Does the Cost of Visas Affect Tourism Demand
by Kurt Janson
Sep 2008
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This article explores the impact on visitor numbers of the 2005 increase in the cost of visas to the UK.
It looks at the evidence to date on the impact of visa charging on visitor numbers and whether the UK visa regime is impeding tourism revenue growth from emerging markets. This is done through an analysis of the UKVisas report for 2005, the 2006 Caledonian Economics Report and the 2008 Oxford Economics research on the subject.
Nationals of 108 countries around the world require a visa to enter the UK – be it to study, undertake business or simply enjoy Britain’s unique heritage and attractions. In visiting the UK, these visitors make a valuable and vital contribution to the UK economy. However, on 1 July 2005, UKvisas increased the cost of the standard six month multiple entry visas for leisure travel to the UK (which account for around 70% of all visa applications) by 40% from £36 to £50 as, under the terms of its Public Service Agreement with Government, it is now required to issue visas on a cost-recovery basis.
This move has triggered an ongoing debate as to the impact of visa charges on visitor numbers to the UK.
This paper looks at the evidence to date on the impact of visa charging on visitor numbers and whether the UK visa regime is impeding tourism revenue growth from emerging markets.
Although there are 108 countries whose residents require a visa to enter the UK, there are a small number of large emerging economies of countries that are particularly relevant to the growth of tourism both globally and to the UK. These countries include Russia, India, China, Saudi Arabia, UAE, Thailand and Taiwan.
According to the UN World Tourism Organisation World Tourism Barometer 2008, India, for example, has one of the fastest growing economies in the world. This is reflected in the growth of outbound travel, with overseas trips increasing by 15% per annum for the last three years to stand at 8.3m. The Chinese economy is experiencing similar growth and spending on overseas travel has ballooned from just US$ 3.7 billion in 1995 to US$ 24.3 billion in 2006.
Over recent years, these emerging markets have become increasingly important to the UK economy. According to the Office for National Statistics' 2007 International Passenger Survey, the top seven markets requiring a visa accounted for £1.3 billion of the UK’s overseas earnings from tourism (7.1% of total earnings).
However, despite the strong growth in outbound tourism from these markets, research by organisations such as Euromonitor International and AsianDemographics indicates that the growth in tourism from these markets is highly price sensitive. For example, work by AsianDemographics in 2005 estimated that there are 33m middle-income households in China that earn enough discretionary income to afford to take an overseas holiday and that this number should triple to around 100m by 2010. However, the level of income required to be classified as “middle-income” in China equates to around US$5,000 a year (The Eiffel Tower Factor, 2005). This means that while there are large numbers of Chinese able to afford an overseas trip, they are going to be very price conscious when considering travel to high-cost destinations such as the UK.
Determining the impact of visa price increases on these price-sensitive emerging markets is very important to the UK in its attempt to increase tourism earnings.
In the three months after the introduction of the price increase on 1 July 2005, applications for visas to enter the UK decreased by 18.1% (UKvisas) suggesting that the increase in charges had a marked impact on demand for visa nationals to visit the UK. Unfortunately, however, the increase in visa fees came just six days before the terrorist bombings on the London transport system on 7 July 2005, meaning that it was difficult to differentiate whether the drop in visa applications was due to the increase in cost or the terrorist bombings deterring travel to the UK.
The first research to attempt to determine the impact of the change in visa pricing was the UKvisas report, Analysis of Visa Demand: July to September 2005. This analysis indicated that prior to the introduction of the increased fees (Jan-Jun 2005), the demand for visas was up 9.8% over the previous year. However, once the fees were increased in July, demand for visas fell to 10.8% below the same month in 2004 and averaged 8.3% below the comparable period the year before in the three months from July to Sept 2005.
Despite this drop in visa demand, UKvisas’ analysis stated that there was “no evidence that any fee increase has been a dominant factor in any reduction in visa remand”. Rather, it concluded that the decrease in demand was primarily due to the London bombings and to airlines introducing fuel surcharges as a result of rising oil prices.
However, an analysis of the three-month rolling averages for the inbound visitor number growth against the growth in visa demand indicated that the London bombings were not entirely the cause of the decrease in visa demand.
This graph shows that the demand for visas was increasing at approximately the same rate as inbound visitor numbers for the first half of 2005. At the same time, the growth in inbound visitor numbers from long-haul markets was starting to recover from a poor start to the year.
In July, the London bombings certainly reduced the growth in total inbound visitors and, after a lag period, had a small impact on growth from the long-haul markets. However, it is important to note that both total inbound visitors and long-haul visitor numbers have continued to grow since the London bombings, albeit at reduced rate.
By contrast, the above graph shows that the growth in visa demand did not just slow, but actually reversed. The decrease in the rate of visa growth is 135% greater than the decrease in growth of total inbound tourism numbers. This strongly suggests that there is another factor, other than the London bombings or fuel cost increases, that has caused this decrease. It also shows that this other factor must have occurred in July 2005. As the only other significant factor to occur that month was the increase in the cost of visas, this analysis strongly indicates that the increase in the cost of visas has reduced the growth in demand for visas to the UK by approximately 10%.
To test this hypothesis and the findings of the UKvisas report, in 2006, the tourism industry commissioned Caledonian Economics to analyse the likely number of visitors arriving from India and China compared to the number who would have come without the increase in visa charges.
This was done using an econometric model developed in 2001 to determine the price sensitivity of tourism to the UK based on macro-economic factors such as the growth in real incomes and Sterling’s exchange rate (Caledonian Economics, The Price Sensitivity of International Tourism, British Tourist Authority, London, 2001).
The regressions calculated in this research (The Impact of Increased Visa Charges on Inbound Visitors to the UK from India and China, Caledonian Economics, 2006) indicated that with a 3.5% increase in the exchange rate and the Indian GDP growing by 7.6% in 2005, Indian visitor spending in the UK during the second half of 2005 should have been approximately £34m (26%) higher than the actual International Passenger Survey figures for this period. Similarly, the modelling of the Chinese market suggested that tourism expenditure from Chinese visitors should have been £49m (86%) higher in the second half of 2005 than the actual figures.
Overall, this study concluded that in the year following the visas price increase (compared with the same period in 2004), the UK economy lost approximately £80m per annum from China and £60m per annum from India. These falls are despite the introduction of the Open Skies policy in India and the ADS agreement with China.
However, there are two main weaknesses with the report.
1. Because the analysis was undertaken with only three months of post-event data, it relied on pre-event data and the assumption that the econometric model developed to determine total tourism revenue for the UK in 2001 was applicable at the level of the individual market.
2. The model was not able to demonstrate that the primary driver of lower visa demand was the increased cost of visas – it was only able to show that there was a variance in the level of revenue gained from the two markets that could not be explained by GDP growth or changes in exchange rates.
It could only conclude that,
'“The evidence suggests that the UK is losing approximately £80 million in inbound tourism receipts from China in a full year, and £60 million in inbound tourism receipts from India, as a result of factors that are running counter to the overall positive economic drivers of outbound Chinese and Indian tourism. There is a strong likelihood that increased visa charges are one of the factors causing the loss, as no other significant factors have been identified to explain the decline in International Tourism Receipts from China and India at a time of strong growth in the UK’s earnings from the rest of the world”.
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To overcome the weaknesses in the Caledonian Economics study, the industry and the Government undertook a third study into the impact of visa pricing on demand in 2008. This study was undertaken by Oxford Economics and used the three years of post-event data to develop an econometric model to determine the impact of visa pricing on demand.
The study also benefited in that the post-event data showed that the growth rate in visa applications and issued visas recovered strongly the following year and have largely mirrored the growth in total tourism numbers to the UK since the beginning of 2006.
To undertake the econometric analysis on the short series of post-event data, visits from the 108 visa-requiring countries were grouped together into four income-based sets. This way, it could be reasonably assumed that the impact of income on visa applications was the same across all countries in that group.
The resultant econometric analysis was only able to detect a statistically significant impact for one group of countries – those with the lowest income. However, even with this group the impact was very small and it was determined that the results were too narrowly based to conclude with confidence that increases in visa fees had a statistically significant negative effect generally on visa applications.
The inability to find a statistically significant correlation between the price of visas and application rates does not, however, mean that such an impact does not exist. As the time-span of the study was very short (there were only 17 periods of data available for analysis) there was the problem of not having sufficient data to produce an accurate regression. The second, and more difficult problem was that the data available on visa applications did not differentiate between whether the visa was sought for a study, business or leisure visit to the UK.
This is important as the 2001 BTA study on price elasticity showed that business and study travel is largely determined by economic growth and is relatively unaffected by cost as the cost is a very small component of the value of the trip. By contrast, leisure travel is much more price sensitive but constitutes only a third of all travel. This means that any correlation between visa price and leisure travel will be difficult to detect due to being hidden by less price-sensitive visa applications.
There were also other factors which impacted upon the study. One of the most significant was that over 2007 the visa application regime itself was changed significantly with the introduction of biometric visas. This meant that rather than being able to post in applications or a single member of a travel party (or an intermediary) being able to take applications for that party to a visa processing office, all applicants now have to travel to a visa centre to have their fingerprints taken and undergo an iris scan.
While these measures are required to increase security, the additional time and effort required to make an application for a visa will also have had an impact on visa application rates.
Taking these factors into account, the study could only conclude that;
'“Although in general no statistically significant impact from the visa fee increases has been found, this does not rule out an impact existing – as many in the UK tourism industry believe on the basis of anecdotal evidence and their experiences. However, this research does conclude that at the moment such an impact cannot be scientifically quantified.”
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The studies that have been conducted show that in complex environments such as travel, where purchasing decisions are subject to a large variety of constantly changing influences from terrorist attacks and fashion through to exchange rates and weather, isolating the impact of one influence using a short series of data is extremely difficult.
It is easy to argue that the cost of a visa must have an impact upon application rates, especially as leisure tourism is almost infinitely substitutable (ie tourists have numerous alternative destinations that they can visit). It is a truism that if the cost of a visa was infinitely high, no one would apply for one, while if there was no cost, more people would apply. The real question, therefore, is whether the cost at the present level is having a significant detrimental impact on tourism numbers and the level of revenue that the UK earns from visa-requiring countries.
The research to date suggests that the cost of a visa to the UK has very little impact on application rates and, by extension, the revenue that the UK gains from tourism. This conclusion is supported by the 2001 price elasticity work which indicates that the price elasticity is -1.3 (ie., a increase of 1% will cause a 1.3% decrease in demand). As the average cost of a trip to the UK is around £700, the increase of £14 in the cost of a visa equates to only a 2% increase in total cost. This is relatively insignificant and would be unnoticeable to most travellers.
However, it is important to note that the cost of visas should not be assessed in isolation. There are other Government-related charges that apply to travel to the UK such as Air Passenger Duty and VAT on major expenditure items such as hotel accommodation and restaurants. These charges are not applied, or applied at a much lower rate, on the cost of travel to other competitor destinations.
Work by VisitBritain and the Council for Travel and Transport indicates that direct taxation on visitors from visa-requiring countries constitutes around 18% of the total cost of travel to the UK and is twice the level of taxation that applies to other European destinations. At this level, it is clear that the UK is at a competitive disadvantage.
One final impact of increased visa charges that needs consideration is that of overseas perception of the UK as a destination. The 2004 Home Office Report “The Impact of Changing National Visa Regulations on the Choice of Destination Country by International Students” concludes that;
'“the change in student flows to a country is not necessarily proportional to the magnitude of any policy change. As international students make their decisions based on their perception of the country of study the impact is frequently greater than might rationally be anticipated, ie a stricter regime or higher fees results in the country being perceived as a less welcoming and/or accessible destination”.
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When viewed alongside other factors such as the need to fingerprint visitors for biometric visas, it is easy to understand how the increase in visa costs to the UK could have been perceived as being unwelcoming and could result in slower growth rates from emerging countries than would otherwise occur. So, while the increase in visa charges in itself may not have caused a significant downturn in tourism to the UK, it would be unwise to dismiss the notion that the increase had no impact.
Kurt Janson has a Masters Degree in Public Policy from Lincoln University (NZ) and worked for the New Zealand Department of Conservation and subsequently for the New Zealand Tourist Board, developing national and regional tourism strategies. He moved to Britain in 1997 to work as Policy Manager for the English Tourist Board and the British Tourist Authority. Later he became the Head of Strategic Planning for VisitBritain with responsibility for Policy, Strategy, Sustainable Tourism, Business Planning and Marketing Evaluation.
Kurt left VisitBritain in 2004 to set up his own tourism consultancy business which, as well as undertaking research projects for a number of tourism businesses and organisations, provides tourism policy advice to the Tourism Alliance, an umbrella trade association for the tourism and hospitality sector that comprises almost 50 industry associations representing almost 200,000 business of all sizes throughout the UK.