As most who follow news of the Icelandic economy are aware of, the tourism industry has been struggling over the past few months. Tourist arrivals have dropped significantly and many tourist companies have found themselves in a tight spot. The latest figures on payment card turnover and overnight stays, however, indicate that the outlook is not as bleak as many, including us, feared.
The Centre for Retail Studies has updated the foreign payment card turnover figures for April and May. The preliminary figures were stronger than anticipated, with only 13.1% decrease YoY in May despite the 23.6% drop in tourist arrivals. The updated figures, however, surpass the preliminary ones by a mile, catching analysts by surprise. According to the updated figures total foreign payment card turnover decreased by only 0.7% YoY in May, following a 4.5% YoY increase in April. Assuming no further updates, such a small decrease in May and growth in April is an astonishing victory for Icelandic tourism, as tourist arrivals dropped by 18.5% and 23.6% in April and May respectively. If the foreign payment card turnover is adjusted for exchange rate movements, the contraction in May is larger, unsurprisingly given the depreciation of the ISK in recent months. It should be noted that the figures exclude payment for flights, meaning that WOW air’s bankruptcy should not directly affect the figures.
Sources: Centre for Retail Studies, CBI, Arion Research
What really caught our attention is that spending per tourist seems to have increased greatly between years. A nominal increase in payment card turnover per tourist was expected, what with the depreciation of the ISK, but the order of magnitude came as a pleasant surprise. Each tourist spent 28% more ISK in April than at the same time last year, and 30% more in May! On top of that, each tourist spent far more in his own currency than before, a crucial development for value creation in the economy. In April, each tourist spent 13% more in their own currency than a year ago, and 15% more in May.
Sources: Centre for Retail Studies, CBI, Icelandic Tourist Board, Arion Research
By dividing foreign payment card turnover by nationality it’s clear that two nationalities tower over others when it comes to spending increases in April and May. Each Spaniard spent roughly 31% more euros in April and May combined, compared to the same period last year, while each American spent nearly 27% more in US dollars over the same period. The increased spending of Americans is particularly favorable considering every fifth tourist who has visited Iceland this year is American. In addition, Americans have in the past proved to be relatively valuable tourists, i.e. they spend more than most other nationalities.
Britons and Russians have also increased their spending considerably between years. The UK is the second most important market for Icelandic tourism, based on headcount, after the United States. Together, Britons and Americans account for over 40% of all tourists who have visited the country so far in 2019.
Sources: Centre for Retail Studies, CBI, Icelandic Tourist Board, Arion Research
So what’s changed? At this time, with only three months since WOW air was declared bankrupt, we can only try to guess. However, the newly published figures from Statistics Iceland on overnight stays might at least partly answer the question. According to the preliminary figures the total number of overnight stays, registered and unlisted, decreased by just over 9% YoY in May, while tourist arrivals decreased by 23.6% at the same time. Overnight stays in hotels increased in the Capital area, the East and the North in May, decreasing in other places. In total overnight stays in hotels decreased by only 1% between years.
If registered and unlisted (e.g. Airbnb) overnight stays are combined and divided by the number of tourists visiting the country, as is done in the graph below, it’s clear that each tourist is staying longer on average, in Apil and May, than one year ago. The duration of stay increased by 19.6% in April and 18.7% in May, which roughly equals a one day longer stay than before!
What is causing this remarkable change? Has the composition of tourists changed so drastically in one year? That’s probably one part of the explanations, as according the Icelandic Tourist Board’s survey among foreign tourists, tourists traveling with WOW air stayed for shorter period of time and spent less on average than other tourists, e.g. travelers with Icelandair. The composition of passengers with Icelandair has also changed considerably as the airline has increased the number of to and from passengers while reducing the number of via passengers. Icelandair has said that about 25% of via passengers are stopover passengers, who typically stay for one or two days in Iceland, and Isavia counts as tourists. Less via passengers means less stopover passengers which leads to a longer average stay per tourist. In addition, WOW air carried relatively more tourists who only stopped for a short while in the country without staying overnight. Another part of the explanation might also be the increased importance of foreign airlines, who usually fly less frequently to and from the country than Icelandair does and WOW air did. Whatever the case, the numbers are extremely positive for Icelandic tourism sector and the Icelandic economy as a whole.
Sources: Statistics Iceland, Icelandic Tourist Board, Arion Research
Foreign payment card turnover has generally had a good predictive value for travels in service exports. Last year, foreign payment card turnover amounted to 237 bn. ISK while travels in service exports amounted to 367 bn. ISK. That means that payment card turnover accounted for 65% of travel, or tourist’s total consumption in Iceland. As travels accounted for almost half of service exports revenues last year, we can use the payment card turnover to generate a rough estimate of service exports in Q2.
April’s preliminary figures are already available. Export of services was estimated 44 bn. ISK and import of services was estimated close to 35 bn. ISK. Hence, the surplus of balance of trade in services was 9.7 bn. ISK, compared to 12 bn. ISK surplus in April 2018, at a constant exchange rate. The change between years is much smaller if the figures are not adjusted for exchange rate movements, or just under 2%. Based on the payment card turnover figures and overnight stays in May, we expect service exports to exceed our expectations for Q2. Our forecast assumes 153 bn. ISK service exports revenues in Q2 but in light of the most recent figures the final result will probably reach 160 bn. ISK, or slightly more. If the development in April and May is an indicator for the rest of the year, the export contraction is likely to be somewhat smaller than we expected in March, a positive sign for GDP growth and the ISK.
Sources: Statistics Iceland, CBI, Arion Research