Travel Operators Feeling the Pinch in Bookings Slump
August 19th, 2010
The annual Anglo-German race to be first to the coveted Mediterranean sun lounger with the beach towel looks set to be resoundingly won by Teutonic tourists this year, as it seems growing numbers of hard-pressed British holidaymakers are forgoing their annual package holiday. Almost one in three Britons who took a package break in the sun three years ago are thought not to be doing so this summer, according to leading figures in the tourism industry.
And with darkening economic clouds forecast to remain over consumer spending for some time, traveller numbers are set to dwindle still further next year. Market leaders Thomas Cook and Tui Travel last week delivered cautious prognoses for their UK operations in 2011 after identifying an abrupt slowdown in booking patterns since mid-May that is likely to dent profits for the current year at both businesses.
The two companies stressed that the slowdown in bookings came immediately in the wake of the third closure of airspace caused by the Icelandic volcanic ash cloud. This, they told investors, might suggest the weakness in demand was an aberration. Equally, however, it might be the start of something more enduring. “What we don’t know is how much was driven by fears in the economy and how much was driven by volcanic ash,” says Thomas Cook chief executive Manny Fontenla-Novoa. “We just don’t know.”
Adding to the industry gloom in the UK has been the failure last week of Birmingham-based agent and tour operator Sun4U. The collapse came less than a month after Surrey-based Goldtrail Travel called in the administrators and nine months after the demise of Scottish package-holiday provider and airline Globespan.
The wary tone struck by both Tui and Thomas Cook is echoed by Ian Oakley-Smith, an insolvency partner and travel specialist with accountant PricewaterhouseCoopers. He warns that a rash of corporate failures are likely once the busy summer season fades and the final hotel and airline bills fall due.
“The autumn always sees a few firms go bust, but we expect to see more than average this time,” he says. “If the big players are seeing a tougher bookings environment, and if that is reflected across the board, then there will be some smaller players less able to cope … They may already have seen two years of difficult trading eating away at reserves on their balance sheet.”
The good news is that pressure to fill aircraft and hotels this summer is already generating a wave of late bargain deals for holidaymakers who have waited until the last minute before booking. Good deals are most likely to appear in Spain, Greece, Ibiza and for holidays in Mallorca.
Tui’s finance director, Paul Bowtell, says the most subdued trading is in the north of England and the south-west, with things slightly better in Scotland, the Midlands and the south. The Balearic Islands, Portugal, Spain and to a lesser extent Greece are among the usually popular destinations that appear not to be attracting the anticipated numbers of holidaymakers this year.
Among those opting to stay in the UK this summer was David Cameron, who is spending his time off in Cornwall. Before departing for the West Country, he urged others to follow his lead in the interests of the fragile economic recovery. “At the moment, 36% of what Brits spend on holidays is spent at home. Can we up our game and raise that to 50%?” he asked last week.
Many hotels, B&Bs and campsites around Britain’s coasts are already struggling to meet record levels of demand. Not only have travellers been spooked by the cost of overseas travel and uncertainty over their personal finances, they have also been adjusting to long spells of travel disruption. As well as ash clouds from the Icelandic eruption and exceptional winter snowfall, strikes by BA cabin crew and the threat of industrial action at BAA have added to the uncertainty.
“The ‘staycation’ phenomenon looks as if it is happening right around the coast,” says Guy Parsons, chief executive of no-frills hotel chain Travelodge. He says revenue per available room is up by a percentage in “good double digits”, albeit against a very weak spell last year.
A headline-grabbing promotion at rival chain Premier Inn seeks to play on the unpredictability of British holiday weather, offering free spray-on tans to Friday-night guests at a dozen of its hotels throughout August.
The storm cloud gathering over the travel industry in the UK is in sharp contrast to the outlook for other parts of northern Europe – particularly Germany, where the economy is showing signs of health and consumers seem to have no intention of sacrificing their annual stint in the sun.
The German economy showed quarterly growth of 2.2%, according to official figures last week. While many believe that rate of expansion will ease off, most analyst are nonetheless agreed that Germany’s recovery prospects look rosier than those for the UK. Two days before Germany’s GDP results, the Bank of England cut its growth outlook for the UK, noting how shaky consumer confidence appeared and forecasting a long and “choppy” recovery.
Public sector jobs cuts and fears of rising mortgage costs could make consumers increasingly wary of committing to expensive purchases, and demand for package holidays could see further declines in coming years. “If interest rates go up quite quickly then we may find that the market changes,” warns Oakley-Smith.
Tui and Thomas Cook last week reminded investors how hard the industry had already worked in recent years to slash the number of package holidays on sale. A round of mergers in 2007 saw Europe’s four market leaders, MyTravel, Thomas Cook, First Choice and Thomson shrink to just two groups. These consolidated businesses, struggling against the aggressive pricing of low-cost airlines, quickly moved to scale down short-haul packages to the costas and other “commodity destinations”.
No sooner was this process under way, however, than the credit crunch arrived, forcing the industry to accelerate plans to reduce the number of holidays on offer in order to reflect crumbling demand. And in September 2008 about 3% of industry capacity was removed at a stroke with the collapse of the third largest tour operator, XL Leisure.
“After three years of reducing capacity by 30% [in the UK], we are starting to become more limited in terms of what we can do,” explains Tui’s Bowtell. He has hinted at the prospect of handing some of Tui’s aircraft back to their leasing companies next year, while Thomas Cook’s Fontenla-Novoa has raised the spectre of job cuts.
If these are the prospects for the industry’s biggest players, it looks a fair bet that the next few years could see several smaller British tour operators go the way of XL, Globespan, Goldtrail and Sun4U.
FAILURES INTENSIFY CALLS FOR REFORM OF CONSUMER PROTECTION
The chaotic and costly collapse of the tour operator Goldtrail last month, at a likely total cost to the taxpayer-backed consumer protection scheme of £15m-£20m, was quickly followed this weekend by the demise of Sun4U, highlighting the urgent need for reform of the regulation of package holidays.
The failure of Goldtrail in particular shocked regulators and industry insiders, as it came at a time of year when most tour operators are usually awash with cash from bookings, but are yet to pay out in full to airline and hotel suppliers. The same is true of Sun4U, although it may have been on the Civil Aviation Authority’s watch list for some months prior to its failure.
The unusual timing of these two collapses also created maximum disruption for travellers. Some 50,000 Goldtrail customers — and a further 7,000 estimated to be booked with Sun4U – had been expecting to enjoy their summer break when they heard the news that their holiday firm had been declared insolvent.
While package holiday customers will be refunded through the Air Travel Trust’s fund, which helps customers of failed tour operators licensed by the CAA’s Atol scheme, booking payments are unlikely to be returned in time for the cash to be put towards another holiday this summer.
Both Goldtrail and Sun4U were licensed to carry thousands of Atol-protected travellers despite being almost one-man bands: the ownership and directorial responsibilities of the two firms were tightly controlled by just two travel agents — Kinnary Patel, 48, of Purley, Surrey in the case of Sun4U, and Kadir Aydin, 44, of Wimbledon, in the case of Goldtrail.
The unfortunate timing of the collapse of Goldtrail alone — a business with a turnover of close to £60m holding an Atol licence from the CAA to carry 110,000 package holidaymakers — is expected to put a dent of up to £20m in the ATT traveller protection scheme, which is already £31.8m in the red.
The Goldtrail bill will not be far shy of the £27m cost incurred by the failure of XL Leisure – a much larger tour operator which had its own fleet of aircraft – in the autumn of 2008.
The scale of XL’s collapse – the company had 3% of the package holiday market – shocked regulators. Combined with the worsening economic outlook, the failure prompted the then Labour government to raise the recently introduced £1 levy on package holidays to £2.50. There is now every chance this charge may have to rise again if the expected wave of tour operator failures materialises in the autumn.
The ATT fund, designed to pick up the tab for consumer protection costs, currently finances its deficit through taxpayer-guaranteed bank loans.
But the coalition government may want to take a more radical view and reform travel consumer protection in its entirety. Ministers are already facing pressure to drag regulation into the internet age, with clearer guidance for holidaymakers on which holiday deals are covered by CAA protection and which are not. There is a growing industry consensus — among regulators, tour operators and insolvency experts — that the current protections are as confusing as they are outdated and underfunded.
Story from Guardian