August 21, 2012

Could Ryanair discover limits to growth?

Who would have thought a year ago that British Airways would now have its hands on BMI, Virgin Atlantic be preparing to launch a short-haul shuttle rather than a space shuttle, and Ryanair be contemplating a bid for Stansted along as well for Aer Lingus while dealing with claims it skimped on fuel?

Well, perhaps not all are so surprising.

The aviation landscape is changing fast under pressure from the twin pressures of a high oil price and demand across Europe squeezed by crisis in the euro zone and recession in Britain.

BA must feel it played a blinder in getting hold of BMI. In one bound it was free of slot constraints at Heathrow and a long-time competitor.

Virgin is left in a pickle and has to respond.

EasyJet goes its merry way, extending its network, adding features of appeal to corporate travellers and selling holidays. (Stelios remains its biggest problem.)

But what of Ryanair, which has thus far ridden out every crisis in a two-fingered style all its own?

The carrier has ridden out investigations before, though the Spanish fuel inquiry could prove damaging if it turns out pilots were pressured to take liberties.

At the same time the European Competition Commissioner is some way into an examination of "state aid" to Ryanair via "public support granted to mostly regional airports" across Europe and "arrangements involving Ryanair i.e rebates and marketing agreements".

Ryanair's arrangements with Beauvais airport were the latest to be confirmed as the subject of investigation in May. The inquiry extends to six other French airports, six German airports and airports in Austria, Belgium, Denmark, Finland, Italy and Sweden.

This is not unconnected to the fact that authorities in a growing number of destinations are finding they cannot meet Ryanair's demands for "marketing support" and zero airport charges amid government debt and austerity.

Kos, Rhodes, Morocco, the Canary Islands and Finland have all seen Ryanair pick up its ball and walk off in recent months.

The Ryanair model is based on growth - gang-busting growth. So the carrier's interest in Stansted makes sense. However, Ryanair's endlessly repeated claim that Stansted traffic has fallen for five years because of the airport's landing charges is debatable.

Ryanair has cut its operations at Stansted, but it's the state of the economy that has hit demand at the airport and at Ryanair's end of the market.

The attraction of Stansted is clear. In the words of Ryanair chief financial officer Howard Millar in July: "Stansted is the only place in London where another runway can be built. It is the only place with capacity and we want a 25% stake."

However, restoring traffic at the airport may not be straightforward. Big-four auditor PwC noted in July: "The speed of passenger growth at airports hinges on the pace of economic recovery.

"It is unlikely numbers will revert to their historical trend before 2022-24, reflecting the fact that the fall in traffic since 2007 has been markedly sharper than in previous recessions.

"It may even be the case that traffic never returns to the historical long-term trend."

Ryanair sits on a huge cash pile - €3.8 billion (£3 billion) at the last count. Yet it reported a 29% fall in profits year on year for the most-recent quarter.

Analyst Diogenis Papiomytis of Frost and Sullivan noted: "The company highlighted the EU recession and high fuel prices as the main drivers for its underperformance . . . What fails to make the headlines is Ryanair's apparent lack of a future growth engine."

The carrier is due to take delivery of another 11 aircraft this year, taking its fleet above 300. These aircraft need to be in the air as close to all the time as Ryanair pilots can keep them.

Ryanair's network of regional airports extends from islands off the coast of Africa to the shores of the eastern Med, all served pretty much within a two-hour radius of its many bases.

At some point it must reach the limits of growth in Europe. Papiomytis argues that time has come: "Further growth can only come from acquisition."

Yet Ryanair has confirmed it is back in talks on a massive aircraft order - believed to be with Boeing, believed to be for 300 aircraft.

In 2002, off the back of 9/11 and a collapse in aircraft orders, Ryanair drove Boeing to give it the bargain of the century on its current fleet.

Now Boeing is booming with orders from Middle East, Asian and, latterly, US carriers. Ryanair has courted China's Comac and will flirt with Airbus, but it won't buck an iron law of low-cost life and operate a mixed fleet.

Every way you look at it, Ryanair's costs must rise. The question is, can it continue to grow?

August 20, 2012

Did June mark the start of a late outbound spring?

Latest tourism figures show outbound and inbound travel experiencing conflicting fortunes in June, with both bucking medium-term trends.

Outbound travel had a good June. The UK Office for National Statistics (ONS) reported 500,000 more people departed the country in June this year than last.

Holiday departures were up 6% on a year ago - and June 2011 was 4% up on June 2010 so the month was unequivocally a good one.

This was in sharp contrast to May when holiday departures were 9% down on May 2011.

However, the reasons are clear: June this year saw two bank holidays, with Whitsun moved from May and joined by the Queen's Diamond Jubilee. The May 2011 figures benefited from the Whit holiday, the May Day holiday and a hangover from the royal wedding at the end of April 2011.

More important, June 2012 marked a clear break from the trend so far this year.

It left holiday departures for the year to date (January to June) just 2% down on a year ago, when in May they were 4% down following a shortfall on 2011 in every month so far this year.

June also left leisure departures for the 12 months (July 2011 to June 2012) down just 2% year on year.

Perhaps more significant, June was just 10% down on June 2008, when May was 25% down, April 21% down and the first three months of this year 36% down on 2008.

Two questions occur: did people hold off from going away early in the year to save time and money for the June bank holidays? Has the double bank holiday exhausted the capacity of some to go away in the second half of the year?

Inbound travel faired rather differently in June. Numbers were down by 300,000 or -13% for leisure visitors, having been up every month from January to May.

It was the pre-Olympic effect, no doubt. Yet inbound leisure visitors remained 8% up year on year for the three months to June and 2% up for the year to date.

The medium-term outbound trend stands in stark contrast to June. Outbound holiday departures have fallen year on year in every quarter bar one since April-June 2008. The one exception was a year on from the period of volcanic ash disruption in spring 2010.

So two caveats on the June performance, heartening as it is: one, the second quarter has consistently been the strongest quarter for holiday departures since 2007-08.

Two, April-June was a strong quarter last year, but July-September was the worst since 2008 with departures in peak season falling year on year.

It is too early to declare an 'outbound spring', but the sector will be grateful for the improvement.

August 15, 2012

Post-Olympics, how long will the feel-good factor last?

The Olympics provided welcome relief from unsettling economic news, but away from the Games barely an economic signal has been heartening.

News this week may prove better - although the latest inflation figures did not, showing an unexpected rise which means a further squeeze on incomes. Retail sales figures on Thursday might provide first evidence of an 'Olympic effect'.

However, Bank of England governor Mervyn King doused hopes of the Olympics having a significant impact on Sunday when he wrote: "The Games cannot alter the economic situation we face."

The situation is that the UK is in a deeper recession than the euro zone despite the euro crisis and the latter is no nearer resolution despite euphoria at remarks by the head of the European Central Bank (ECB), Mario Draghi, at the start of the month.

Draghi's declaration that "The ECB is ready to do whatever it takes" was interpreted as meaning the Central Bank would write an open cheque to solve the debt crisis. But Draghi's words quickly morphed into "[The ECB] may undertake operations of a size adequate to reach its objective", which is not quite the same.

The problem is the financial markets and major banks want the ECB to guarantee unlimited funds to bail-out Spain and Italy, not just Greece. This depends on Germany which refuses to sanction such a guarantee. It will take an even deeper crisis to force Germany to give way, and that is what the markets may engineer.

Unfortunately, this is not the sole problem. The rescues come at the price of increasing austerity which produces a downward spiral. Each bail-out increases the potential losses if a country exits the euro - in the Greek case, these are now put at euro750 billion. A failed Spanish rescue would dwarf this.

Worse, the problems are not confined to Europe. The Brookings Institution, a US economic institute, noted this month: "The engines of world growth are running out of steam while the trailing wagons are going off the rails."

The US economy is approaching a 'fiscal cliff' (multiple tax rises in January) as growth in its manufacturing slows to its weakest in three years. Chinese growth is also slowing. India has stalled (and has struggled to keep the lights on).

Add in fears of a global food crisis, with prices of two of the world's four staple crops - corn and soya bean - at record highs because of the US drought and you can understand the reasoning behind the Financial Times' (FT) view of the global outlook on Monday: "The world is halfway through a lost decade . . . Economists are starting to accept the Great Recession has permanently damaged growth."

What does it mean for the UK? The FT reported (August 2): "The bond market thinks Britain is going to be terrible for a long time. All hopes are pinned on the ECB."

The most-recent GDP figures confirmed the dire state of the UK economy. A provisional second-quarter decline of 0.7% was far worse than the -0.2% economists predicted.

Office for National Statistics (ONS) figures showed an across-the-board drop in construction, production and services. This followed a 0.3% decline in January-March and 0.4% fall in the last quarter of 2012.

The double bank holiday in June was estimated to account for 0.5% of the decline. But in the words of Citigroup economist Michael Saunders: "The weakness cannot be wholly attributed to special factors."

The Olympics were forecast to add 0.5% to GDP in the third quarter, but it would take a further 0.5% to take the economy back to its January starting point.

The Bank of England monetary policy committee (MPC) meeting in July recorded falling consumer spending, revised down estimates of business investment and revised up "significantly" its view of government spending (supposed to be reducing).

It noted growth in lending to households "had changed little since mid-2009" and "loans to non-financial businesses had fallen 3% over the 12 months to May", adding: "Interest rates on mortgages and loans to small and medium-sized companies have risen."

The squeeze on household income continues despite falling inflation, with the committee describing annual pay rises as "subdued" and the latest settlements as "very weak".

The longer-term outlook is hardly better. Prime Minister David Cameron, in an interview in mid-July, hinted at austerity continuing to 2020. Cabinet secretary Sir Jeremy Heywood told the Institute of Government: "We are 25% through fiscal adjustment. Spending cuts could last seven, eight, 10 years."

For travel, the euro exchange rate provides some cheer, as does the fact that unemployment remains surprisingly low in the circumstances. But the oil price was back at $115 a barrel at close on Monday.

So FT columnist John Authers' warning about the post-Olympics outlook may be uncomfortably close to the mark: "Seven months of market turmoil were followed by two weeks of calm for the Beijing Olympics [in 2008] . . . Days after the Games ended came the deluge. There is ample risk of another September deluge."

July 31, 2012

Tui's transition from Frenzel to 'Fritz' marks the end of an era

The announcement by Tui Travel parent Tui AG of a successor to chief executive Michael Frenzel should come as no real surprise.

Frenzel is 65 and his retirement expected. It is in keeping with Tui's handling of affairs under Frenzel that his departure be well choreographed: no nine-month search for a successor like rival Thomas Cook.

But his departure does mark a decisive moment. Frenzel joined the Tui group, or Preussag as it then was, in 1988 and led its transformation from a heavy industrial group focussed on coal and steel production.

Preussag was the former Prussian state coal and steel company, hence its name: 'Preuss AG' (Prussia Ltd).

Frenzel saw no future in heavy industry and looked around for a sector to which he could migrate the group, first of all turning Preussag into a holding company.

He did not turn miners to tour operating and steelworkers into travel agents, but over little more than four years at the end of the 1990s the industrial giant mutated into the world's largest integrated travel group.

First Frenzel acquired and assembled a major German tour operation, airline and agency chain. Then he looked overseas, acquiring companies in Scandinavia and elsewhere in Europe.

His biggest rivals in Germany, airline Condor and tour operator Neckmann, followed in his wake, consolidating to form C&N.

Frenzel divested the coal and steel interests as he went, borrowing to make acquisitions and making repayments with the proceeds from sales.

When Thomas Cook in the UK became available in 1998, he snapped up a controlling stake. C&N reacted by entering talks with Thomson Holidays.

Alerted to the fact Thomson was available, Frenzel bought that company in 2000 and deftly disposed of Thomas Cook to C&N, which subsequently adopted the UK brand name.

Preussag became Tui, the holding company of the Tui travel group, when it purchased the Hapag Lloyd shipping company in 2002, a deal which included the Tui name.

Subsequently, Frenzel gave the go-ahead for Tui UK's takeover of First Choice in 2007 (a move triggered by the merger of Thomas Cook and MyTravel) and the Tui Travel Group was formed, listed on the London Stock Exchange. Tui AG remained listed in Frankfurt as Preussag had been.

It is hard to think of a comparable transformation in another sector of industry.

Frenzel will remain with Tui for now, retaining the positions of chief executive of Tui AG and chairman of Tui Travel for the next year or more.

He will surely remain in travel beyond this time as chairman of the World Travel and Tourism Council, a post he took this year.

Frenzel's successor Friedrich Joussen will join from Vodafone Germany where, ironically, he has also been in post since 1988.

Joussen joined German mobile phone company Mannesman in that year and held a senior position when Mannesman was acquired by UK company Vodafone in 2000. He worked his way up to chief operating officer in 2003 and chief executive in 2005.

Part of the attraction for Tui will be that Joussen sat on the executive committee of Vodafone Group, based in the UK.

Frenzel's successor has thus been secured a year before his departure. In similar vein, at Tui Travel the likely successor to chief executive Peter Long (deputy chief executive Johan Lundgren) is already in situ.

Meanwhile, Harriet Green took over as chief executive at Thomas Cook on Monday just short of a year since predecessor Manny Fontenla-Novoa was forced out.

It is surely no coincidence that the announcement of Frenzel's successor came when it did.

July 26, 2012

Crisis? What crisis, on Santorini?

Representatives of the European Central Bank, the European Commission and International Monetary Fund - 'the troika' - flew into Athens on Tuesday. I flew into Greece on Wednesday.

Our arrivals were unconnected. The troika were in Athens to review the new Greek government's level of compliance with austerity demands imposed by the institutions which comprise it.

On this basis they will decide whether to release the next phase of funding of an agreed bail-out.

I'm in Greece to assess the extent of the welcome to visitors and ease of experience for holidaymakers in light of the country's well-publicised debt crisis.

Our work won't overlap, but there is a connection between the visits. The troika may decide Greece has failed to meet its commitments to what, most observers agree, are crippling loan terms.

An unnamed troika official, quoted on Tuesday, said: "Greece is hugely off track." The possibility of a Greek exit from the euro zone - a Grexit - is openly touted once more. At any moment Greece could be back in the news in a way that is discouraging to visitors.

Yet Greece is as open for tourism and the country as enjoyable and welcoming as ever, and that won't be in jeopardy should the troika freeze payments and place the Greek government budget on hold.

The packed easyJet flight from Gatwick to Santorini on Wednesday morning suggested no shortage of those who understand that. Reports suggest bookings to Greece have surged in the aftermath of the country's general election last month (June 17).

On Santorini there is no evidence of a recession let alone the deep crisis reported in the news. Hotels, restaurants and bars are open as normal. Ferries are operating, taxis running, historic sites and museums open.

There are no closed shops, no derelict buildings apart from the usual, odd, half-finished construction. Everything is beautifully whitewashed, the streets clean.

Upmarket hotels report being full after a quiet start to the season. The capital Fira is perhaps a little quieter than normal for the time of year, but people seem relaxed about it. Smiles are everywhere.

Yiannis Syxeris, the manager of the San Antonio Hotel in Imerovigli overlooking the caldera of Santorini, summarises the dilemma for Greek tourism beautifully. "God was generous with the land he gave us Greeks," he says, "but not with the politicians."

He tells me with incredulity: "A German visitor asked me, 'Why are you smiling. Have you given me a bad room.'" There are no bad rooms at the San Antonio.

Elsewhere in Greece the picture might be different, of course - in Athens, in particular. The worry is that the deliberations of the troika will have an impact when the economy of Greece is already forecast to contract by 7% this year.

One small area at risk if payments are suspended and budgets put on hold is the ability of the Greek National Tourism Organisation to publicise the fact that the country is open as normal New tourism minister Olga Kefalogianni was in London last week to discuss joint-marketing arrangements with UK tour operators. A budget freeze would not help anyone.

May 14, 2012

UK aviation policy and the capacity for delay

Industry leaders at the Abta Travel Matters conference last Thursday listened politely to transport secretary Justine Greening as she outlined the anticipated timetable for publishing an aviation strategy framework document, but not a lot else.

The underlying frustration in the industry, and more widely across business, was evident two days later at the Guild of Travel Management Companies' (GTMC) conference in Dubai.

Peter Drummond of Horncastle Executive Travel, who chairs the GTMC air working party, summed up the feelings of many when he said: "The government does not have an aviation strategy. It's not even on the agenda. There is no long-term planning."

Drummond was not quite right in one respect. Aviation is on the government's agenda. But it certainly does not have a policy.

The reason is the current government tore up the policy it inherited - for expansion at Heathrow - and binned the previous government's Future of Air Transport White Paper which set out a long-term strategy.

Now it wants the industry's help in drafting a preliminary replacement paper (a 'framework' document) from a reduced number of options.

The 2003 White Paper made assumptions about future demand and growth that are genuinely open to question. But the lack of capacity at Heathrow is blindingly obvious daily.

The reasons the coalition junked the paper and previous policy were purely political.

The Conservatives embraced opposition to a third runway at Heathrow ahead of the last election to channel support among voters under the Heathrow flight path in constituencies like Putney (represented by Conservative MP Justine Greening).

The policy shift also signalled a Tory move to the centre ground, away from knee-jerk support for business and towards concern for the environment - an issue that might more naturally be seen as 'belonging' to the left.

The Liberal Democrats had long since been part of the anti-third runway camp. The coalition agreement between the parties enshrined a block on expansion in official policy, where it is to remain until the next election.

So the GTMC was mightily entertained by Qatar Airways chief executive Akbar al Baker exhorting the UK to "act like us" and just get on with building a new airport.

The realities on the ground in Qatar and the UK are very different, of course. Doha has plenty of empty space for the new Doha International Airport now under construction next to the old. Bucks, Berks and Kent do not.

The UK does not have Qatar and neighbour Abu Dhabi's "box of money" either, as al Baker acknowledged - quite the reverse.

The cost of a Thames estuary airport is put at £50 billion, yet would almost certainly cost more - such projects always do - and this is just the bill for the airport, not the motorway(s) and express rail links required to take 100 million passengers a year to and from it.

Against a background of steepening government austerity (the biggest cuts are to come), it's hard to see a significant proportion of such a bill being placed on the government's books. Yet without state guarantees, why would major investers step in?

The UK does not have Qatar's political system either. Whenever and wherever a new airport or runway is sited will attract opposition. There is no way around that.

So the industry must deal with political reality.

The mood in the sector does appear to be shifting, from Heathrow towards a new airport, perhaps as a result of Mayor Boris. However, there are at least four key problems with this.

One is the cost. Another is the likely level of opposition, not just around the site of the new airport and from those opposed to airport expansion in general, but from those around Heathrow whose jobs, livelihoods and businesses would disappear. Of course, there will be opposition to any proposal, but a new airport is likely to attract the most.

A third is the time a new airport will take to get into construction, a process which might be expected to reflect the degree of opposition.

Boris Johnson's aviation policy advisor, Counciller Daniel Moylan of Transport for London, rather dismissed this at the Travel Matters conference, arguing it was "a matter of leadership" and political will. That is right up to a point. However, the project's opponents might display equally strong will.

A combination of legal challenges, electoral challenges, demonstrations, occupations and God-knows what else could produce quite a battle.

A fourth problem is British Airways (no offence) and its understandable opposition to moving from Heathrow.

Willie Walsh has made clear he won't entertain the idea. Boris Island is a non-starter as far as he is concerned, and if the UK's hub carrier refuses to move to a new hub, how is it going to happen?

Indeed, short of Qatar or Abu Dhabi investors buying up a site, building the airport, compensating all and sundry and moving carriers in, it is difficult to see a new airport winning investment without BA involvement.

Moylan suggested "Willie won't be there for ever". But neither will Boris - although he may be prime minister at some point before we see the back of him and Willie won't be that.

Councillor Moylan's vision of Heathrow is as a "premium leisure" point-to-point airport for "the comfortably off". "Heathrow would not have to close," he believes, "it would be a different airport."

Moylan is an engaging speaker. But I was more drawn to the view of Tim Leunig, chief economist of liberal think tank CentreForum, who also appeared at Travel Matters.

He dismissed Moylan's argument as "rubbish". "Heathrow will survive because it is where people want to fly from," said Leunig. "Boris Island will struggle to get off the ground."

With politics, like all human actions, comes cock-ups and unintended consequences which complicate the picture.

Among the most interesting asides at the GTMC conference was one from Tim Montgomerie, founder and editor of the influential Conservative blog ConHome, a man with connections to the heart of the Tory party.

He suggested David Cameron had welcomed Treasury secretary Chloe Smith to her new post with the words: "It's good to have an economist at the Treasury." Smith, who took over responsibility for APD among much else, replied: "I'm not an economist."

Montgomerie added:  "I'm not sure Cameron was aware of Justine Greening's history of opposition to a third runway at Heathrow when he appointed her transport secretary."

So that is where we are.

May 10, 2012

Black holes, borders and quantum matters

Transport secretary Justine Greening is among the more impressive members of the coalition government thus far so her appearance at the Abta Travel Matters conference at Millbank this morning should be of interest.

It is important, in any case, that the Secretary of State for Transport could be prevailed upon to address a travel industry policy conference when so often it appears from government policy that ministers have listened very little to the sector's concerns.

If Greening stays for the morning she will hear a presentation of economic research commissioned by Abta which quantifies the outbound industry's contribution to UK GDP and employment.

Hopefully, tourism minister John Penrose, also due to speak at the conference, will take a copy of the report away with him to read in conjunction with the latest monthly travel and tourism release from the Office for National Statistics, also due out this morning.

This will give the latest figures for inbound and outbound travel and the estimated value of each. It will then subtract one from the other to produce a figure showing a deficit in the UK travel and tourism economy, given the estimated value of UK travellers' spending abroad is greater than that of inbound visitors to the UK.

The Abta research will suggest the ONS figures are incomplete.

It would be interesting to know what Greening thinks of another piece of research, into attitudes to Heathrow among UK consumers.

The survey, referred to in the linked story, was carried out for Travel Weekly by Explore Research at the weekend. It was a relatively small survey of 500 adults, but carried out among a representative sample of people on Explore's panelbase of 180,000 UK adults. So we can consider it a reasonable snapshot of opinion.

It found 46% of those surveyed would avoid Heathrow at the moment (and two-thirds avoid Heathrow during the Olympics). A similar proportion, 45%, would not book a flight or holiday from Heathrow at present, and one-third "dread" flying to or from Heathrow.

God knows what the result would have been among non-European Union passport holders.
Respondents blamed the government, border control staff and BAA for the delays, in that order.

Perhaps surprisingly, more thought BAA should pay for the staff and technology to put things right (43%) than said the government should (36%). Possibly, they realised 'the government' would mean taxpayers.

One in five (21%) thought the airlines should pay, which will please Willie Walsh no end.
However, they did not blame the airlines, which may not fit with the hopes of some in the Home Office.

Just 4% of Explore's sample fingered the carriers, when barely a week ago the FInancial Times quoted an unnamed government official suggesting: "People standing in the [passport] lines [at Heathrow] often think it's the airlines' fault, not the government's."

A fellow official said: "The real answer is to get the airlines to pay for more security - that is the long-term answer."

Of course, whoever pays the bill, the burden will ultimately fall on air passengers.

Border control is a black hole for the airlines. In a way, it is a metaphor for government policy on aviation at present. There is an awful weight of matter sucking up energy, but nothing we can see.

It would be astonishing if Greening gave much indication of the government's thinking on this today, or on much else as her department prepares a document on the future of aviation for release this summer.

When she spoke at a recent Parliamentary reception hosted by easyJet, the transport secretary was full of praise for the sector, saying "this industry is really playing its part in getting the economy back on its feet.

But she offered nothing concrete. "I know there has never been a more important time in aviation. We are determined to work across government to help make a success of your industry," was how Greening responded to a direct plea to consider a review of the costs and benefits (?) of APD.

No matter: this morning forms part of a dialogue with the government and the industry must hope it continues.

April 23, 2012

'Trouble, you can't fool the BoE'

We are poised to see the first official estimate of UK economic growth in the first quarter of 2012 this week, amid signs that the calm which descended over economic forecasters and financial markets since the turn of the year could be drawing to a close.

Most recent indications pointed to a revival in the world economy, bolstered by better-than expected US economic data and the aversion of a meltdown in the euro-zone. The result was that stock markets rose almost continuously from December until Easter.

Falls in the London Stock Exchange, on Wall Street and in Germany and France yesterday may not yet mark a shift. They appear to have been triggered by a first round election defeat for President Sarkozy of France and the failure to agree government austerity measures in the Netherlands, allied to the appearance of some weaker economic data.

Recession was confirmed in Spain and a closely-watched index of economic activity in Germany fell to a near three-year low.

In the US, the Federal Reserve was expected to announce this week that the recovery is strong enough to forego further quantitative easing - a message that was considered sufficient to send a shudder through the markets.

The Financial Times quoted one analyst suggesting: "Markets have become accustomed to persistent monetary easing. This could prove a more difficult investment backdrop."

However, evidence of underlying problems was never far away despite the apparent resolution of the euro crisis. At the end of March, the Financial Times reported: "European finance ministers have been warned the underlying causes of the European debt and banking crisis have yet to be resolved."

Confidential reports by EU officials described the European Central Bank's provision of more than euro1 trillion (£833 billion) in cheap loans to banks as merely "a reprieve". It warned: "Contagion may re-emerge at very short notice . . . The euro crisis is not over."

Just before Easter, European finance ministers agreed a 40% enlargement of a bail-out fund for troubled euro-zone states, taking it to euro700 billion (£583 billion).

That came on top of the euro1 trillion and in addition to a separate bail-out fund accumulated by the IMF (International Monetary Fund). The IMF fund swelled from $500 billion (£320 billion) to about $660 billion (£420 billion) last week through a series of additions, including a promised contribution of almost £10 billion from the UK.

Yet the FT pointed out the euro700 billion in the European fund "remains far less than the combined borrowing needs of Italy and Spain for the next two years".

FT columnist John Authers noted: "It is hard to see how Spain could be rescued with the funds the EU has available. That is why the IMF is drumming up more."

Meantime, the UK economy contracted by 0.3% in the last quarter of 2011. The Organisation for Economic Cooperation and Development (OECD) forecast it would contract again (by 0.4%) in the first quarter of this year, putting the UK technically back in recession.

Other forecasts contradict this. The consensus among economists is for shallow growth of perhaps 0.1% in the first quarter, meaning an annual UK growth rate of 0.3%. That is economic stagnation to you and me.

However, the Bank of England (BoE) monetary policy committee has warned it can "not rule out the publication of official data showing GDP falling for three successive quarters".

Indeed, the BoE has already forecast a contraction in the second quarter of 2012 due to the spate of bank holidays during the period (Easter, May Day, Whitsun and the Queen's Diamond Jubilee).

The same committee warned: "There is a risk inflation could fall less rapidly in the near term than the Committee had anticipated in February . . . The latest upward pressure on prices is liable to delay the point when real household income will begin to rise again.

"Further contractions in output in the first and second quarters might further damage household and business confidence, even if the underlying pace of economic expansion were stronger."

So barring an as-yet undetected acceleration in growth, the economy remains in a parlous state. In the words of one leading economist: "What was already the slowest recovery in modern times has got even slower."

UK GDP remained 4.1% below its pre-recession peak ahead of tomorrow's announcement.

The implications for outbound travel demand are fairly obvious. The market should by no means deteriorate, but demand is hardly likely to leap forward.

April 19, 2012

Tourism 'no longer a vice' as Japan defies disaster

Japan has recovered astonishingly from a disaster of Biblical proportions just over a year ago that combined a category-nine earthquake, a tsunami and a meltdown in not one but three nuclear reactors.

Perhaps only the southeast Asian tsunami of 2005 surpassed it in scale in modern times. Yet Tokyo appears unchanged, and was unfazed by small tremors through the past week.

The rail system and rest of the infrastructure of Japan has long been back to normal. To the north of Tokyo, the region of Tohoku which bore the brunt of the quake and tsunami on its Pacific coast appears surprisingly at ease.

The view from the 'bullet train' on the two-hour journey between Tokyo and Sendai, a city of one million at the heart of Tohoku, offers little or no sights of reconstruction let alone destruction - although this cannot be the case on the coast where the tsunami swept inland for eight kilometres, smashing and washing away homes, workplaces and up to 20,000 lives.

There is no sense of disaster, recent or impending, even at the station stop in Fukushima, despite the continuing battle to control the reactors at the damaged nuclear plant nearby.

Up to 300,000 were rendered homeless, 160,000 of them displaced from the evacuated zone - the "cautionary area" - around Fukuskima.

I am in Japan because the World Travel and Tourism Council chose Tokyo and Sendai for its annual summit this week to show solidarity with its Japanese hosts and to demonstrate the revival of the country and resilience of its people.

Local tourism authorities report inbound tourism has returned almost to the level of 2010 after falling 60% in the wake of the disaster last March.

Noriko Abe, who owned a hotel in the worst-hit region of Tohoku, told the summit: "People were left with only the clothes on their backs. Everybody took to washing clothes in the river. People lost family members, lost homes. They had to travel 50 minutes to buy food."

Her hotel took in refugees. Noriko said: "We realised people would leave the city unless we re-established businesses." So they re-established them.

Hiroaki Takahashi, chairman of the Tohoku Tourism Promotion Organisation, said: "The damage was immense. Recovery was not easy, but we expect to see a move to full recovery this year."

He insisted: "There is no problem with daily life [in Tohoku]. Tourist spots are operating normally. Food and water are safe."

Takahashi reported radiation levels in the region outside the cautionary zone the same as in the rest of Japan, but said people continue to avoid food and water from the region because of "unfounded rumours".

"There is still a tendency not to travel to the Tokohu region," he said. "Sensational images of tsunami damage gave the impression the entire region was damaged or contaminated. There is a fear the entire region is affected by high levels of radiation."

The Japan National Tourism Organisation (JNTO) must be the only tourist office in the world now publishing local radiation levels.

Norifumi Idee, Japan Tourism Agency commissioner, gave an assurance: "You are entirely safe from radiation and radioactivity. Levels of airborne radiation are well within safe limits."
He reported the government recently toughened restrictions on the amount of radioactive cesium allowed in foods, raising Japanese standards well above those in Europe and the US.

Unfortunately, the assurance on airborne radiation is not entirely convincing, given there has reportedly been no breach of the shell encasing the reactors at Fukushima, unlike at Chernobyl in the Ukraine in 1986 where a meltdown blew the roof off a reactor and spewed radioactive material across Europe.

However, the problems at Fukishima have been every bit as serious as Chernobyl, despite months of denials by operating company Tepco.

The release of radioactive material into ground and sea water, and repeated use of sea water to cool overheating reactors, must have caused contamination. The measurements that matter will be of radioactive material in ground water and in plants and creatures on the Pacific sea bed where such material will begin its entry to the food chain.

On the day we spent in Sendai, the Japan Times reported: "One of the two remaining thermometers at the bottom of the pressure vessel of reactor number 2 at the Fukushima power plant is broken . . . The finding follows the discovery of a broken thermometer in the same unit in February and means only 18 of its 36 temperature sensors are working, magnifying concerns about the utility's long-term ability to monitor the crippled facility."

So a single working thermometer remains at the bottom of a reactor which, as the Japan Times reported, must be kept below "the threshold of 100 degrees when water starts boiling and radioactive materials are released".

Perhaps somewhat perversely, Toshiba chairman Aksutoshi Nishida, who also heads the Japanese Travel and Tourism Association, suggested the earthquake and tsunami had at least one beneficial effect on tourism by changing the country's attitude towards the industry.

He said: "After World War Two, diligence was seen as a virtue, recreation was a vice. Tourism was pleasure seeking, its status low. That has changed. People no longer see holidays as a vice. Tourism is appreciated more highly in the post 3/11 [March 2011] world."

In a sushi restaurant in Tokyo's Ginza district I was assured the fish came exclusively from the Sea of Japan, the other side of the country from Fukushima. It was and is a fabulous restaurant and I had not asked. But the concern is tangible.

January 23, 2012

Concordia tragedy deflects gaze from an economy on the rocks

The consequences of the Costa Concordia tragedy remain uncertain, but one impact is clear: the sinking displaced the fragile state of the economy from the headlines - albeit temporarily.

The switch of media focus may be a blessing while the International Monetary Fund taps up Europe's chancellors for contributions to a $1 trillion bail-out fund it believes will be needed imminently, Greece moves toward the next Eurozone flashpoint when its debts fall due in March and France grapples with a credit-rating downgrade.

Latest UK economic indicators appear contradictory. Unemployment rose to almost 2.7 million or 8.4% in the three months to November, fuelled by job losses in the public sector. However, Office for National Statistics (ONS) figures showed a 2.6% rise in the volume of retail sales year on year in December - despite a fall in spending on credit cards.

KPMG's head of retail told the Financial Times: "Retailers achieved these sales through heavy and prolonged discounting and this has seriously damaged the health of the sector." That would explain the profits warning at Tesco.

At least inflation appears to be coming down, though it remains at least double the rate of earnings growth.

In the medium term, the government now plans seven years of public spending cuts and tax rises. The Office for Budget Responsibility forecasts that by 2016-17 UK output will be 18% lower than if the growth rates of 1997-2007 had continued. Or to put it another way, it could be 2015-16 before a household at the midpoint of UK income distribution attains the living standards of 2002-03.

Bank of England research on the impact of government austerity on UK households found 48% worse off last year than in 2010, and 69% expect to be worse off this year than last.

So what about travel? An indication of the strength of the January market should be emerging following a sluggish first week of the year. Comparisons with January 2011 ought to be tempered by the fact that the start to last year was particularly strong, when subsequent months were not.

The most up-to-date ONS figures show outbound holiday departures down 1% year on year in the 11 months to November, but a 5% decline in the third quarter of 2011 - July to September. That is quite a fall in a peak summer market that was already well down on the heady days of 2007-08.

The big two have already acted as though this is a sign of what is to come. Thomas Cook has cut capacity for summer 2012 by 8% year on year and Tui Travel has taken out 9%. Both could restore capacity, of course, although Tui must be the more likely to.

The past fortnight has tossed several straws in the wind: Flybe issued a profit warning following a sharp decline in traffic in the run up to Christmas; the Guild of Travel Management Companies (GTMC) reported a quarterly decline in air bookings for the first time since 2009; and AirAsia X pulled out of Gatwick.

The Malaysian-based carrier blamed APD and emissions trading yet also pulled out of Paris (no APD) and India (no emissions trading), so we can take it the economy and the price of oil were the major factors on top of the inherent difficulties of operating low-cost long haul.

AirAsia X only moved to Gatwick in October and we may presume founder Tony Fernandes did not take over Queens Park Rangers last August with the intention of withdrawing from the UK. Clearly, the current state of the UK market does not accord with Fernandes' view last summer.

Those predicting an improvement towards the end of this year may be right, but I wouldn't bet on it. If this summer ends well on price, with capacity 8%-9% down on 2011 and without a major failure, it won't have been a bad year - in the sense that it could be so much worse.

August 2012

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