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READER LETTER: Guernsey's post-pandemic economy

READER LETTER: Guernsey's post-pandemic economy

Tuesday 13 October 2020

READER LETTER: Guernsey's post-pandemic economy


Businessman Peter Bachmann has analysed the effect of the pandemic on Guernsey's economy, concluding that the States needs to approve a detailed project plan for the extension of the runway as soon as possible.

"The more I consider the island's future the more concerned I become.

I fear a surprising level of complacency in the community. It seems to me that the island is fast approaching a tipping point in its political and economic future which is existential in nature.

1. The Covid-19 pandemic

It is a given that by the end of 2021 the island, as a community, will be a much poorer place.

Our financial reserves will be substantially depleted and our borrowings will be much higher than 2019, pre-pandemic.

The downturn is difficult to quantify at this stage but is likely to be many hundreds of millions of pounds.

2. Brexit

There is a view that because the EU has given Guernsey third country status etc. that structurally the island will escape reasonably unscathed from the Brexit disaster.

However, I’m more sceptical. 

I had a disturbing discussion with a senior London banker. He had worked all his business life as a Trader in the City of London. 

He believes that the UK and in particular the UK’s offshore islands have not taken sufficient notice of the emotional and sentimental anger that will underpin the island’s future relationship with the EU.

France and Germany will never accept in the long run, the generous conditions given to the UK’s Offshore Islands, as our protector, the UK, has walked away from the EU.

Time will tell!

3. The Finance Industry

The Finance Industry underpins our entire economy. However, I also understand that most tax revenue comes from the PAYE of those employed.

However since the island’s cohort of working population is at best static, there seems little opportunity for a substantial increase in revenue under our current rules.

4. The Tourist Industry

The recent Frontier report on the economic viability of extending the island’s airport runway has some stark figures. Airport arrivals have declined for the last decade on average at just under 2% per annum. 

We hear from all sides of the tourist industry, apart from one or two notable exceptions, that unless something is done at government level the island’s tourist industry is in slow terminal decline.

We must not forget that this decline in tourists has a dramatic effect on the island’s restaurants, entertainment, facilities and cultural community as well.

5. Government

It is a given that government is the primary investor in core infrastructure upon which the private economy provides a wide diversity of content.

Over the last decade, the States of Guernsey has abysmally failed even to meet its own conservative infrastructure investment mandate by some hundreds of millions of pounds.

The reasons for this failure are probably complex but certainly partially due to a system of government comprising a committee of 38 people who seem incapable of any long term policy, let alone maintaining any policy decisions they’ve already made.

Islandwide voting I hope will gradually lead towards some form of “political” parties which in turn will lead towards some more efficient form of executive government.

So where do we go from here?

How are we going to repay our increased debt and rebuild our depleted reserves? It seems to me that there are only three practical alternatives.

1. Austerity. A significant reduction in community expenditure of much prized benefits, including reduction of costs where practical.

2. Substantial increase in taxes.

3. At least maintaining but doing all we can to grow the island economy and thereby the tax take. 

The first two points above appear highly undesirable, unacceptable to the community and political suicide if proposed. How do we move forward on item three?

There appear to be only two practical options where there is a realistic chance of making an effective and early response to growing the economy.

I’ve thought long and hard about new economic options for the Island and nothing comes close to the two below.

1. Increase the numbers working in the Finance industry.

At one point last year I believe there were over 1,200 individual jobs being advertised by employment agencies in the Finance industry. However, our complex employment and residential legislation militates against advertising off-island.

This whole area needs an urgent rethink particularly the residential licensing system. Do we need to consider a limited population increase?

2. Rejuvenate the Tourist and associated industries.

The Tourist industry is the third-largest employer in the island. Whilst not paying the level of salaries of the Finance industry it does encompass a large number of small to medium-size enterprises which comprise much of the backbone to the diversity of our community which is a substantial benefit to the island economy.

We appear to have a chicken and egg problem in the minds of many in the community. I hear from some people the argument that more tourists will not come to the island until there are better facilities such as special attractions. 

However, the majority of the Tourist industry says loud and clear it will not invest further until there is a reasonable chance they will receive a worthwhile return on their capital outlay. This is fundamentally dependent on the number of tourists coming to the island.

So now we come to the nub of the problem; what can government do to give the most immediate assistance to the Tourist industry so that it can help drive forward the island economy?

At the cost of some £300,000, the States voted to instruct an expert review, by Frontier Economics, of the financial impact on the island economy of the Guernsey Airport Runway being extended approximately 170 metres such that the small workhorses of European air travel, the Airbus 319/320 and Boeing 737 can use our airport economically and safely.

Why hasn’t the Frontier Economics report been prominently publically released? There has been no media reference or public or community discussion concerning some of its powerful conclusions.

The report is buried in gov.gg somewhere. 

In my opinion the report was well-drafted, exhaustively researched, compelling and unequivocal in its conclusions.

  1. Over the forty-year life against which major infrastructure investment is measured the extension of the runway was easily affordable and was likely to provide a major boost to the numbers passing through the airport.

  2. Just less than 9,000 passengers a year more than otherwise would have been forecast would be sufficient to repay the debt and service the interest cost over the forty-year period. To put this number in context the Airport business plan, in 2018, was intending to try and increase airport numbers annually to 850,000.

  3. Airport numbers have fallen by nearly 2% on average every year for a decade.

  4. On average Jersey fares to the UK are 39% less than those to the UK from Guernsey.

  5. To put it another way, if you take the Jersey fare to the UK as the industry norm; every person flying in or out of Guernsey has to pay an approximately 60% surcharge for the privilege.   

Not only is this fare structure differential unacceptable it is unsustainable. It is not only a massive hidden tax on every Guernsey person flying to and from the UK but a huge disincentive to every potential visitor thinking of flying to the island on holiday. Given that the Guernsey/Jersey holiday offering is broadly similar; how are we to compete?

The only possible conclusion is that we must extend the runway to allow other airlines as well as Aurigny to fly in and out of Guernsey, as in Jersey, so that airfares can be reduced to an industry norm. To do nothing is just not an option.

There are however consequences, mainly for Aurigny. 

  1. Is Aurigny sustainable in its current form? It is self-evident that if Aurigny were to charge industry norm fares i.e. 39% lower fares, it would have a catastrophic effect on its finances. It already lost over £9m in a “normal” year 2018. The losses in the event of these fare changes would likely balloon into many tens of millions.

  2. If the Jersey fares were introduced it would have a massive boost to the Tourist industry as there should be a substantial increase in visitor numbers.

  3. However, the Guernsey taxpayer would have to have to pick up a huge bill for subsidising the Aurigny losses of many tens of millions.

  4. It is unfortunate that we own an airline in these pandemic circumstances as it appears likely, according to reports, that Aurigny will suffer an exceptional loss this year of the order £30/40m

  5. Aurigny however does provide control and certainty of delivery, all be it at a cost in terms of operational losses plus huge cost to the community and tourist industry. 

  6. I understand that Aurigny can continue to own the five Gatwick slots, as long as it continues to operate one aeroplane, as long as it leases the slots to other approved carriers. It can of course charter planes whenever it wants.

So what are some of the options in this complex dilemma?

1.  We could do nothing and continue as we are, with Aurigny in effect the only main flight option to the UK. There would continue to be a massive cost to the community and the continued slow death of the tourist industry. This would be extremely poor option with regard to the necessity of a buoyant economy needed to repay our reserves and service our debt.

2. We could extend the runway and allow the airport to operate as per 1 above. We know that only a small increase in passengers will pay for the runway extension. This would keep our options open.

3. Option two above would allow the Island to develop the charter market. Apparently Jersey has a considerable number of charter flights arriving annually from the UK and the EU. School trips, Sports competitions, conventions, cultural events and special interest groups could be regular visitors but only with a longer runway.

4. We could extend the runway and allow other airlines to operate basically in the same way as Jersey Airport including Aurigny. The operational contracts with other airlines would have to be carefully drafted and monitored in order to make certain that various operational requirements were met such as notice period of withdrawal, early morning flight times, frequency of service and fare pricing and many others. However, most airports do not have their own dedicated airlines, such as Jersey, and yet appear to operate successfully.

It is important to remember that even if the go-ahead was agreed by the States of Guernsey next year, it is unlikely that the extension could be completed within three/four years.

During this period Aurigny’s continued operations would be essential. At the same time negotiations with new airlines and Aurigny could take place to optimise the strengths of all parties concerned.

There appears to be a concern that by introducing one or more commercial airlines as the main carriers to and from Guernsey, with Aurigny used to a much more limited extent, that there will be such a substantial loss of control that Guernsey would find itself  open to “blackmail” on fare costs and availability of service to a completely unacceptable level and be unable to do anything about it.

The Guernsey Airport current business plan aims for 850,000 passenger numbers in the near future. An extended Guernsey runway should make this number readily achievable and substantially more, even with just the advent of the charter market, let alone additional travellers when industry norm fares are available at potentially a 60% discount on current prices.

However, the idea that European airlines are going to walk away from an airport that must be generating passenger fares, of the order of, £60/70m annually just does not seem credible, unless of course they can’t fly their standard planes in safely.

However, because of the pandemic times are not normal.

The airline industry is going through a traumatic reduction in passenger numbers. How will this affect Guernsey?

First of all, as we have already noted, the runway extension could not be realistically in full operation within three/four years. The world will not stop travelling indefinitely and it is highly likely that travelling numbers will be recovering to a more normal level.

However, Guernsey has unique passenger elements to its travel industry. What is to be the likely effect on travelling numbers? Remember the pandemic is likely to be with us, in one form or another, for years.

I suggest travellers fall into four specific general categories, tourists, residents travelling for holidays and to visit relatives and vice versa, finance industry, government and health and other business travel.

1. Tourists.

The Channel Islands have handled the pandemic so well that our name is being referenced as a worldwide example. We can play on this reputation for years by offering UK and other northern European countries the safest of holiday destinations.

2. Other.

I see very little change in the other travel groups except perhaps the finance industry that may see a slight temporary reduction due to Zooming etc.

The key point to remember is not that there may be a fall in numbers to Guernsey, which indicates we should not extend the runway. 

Rather to remember that we only need just under 9,000 yearly extra passengers other than we would have otherwise had to fund the airport extension. Every additional passenger is a free bonus to the island economy which we will desperately need.

This point needs emphasising as I see in many Political Manifestos currently being circulated a view that we should postpone airport extension decisions until the effect of the Pandemic on the airline industry passenger numbers has been analysed.

This is to misunderstand the Frontier Economic Report. It doesn’t matter if the Guernsey Airport passenger numbers are 850,000 as they are now, or are reduced by the Pandemic to 400,000. The Runway extension still only needs just under 9000 additional visitors to be self funding and it is therefore at least or even more important now that Guernsey tries everything it can to encourage visitors and not wait years for the Pandemic to subside.

Can there be any serious argument that an airport handling 800,000 or more passengers per annum will be unable find any European airline to handle this market. 

When is the Tourist/Catering industry going to start fighting its corner? It is said in various quarters that the GDP generated by the industry has fallen to such a small percentage that it may not be cost effective for government to invest in it any further!!! 

Can this possibly be correct? The Tourist industry has always been held up as the only other industry which is a natural partner for Guernsey, for historic, cultural and economic reasons.                            

Green matters

The new Airbus 319/320 NEO family of aircraft is approximately 20% more carbon efficient and releases less C)2 per passenger mile travelled than those planes currently flying scheduled flights into Guernsey. 

As a bonus the extended runway would allow for the Airport to apply to change its Instrument Landing System to Cat2 and possibly in future to Cat3 allowing significantly lower visibility requirements for landing.          

Electric Planes

There has been talk of electric planes entering the market and being of interest to Guernsey.

This is, of course, an exciting development but no one I’ve talked to believes there is any realistic chance of scheduled flights by electric aircraft being available from Guernsey, to the UK and further afield, within the next 15 years, except possibly in the 9-10 seat category for short hops inter-island.

Crucially what everyone does agree, including Cranfield University, an expert in this field, is that electric planes will require an airport runway at least as long, if not longer, than the current Airbus and Boeing options need. This would mean an airport extension anyway. 

Funding

A top-end figure to extend the runway is estimated at £70/80m. However, I believe that subject to the configuration of the “green EMAS” safety area this figure could be significantly less.

Whatever the final figure is, it will be substantial. It may not be possible, practical or desirable to take this money from States reserves but fortuitously we are in a historic low-interest period which very importantly is forecast to last for an extended period of time.

Apart from bank borrowing, there will be a number of long term funding arrangements available to the States such as an Airport Construction Bond offered to Guernsey residents and others. 

It is important to remember that given the small additional number of passengers needed this whole development should be self-funding.

Conclusion

In my opinion, the facts and figures speak for themselves. I believe that the economic argument is credible and compelling based on the recent Frontier Economic Report referred to in the figures above. 

I recommend that the States of Guernsey immediately instruct the appropriate committee to prepare a detailed project plan for the extension of the Guernsey Airport Runway that can be laid before the States of Guernsey, no later than the end of next year, for debate and approval. 

This project will take years to bring to fruition. Procrastination is not an option.

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