Even pre-COVID, the travel industry was suffering from low margins, high fixed costs and an excess of capacity resulting from well-capitalised new entrants into the packaged holidays market.
Barriers to entry in the industry are low. The fact that anyone can inexpensively enter the industry via a travel agency franchise has reinforced this dynamic.
There is substantial excess capacity across both hotels and airlines, with Government assistance removing any immediate impetus to reduce this. TUI, for example, has received €4.8 billion in support from the German government, including €2 billion for working capital. In the UK, CCFF, CBILS and CLBILS have also supported operators of various sizes to maintain liquidity and cover overheads.
As well as debt reprofiling, equity placing and making challenging operational cost savings, the sector has been one of the primary beneficiaries of the furlough scheme. This has allowed airlines, for example, to bring pilots and crew off furlough to ramp up capacity as and when required.
With the furlough scheme expected to end in September 2021, and an uncertain consumer outlook, operators may need to soon make some significant long-term strategic decisions, either to maintain volumes and aggressively chase demand or reduce total carrying/operating capacity with the restructuring costs that may entail.
These decisions will be particularly important for the vertically integrated tour operators with significant fixed cost bases, but travel agents with bricks and mortar shop fronts will also need to carefully focus on near-term cash management. Flexible low-cost OTAs with low risk business models are likely to be the long-term winners.
In addition, it is estimated that approximately £780 million of so-called Refund Credit Notes (RCNs) are currently being held by consumers with travel companies in lieu of cash refunds. Should these RCNs be redeemed for cash rather than onward travel, it is likely to drive out material working capital issues for the less-capitalised operators. We also see the trend of merchant acquirers spreading the risk of underwriting travel to continue. For the merchant acquirer, the issue to the consumer of an RCN may well represent an acquirer liability.
Finally, there exist questions around operators’ ability to react to ever-changing government travel restrictions as well as to fast-moving consumer behaviour. Despite the excess capacity in the market, the supply chain may also struggle to react, causing difficulties in fulfilling holidays. Agile business models will be required to react in the best way possible.
