The UK Travel Market – Continuing disruption for the sector
Travel Market Conditions in the Pandemic
Perhaps only the healthcare and education sectors have suffered more severe disruption in the pandemic than the travel market, consisting of travel agents and tour operators, who service our apparently insatiable appetite for holiday experiences.
Those of them focused on international travel have 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. One major UK-based global tour operator has recently posted its first annual results for the pandemic period and reported revenues down by 89%.
Others lucky enough to concentrate on travel within the UK have suffered from a range of deeply frustrating issues, especially this year as demand for staycations has not only outstripped supply but pushed prices up to levels, which quite rightly are causing deep mistrust and outrage among their customers. In any event, this is a part of the market where much of the spend goes directly to accommodation and hospitality providers without generating income for agents and operators.
Even as most of the UK economy sees the first signs of a return of normality, there is extreme irritation within the industry as ever-changing government restrictions, the biosecurity compliance costs and uncertainty about future policy decisions continue to limit activity, devastate profitability and threaten viability.
As the peak school holiday period swings into action, UK airports are finally reporting increases in flight schedules and passenger numbers, but even so they are still only at a fraction of pre-pandemic levels.
Market Characteristics
This is an industry that creates 4% of the UK’s GDP or some £68bn in gross added value when accommodation spend is added to travel facilitation services provided by agents and operators. It employs around 1.5m people directly and its activities influence the employment of many more in other sectors. Travel agents and tour operators deploy £12bn of assets, borrow £3.8bn and have an overall net worth of £4.4bn.
Visit Britain has 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. These are the sunny commercial uplands that the industry hopes to regain once the pandemic finally releases its savage grip on us all.
Financial Challenges
Unfortunately, even with that level of activity the industry did not enter the pandemic in the most robust of financial health. Research using the data analytics system operated by the financial health monitoring specialists, Company Watch reveals some worrying signs of financial strain and distress.
We last carried out this research in April 2021. The deterioration in the overall finances of the travel market in just three months is particularly striking, reflecting the first signs of the devastation the crisis has caused. The picture will surely worsen still further as more companies file accounts covering the period of disruption since March 2020.
There are almost 5,000 companies registered at Companies House, which claim to operate as tour operators or travel agents. Of these, 2,140 (43%) 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. Three months ago, this percentage was 40%.
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 between now and March 2022.
The average financial health score awarded by the Company Watch system (H-Score®) is now only 37 out of a maximum of 100, compared to the whole economy where an average closer to 50% would be expected. The average for these same companies was 40 a year previously, which is a remarkably sharp downward correction in such a short space of time.
902 (18%) travel companies had negative balance sheets with a combined deficit for these ‘zombies’ of £272m. Even more (919 or 18%) had negative working capital and the total shortfall here was £186m. Only 12% were zombies and 13% had negative working capital when we did our research in April 2021.
Our analysis also confirmed how fragmented the industry is and how fragile some parts of it are, with 1,427 (29%) companies having total assets of only £25,000 or even less.
Because of the delays in filing company accounts, it must be remembered that this research relates to financial data much of which is for trading periods pre-dating the Coronavirus crisis. With the savage impact of the pandemic, the picture will inevitably be far worse in a year’s time when the next set of accounts are in the public domain. This is despite the commendable efforts by the government to provide support to struggling travel businesses, especially through the furlough scheme. The extent to which travel enterprises may have loaded up their balance sheets with additional borrowings under the various government-guaranteed loan schemes and are now carrying substantial deferred VAT and PAYE liabilities is a source for serious concern.
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.
Getting Match Fit
The travel market had a disastrous 2020. Despite the extraordinary success of the vaccination programme, 2021 looks like turning out only marginally better. The highest priority now is for travel agents and tour operators to do all they can to put themselves in a position to take advantage of the widely anticipated surge in activity in 2022, when pent up demand and accumulated savings are expected to drive unprecedented travel activity.
Our research shows the first signs of the damage to financial viability caused by the pandemic, but the true picture is inevitably worse. Balance sheets have been loaded with borrowings and unpaid legacy liabilities abound, while getting businesses and their staff back to the required level of operational efficiency is going to be a major challenge.
It is imperative that owners and managers focus now on sorting out as many financial and practical issues as soon as possible and as fast as circumstances allow. A thorough refurbishment and recovery programme is required:
- Realistic cash flow and profit forecasts need preparing, based on reasonable assumptions
- Finances need restructuring
- Debts and legacy pandemic liabilities need re-negotiating
- Working capital resources need bolstering to support growth in 2022 and beyond
- Furloughed staff need re-integrating and new staff need recruiting to fill gaps
- Operational capacity needs re-aligning with the new normal, whatever that turns out to be for each business
Moving Forward
The full commercial horror of the pandemic has been clear to the travel market for all too long. Only now are the financial implications beginning to emerge into the public domain and much worse is yet to come on this front.
The wide range of government support measures has kept many businesses alive, when in different times the crisis might have proved fatal. The trick now is for those companies to move from surviving to thriving.
Early and independent expert advice will be a vital part of that process. Not only are whole swathes of travel managers and staff shell-shocked from what they have been through, but very few executives have the necessary experience of these recovery situations to choose the right options and take the hard decisions that are now both essential and urgent.
August 2021