UK OTA On the Beach has slashed monthly costs to £2 million as it prepared the business to take no future bookings until up to September 2020.
In a trading update to the City today, the Manchester based firm announced it has extended a revolving £50 million credit facility with its bank to December 2023.
As part of a stress testing of the business, the agent has also reset all covenant liabilities for all periods up to and including June 2021.
Founder and chief executive Simon Cooper will forgo his salary and other board members have agreed to a voluntary 20% reduction in salaries and fees and no bonuses will be awarded in the current financial year.
On The Beach said it has run “theoretical stress tests” that are not an expectation of future trading but which are based on the following assumptions:
- There will be no bookings taken between now and the end of September 2020 across the travel industry for travel on any dates in the future;
- All flight programmes will be cancelled until the end of September 2020;
- All forward bookings until the end of September 2020 will have to be cancelled. All OTB customers will be refunded in cash within 14 days of the receipt of cash refunds from airline providers;
- In the event of airline failure, monies paid for flights would be available via chargeback, as was the case with Thomas Cook Group and Monarch Travel Group;
- Concerns over the financial viability of any airline would lead to that airline being taken off sale by OTB;
- Although bookings would return slowly once airspace reopens, bookings would remain at a significantly reduced level until at least the end of March 2021.
On The Beach said in the above scenario, it would end the half year 0f 2021 with “only a limited drawdown of its facilities and significant headroom”.
“This headroom would allow the group to take advantage of the multitude of opportunities that these market conditions would present,” the firm added.
Because On The Beach operates a trust fund that protects customer money, the above position does not include any customer funds received for untraveled holidays.
In the statement On The Beach said because of its asset-light model it has much lower and more flexible operating costs than rivals that commit to airline seats and hotel beds.
It claims more traditional travel firms have “infrastructure costs” amounting to 60% to 70% of “aspirational” of future sales without any demand.
However, On The Beach says its underlying costs are just 8% of sales, 70% of which is flexible marketing costs which can be dialled down when there is no demand.
“If demand falls away completely then the fixed cost base will drop to circa 3% of aspirational sales, or one twentieth of the costs of a similar sized asset heavy operator, the firm said.
In addition, due to running a trust account, On The Beach said, unlike many of its online rivals, operators and airlines, it does not rely on cash for forward booking to trade.
“Notwithstanding the advantages of the OTB model, the group took early action in February to manage risk and conserve cash,” the company said.
“In this environment of limited demand and therefore limited revenue, the group’s marketing costs have reduced to almost nil and the group has taken further actions to limit other non-essential costs meaning that monthly cash costs are now less than £2 million across the entire group.
“The group has, however, maintained all costs associated with the delivery of its future strategy.”
Simon Cooper, chief executive of On the Beach, said: “The travel industry is prone to shocks: global recessions, natural disasters, terrorist attacks, and major airline failures to name a few.
“A closure of airspace was deemed inconceivable during contingency planning for a no-deal Brexit, but we now find ourselves in a position where airspace may be closed for a number of months due to the spread of COVID-19, and the travel industry needs to brace itself for a potentially prolonged period of significantly reduced, or even zero revenue.
“On the Beach was created with an asset light model to ensure its survival in the inconceivable market conditions in which we now find ourselves.
“Unlike the majority of larger tour operators, online travel agents and airlines, all OTB customer funds are held in a ring-fenced trust account so that if the scenario above prevailed and all forward bookings were to seek a refund of their prepaid holiday monies, in the main this could be facilitated without impacting group cash.
“This is not the case across the industry where customer funds are often held on balance sheet and if refunds were requested en masse, the funds would not be available.
“Against the backdrop of the impossible market conditions in which we find ourselves, the resilience of On the Beach’s asset-light and flexible business model becomes clear.
“The benefits of using a trust account structure (as opposed to the use of customer funds for working capital), become obvious, for consumer protection, for the financial stability of the business, and ultimately for the protection of the taxpayer.
“It would appear obvious that, as an industry, we need to reflect on financial protection and on how we can make our industry robust enough to withstand future shocks.”
Cooper added: “In the days leading up to the closure of airspace, we were able to put a detailed plan in place to ensure that we are best placed to deliver operational and customer service excellence throughout this difficult time.
“As a technology company, we are also well placed to facilitate remote working for all of our staff.
“I am hugely proud of the efforts of everyone at OTB and would like to praise the dedication of my colleagues who have been working around the clock to provide the very best level of support for our customers.
“Whilst the coming months will continue to present a huge challenge, I look forward to the multitude of opportunities which lie ahead.”
On The Beach further announced it is suspending full year guidance “until such time that the overall impact of COVID-19 on the Group becomes clearer”.
It will not be declaring an interim dividend in the current financial year to September 30, 2020.