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UK Travel Industry

More British travel companies may face downfall

Angus McDowall  Aug 18, 2010

LONDON - More U.K. budget travel companies are facing insolvency after a combination of the economic downturn, volcanic ash, bad weather and strikes resulted in a sharp fall in holiday bookings this year.

Kiss Flights, which sold holidays to Greece, Egypt, Turkey and the Canary Islands, went into administration Tuesday, the seventeenth U.K. travel company protected by a customer protection scheme to go out of business this year, according to the Civil Aviation Authority. Another 33 companies under the same scheme failed last year. The total is likely to be higher as not all travel companies are protected by Air Travel Organisers' Licensing, which ensures customers are compensated for any money paid and repatriated to their homes.

The companies have been hit by several factors. Holiday bookings have been hit by the economic downturn, a volcanic ash cloud closed most of Europe's airspace for a week in April and caused continued disruption into May, freezing weather in January that led to flight cancellations, and labor disputes have hit flights at British Airways PLC and threatened disruption elsewhere in the airline industry.

Kiss Flights said it hadn't been able to pick up enough new bookings to cover its costs after the ash cloud that drifted down from a volcano in Iceland caused chaos for travellers in April and May.

"On top of poor yields and very late booking trends, our fate was sealed by very poor forward sales," said Gary Ash, chief executive of Flight Options, Kiss Flights' parent company.

Companies were forced to compensate millions of passengers for the disruption caused by the Icelandic ash cloud on top of the costs of looking after and repatriating stranded passengers.

Earlier this month, TUI Travel PLC, Europe's largest tour operator, said the total impact of the volcanic ash on its revenues was GBP105 million.

TUI could afford the hit as it made GBP3.4 billion in revenues in the three months to June 30, a 4% decline from a year earlier.

Still, the company, which makes about a third of its revenues in the U.K., warned that its U.K. bookings were down 2% since May 11. It said it was outperforming the U.K. industry, where bookings were down 10% over the period.

Thomas Cook Group PLC, Europe's second-biggest operator which also makes a large chunk of its revenues in the U.K., also said bookings in the country were worse-than-expected. It said demand for all-inclusive holidays had risen because customers pay the bulk of their costs up front.

While large companies like TUI Travel and Thomas Cook will survive the downturn, the smaller, low-budget operators are under huge pressure.

"Budget businesses work off low margins and emergency reserves have been eroded during the downturn," said the consultancy firm PricewaterhouseCoopers, or PwC. "This year's shock events, such as the lingering ash cloud, have forced them to price low to win business. This discounting has been enough to push some over the edge."

PwC said travel companies were at greater risk of insolvency because unlike other leisure-sector businesses like pubs or hotels they had no assets to offer in a controlled restructuring. Instead, they relied on new bookings to pay suppliers, which made late summer a dangerous time for tour operators.

"This is a tricky time of year in terms of cash flows," said Douglas McNeil, transport analyst at the stockbroker Charles Stanley. "That seems surprising in the middle of the holiday season, but cash flow is at its strongest in spring and early summer. Companies have to pay out to their suppliers about now, so this is the time of maximum vulnerability."

Although the U.K. emerged from recession late last year, concerns over the slow pace of the economic recovery and tough public sector spending cuts announced by the new U.K. government have led many potential travellers to worry about their jobs - and alter their budgets accordingly.

"Most people try to preserve their holiday plans, but they might trade down from two weeks to 10 days or a week," said Charles Stanley's McNeil. "All the budget companies are now feeling the squeeze and there might be another handful of insolvencies before we're done."

Competition in the market is fierce, adding to the tour operators' problems.

"Suppliers are cutting distribution costs and trying to provide services through their own websites directly," said Euromonitor travel and tourism industry analyst Nadejda Popova. "At the upmarket end, Hilton have been discounting heavily which is unheard of in this segment of the market. That has led to weaker sales for highstreet tour operators."

"Most companies were hoping the crisis was over because the holiday peak was over," Popova added. "But in the autumn we will see quite a lot of companies going bust."

More British travel companies may face downfall
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