000 jobs that are in tourism, throughout the region in towns and villages that don’t have any kind of alternative industries.”
When one looks at how other tourism-dependent countries have managed to keep their businesses open for longer than we have during this Pandemic, one can’t help but ask the question, ‘Did the Government get it all very wrong?’ Did they go too far in their punitive restrictions and enforced closures across our largest home-grown sector? In their efforts to be the best boys in class, have they inflicted a level of damage that was unjustified?
“There are still fears,” says Seán. “It was very difficult. There was a crisis in the country, there were concerns about the health service’s ability to cope with hospital case numbers and personally, I think that the Government did what they needed to do at the time to keep it under control… However, when the industry does have to live with restrictions, it can’t maximise its revenue our weddings, meetings and event revenue is still down 70% because people are nervous about booking events.”
Therein lies the problem – not knowing whether or not businesses in the sector will be in a position to run their businesses normally once all the subsidies and supports have been taken away.
“I don’t have any issues with wage inflation. What I do have an issue with is that, as a country, we don’t seem to be effective at controlling other business costs… A lot has been said about insurance but the reality is that, with practically no claims in the last two years, our insurance has gone up 15% again. There’s no evidence to suggest that costs like insurance or energy are being addressed… If we decide, as we have, that we’re going to have the second-highest wage costs in Europe (after the Netherlands), then we need to be more efficient in other areas and we’re not… I remember living in Switzerland twenty years ago and being shocked at the cost of living but that’s where we’re at now.”