Travel

The travel industry creates of 4% of the UK’s GDP or some £68bn in gross added value. It employs around 1.5m people directly and its activities influence the employment of many more in other sectors. It deploys £13.5bn of assets, borrows £3.7bn and has an overall net worth of £3.8bn.

Travel

No other part of the UK economy has suffered more disruption that the travel sector during the pandemic. For all the woes of the retail, hospitality and events sectors, their periods of interruption have been relatively well defined and there were at least some limited forms of alternative trading for them. Travel has suffered not just from the UK’s crisis management policies, but decisions affecting inbound and outbound tourism and business travel taken by governments all over the world.

Even as most of the UK economy starts to look towards the return of normality, there is extreme frustration within the industry as government restrictions and their associated biosecurity compliance costs and uncertainty about future policy decisions continue to limit activity.

The scale of the hit taken by tour operators and travel agencies is well illustrated by the savage drop in passenger numbers at gateways like Heathrow airport, where passenger numbers fell by 73% in 2020 and then by 89% in January 2021. The owner of British Airways, IAG has reported losses of £1.1bn or £12m a day in Q1 2021 and expects only to operate 25% of 2019 capacity in Q2 2021.

Every cloud has a silver lining, as the issues with foreign travel have pushed staycations to the fore, so one part of the market has gained. Unfortunately, much of the spend here bypasses the core of the travel industry and goes straight to the accommodation provider.

Market Characteristics

This is an industry that creates 4% of the UK’s GDP or some £68bn in gross added value. It employs around 1.5m people directly and its activities influence the employment of many more in other sectors. It deploys £13.5bn of assets, borrows £3.7bn and has an overall net worth of £3.8bn.

Visit Britain reported that inbound tourism generated 41m visits to the UK in 2019 and generated total spend of £28.5bn. Domestic tourism created 99m overnight trips (of which 60m were for vacations), with a total spend of £19.4bn.

Financial Risk Profile

Unfortunately, even with this level of activity the industry did not enter the pandemic in the most robust of financial health. Research using the analytical system operated by the financial health monitoring specialists Company Watch reveals some worrying levels of financial strain and distress.

There are 4,900 companies registered at Companies House, which claim to operate as tour operators or travel agents. Of these, 1,978 (40%) are in the Company Watch warning area, indicating that one in four of them will file for insolvency or undergo a significant financial restructuring during the next three years based on an analysis of their latest published accounts.

Fortunately, insolvencies in the sector have been mercifully limited in recent years but, after the unprecedented financial disturbance during the Covid-19 crisis, it cannot be assumed that this trend will continue, particularly as the various government support measures are withdrawn.

The average financial health score awarded by the Company Watch system (H-Score®) was only 39 out of a maximum of 100, compared to the whole economy where an average of close to 50% would be expected. 601 (12%) travel companies had negative balance sheets, with a combined deficit for these ‘zombies’ of £210m. Even more (657 or 13%) had negative working capital and the total shortfall here was £162m. The research also confirmed how fragmented the industry is and how fragile some parts of it are, with 1,460 (30%) companies having total assets of £25,000 or less.

Because of the delays in filing company accounts, it must be remembered that this research relates to financial data for trading periods pre-dating the Coronavirus crisis. With the savage impact of the pandemic, the very latest financial picture will inevitably be far worse despite the efforts by the Government to provide support to struggling businesses.

The extent to which travel enterprises may have loaded up their balance sheets with additional borrowings under the various government-guaranteed loan schemes and deferred VAT and PAYE liabilities is a source for serious concern. It is worth noting from HMRC data that over a third of all UK companies have taken out one of these loans and that the Office for Budget responsibility has predicted that a third of these debts will never be repaid.

As restrictions are gradually eased and commercial conditions for the travel sector finally return to the new version of normality, whatever that might look like, there will be a mountain of legacy debts and liabilities to be paid back and working capital must be found to support the anticipated surge in activity.

Business challenges being faced by Tour Operators and Travel Agents as the pandemic eases

  • Coping with the continuing uncertainty about Covid travel restrictions
  • Ensuring supply chains are still intact and robust
  • Restoring staff morale and re-integrating furloughed staff
  • Recruiting suitable new staff to replace those who have permanently left the UK
  • Repaying loans taken out during the pandemic
  • Settling legacy liabilities deferred during the pandemic
  • Repairing balance sheet damage where asset values, such as goodwill and property have fallen
  • Negotiating additional working capital facilities to support growth from the current low base
  • Negotiating with landlords on rent arrears and future rents
  • Deciding pricing and capacity in the context of variable customer appetite
  • Managing IT and technology issues, not least cyber security and data protection
  • Absorbing ongoing bio-security costs without damaging profitability
  • Addressing the issues raised by the increasing public and business focus on environmental, sustainability and governance (ESG) standards and on diversity and inclusion (D&I) considerations
  • Making sure businesses are both solvent now and viable for the future
  • Producing meaningful and realistic financial forecasts to guide management and facilitate negotiations with stakeholders, such as lenders

Helping businesses in the travel sector

Partners and staff across the various Opus service lines have extensive experience and knowledge of the travel sector. There are many ways in which we can support tour operators and travel agents, their owners and their management.

Ways in which we support companies, business owners and their management:

  • Carrying out comprehensive business reviews to assess and advise on a broad range of financial and commercial issues
  • Assisting with financial forecasting
  • Reviewing financial and operational systems
  • Advising and supporting in negotiations with key stakeholders, such as lenders, landlords and suppliers
  • Raising new funding
  • Providing strategic advice on changes to the business model or on managing growth
  • Seeking out acquisition opportunities
  • Advising on exit routes such as the sale or merger of the business
  • Undertaking forensic investigations where circumstances dictate
  • Planning and assisting with restructuring projects
  • Offering independent advice on solvency issues

Our strong international connections and experience are available to assist with overseas issues.

If you would like to hear more about how we can help your business to best manage its current challenges, please contact us at travel@opusllp.com or call us your local office to arrange a no obligation and confidential call with one of our Partners.

Market Sector Report

The UK Travel Market – Continuing disruption for the sector

The travel market employs 1.5m people in the UK and, with its wide ranging activities, it has a significant influence on many other industries.

Read the Report