The UK travel sector report – cautious optimism but finances need improvement
When we last looked at the travel industry back in July 2021, the world was still firmly in the grip of the pandemic, which immensely affected the industry. Two years on, the challenges keep coming for those who facilitate travel in the UK, our travel agents and tour operators. Inflation may be falling back gradually and the impact of the Ukraine war on tourism is better understood, but the sudden flare up of conflict in the Middle East is creating a whole new set of uncertainties.
Nevertheless, there is an air of measured optimism in the travel sector as regards its future prospects, although its current finances could be in better shape as they show an elevated risk on a number of key measure.
Market characteristics
The World Travel & Tourism Council latest assessment predicts that tourism will contribute £252bn (11% of GDP) to the UK economy in 2023, finally beating the pre-pandemic high of £248bn in 2019. This is a significant uplift from the £237bn contribution in 2022. Their report says that one in seven of the UK workforce is engaged in the industry one way or another, or more than 4m people.
The estimate for inbound tourism for 2023 is 37.5m visits, compared to only 31m in 2022. The peak was 40.3m visits in 2017. There were 65m outbound visits by UK residents in 2022, of which 80% were to European countries. The latest statistics for domestic tourism are for 2021, when activity was distorted by the pandemic, but there were 119m overnight trips by UK residents, who spent £27.2bn that year.
Our research identified 5,817 UK registered companies claiming to be either travel agencies or tour operators. This compares to just under 5,000 two years ago, an increase of 17%. Between them, they have total assets of £10.3bn, total debt of £2.4bn and a combined net worth of £2bn.
Market conditions
Travel agents
The latest travel agent tracker report by TTG Media for the three months to September 2023 confirmed there were many positives: rising average sales prices, a healthy lates market and shorter call wait times with suppliers. Several respondents revealed plans to grow their businesses and/or expand their retail footprint. Over a third of UK tourists book their holidays through agents according to research by Travel Counsellors.
But equally, these are still challenging times for the travel trade; enquiries, new sales and bookings fell to their lowest level of the year during Q3, although most respondents had a better Q3 than they did a year ago, or at least no worse. The market also remains very late, with client spend heavily dependent on cost of living challenges, particularly with winter and Christmas looming.
Another feature is the continuing growth of online travel agencies (OTAs). Half of the top 10 ATOL brands are now OTAs. Booking.com illustrates this point well. They are now the 4th largest ATOL brand with 2.4m passenger authorisations. In September 2022, they were only 9th with 285k authorisations.
In terms of the major issues faced by travel agents, the TTG tracker identifies the three most significant as price matching, price increases and travel delays. The cost of living only comes in fourth on the list.
Package volumes and pricing
In October 2023, ATOL has authorised 31.6m ATOL-protected packages for the year to September 2024, which is an increase of 20% year-on-year. Pre-pandemic, the figure was only 28m. Mintel is predicting that holiday spending in 2023 could exceed pre-pandemic levels and Barclays has confirmed that credit card spending on travel continues to increase.
There are some concerns that this volume may prompt a price war if the cost of living crisis and the Middle East conflict suppresses demand. The mitigating factor is that compared to the past, there are now fewer integrated groups with their own aircraft to fill following the demise of the likes of Monarch. There are also fewer players with high fixed costs, meaning that there should be less chance of seat dumping.
Airlines
The most recent results of major airlines in the UK market are a litany of almost exuberant optimism. EasyJet has announced a $30bn order for Airbus planes as part of setting an ambitious annual profit before tax target of £1bn as compared to the current level of £460m. It expects part of this growth to come from doubling profits at EasyJet Holidays to £250m a year.
Profits at both Ryanair and British Airways owner, IAG in Q2 2023 soared by 400% and broke previous records for that quarter. Ryanair is joining EasyJet in ordering substantial numbers of new planes, in their case with a $40bn order for 300 planes from Boeing. The common theme from all three airlines is the willingness of travellers to pay higher fares.
Despite this financial success, the airlines are not without operational challenges from a range of recent incidents, particularly the collapse of the NATS air traffic control system on Bank Holiday Monday in August and flight restrictions at Gatwick in September because of air traffic control staffing issues.
Financial risk profile
We have used the Company Watch financial health monitoring system to analyse the latest accounts filed at Companies House by the 5,817 UK-registered companies, which claim to operate as travel agents or tour operators. The results show some signs of improvement since July 2021, but the overall finances of the sector remain significantly below par in a number of key areas.
By way of caveat, the delays built into the Companies House filing timetables means that these results reflect the position as it will have been anywhere between six and eighteen months ago, on average perhaps a year ago.
A summary of our findings can be found here.
Total assets
Although there are more companies operating in the travel sector, their combined total assets have fallen from £12bn to £10.3bn in just over two years. This means that the average asset base of a UK travel company has dropped from £2.42m to £1.76m. This fall appears to be down to businesses shedding assets to generate cash or repay debt. As we explain immediately below, this fall is almost equal to the reduction in borrowings by travel companies over the same period.
Borrowings
Total debt across our sample has fallen from £3.8bn in July 2021 to £2bn now. The average per company has gone down from £765k to £404k. In the light of the recent significant increase in interest rates, this should produce a welcome reduction in debt servicing costs and cash flow pressures, which might otherwise have been an even greater threat to profitability and viability for over-indebted businesses.
Net worth
The retained value of the sector, the difference between its assets and liabilities has shrunk substantially since July 2021, falling by more than half (54%) from £4.4bn to only £2bn. This indicates the level of pressure on profitability caused by the pandemic and subsequent adverse factors. In overall terms, these figures suggest that the UK’s travel facilitation industry has made losses of £2.4bn during the pandemic and since.
Overall financial health
The average financial health rating on the Company Watch database for our sample is 38 out of a maximum of 100, compared to 37 in July 2021. This indicates that the entire sector is more vulnerable in financial terms than most others across the UK economy. The average for the whole economy is around 50 out of 100. The one positive statistic is that there has been a substantial improvement in the average health rating of our sample from a year ago, when the figure was only 33 out 100.
Insolvency risk
A company scoring 25 or lower on the Company Watch system has a proven one-in-four risk of filing for insolvency or undergoing a major financial restructuring involving losses for its stakeholders within three years. Out of the 5,817 companies in our sample, 2,298 (40%) are in this ‘Warning Area’. This is a slight improvement since July 2021, when there were 43% of travel companies with scores of 25 or less. Nevertheless, the norm across the economy would be for only 25% of companies to feature in the Warning Area.
Zombie companies
We found 973 (17%) companies in our sample with balance sheets that were negative by at least a de minimis figure of £20k. Between them they have a combined deficit of £571m. The percentage of zombies has risen significantly from 13% in July 2021, while the deficit has more than doubled from £268m.
Negative working capital
We also identified potentially vulnerable companies, which have greater short-term liabilities (due with a year) than their ‘quick’ or easily realisable assets such as cash, debtors and inventory, again subject to a de minimis limit of £20k. 929 (13%) of our sample fall into this category. Once again, this has improved slightly since July 2021 in terms of the percentage (14% then), but the overall deficit has grown from £182m to £241m.
Insolvencies
Insolvency numbers across the economy are soaring, to the extent that 2023 looks certain now to have the second largest annual total on record. Fortunately, this is one negative financial aspect not shared by the travel industry. Out of over two thousand insolvencies in August 2023 alone, only five were travel companies according to the Insolvency Service. For the eight months to that date, there had only been 47 travel failures out of 17,227.
What next for the UK travel industry?
Travel agents and tour operators appear to be cautiously optimistic, but the degree to which late booking has gripped the market leaves it worryingly exposed to the ongoing cost of living crisis, even if inflation seems to be waning, as well as to traveller confidence. Global geopolitics are another major risk, most particularly events in the Middle East. If the past four years have taught travel entrepreneurs nothing else, they now know to expect the unexpected.
While the sector’s finances are improving, they could still be in better shape, especially in regard to their working capital position. This is an area that can be greatly improved with specialist business advice that can assist travel sector companies with stability, financing and growth opportunities. With the appetite for travel rising, this is a time to take opportunities, but to be acutely risk-aware and mindful of the limitations of cash and borrowing resources.
October 2023
If you would like to discuss any of the points in the report or believe you have been affected by any of these issues, you can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.