Youtravel.com group managing director Graham Nichols is confident 2009 will be the year the three-year-old bed bank business makes its first “significant” profit.
But he is also aware of the challenges of the current recession and the need for a sensible approach in a sector of the market that has grown rapidly over recent years.
As a result, the company has put plans to expand – for example into the cruise market – on hold. “It’s time to focus and grow what we have,” he says.
According to Nichols, group profit for the year ending October 2009 “won’t just be a few €100,000” and will represent a significant turnaround on its first year, when it posted a £900,000 loss.
But he also admits profits are likely to fall short of the ambitious figures the company budgeted for last October. “This year we hope to make a significant profit.
But it might be slightly less than we forecast because we budgeted aggressively in October 2008,” he said.
He adds: “It is not surprising [for a start-up] to make a loss in the first year. Last year our turnover was just over €110 million and our passenger numbers were just under 500,000. Our profit will just about break even for the year ending October 2008.”
Shareholder Barclays Ventures continues to support the business, now in its third year.
But the current marketplace does mean every company has to be more careful, warns Nichols. So far, problems with booking payments as a result of companies struggling in the current market have been limited, but he adds: “We are not saying it’s not a problem at all but it’s not as bad as predicted. We have been incredibly careful about receipts through travel agents. It does create some tensions in your relationship with agents. but you have to talk to them about it.”
Plans to grow the business by expanding into new product areas – the group’s strategy six months ago – have been curtailed because of the economic downturn.
“It’s not the right time to invest in new ventures. We do not want to bolt on other things internally. We are getting more analytical about the way we look at our business,” claims Nichols.
The business is making a conscious switch in its focus from sales volumes, as a start-up business, to profits, according to Nichols.
Its expansion further into the cruise market, following its partnership with EasyCruise, have been put on ice. He says: “We did have some discussions [with cruiselines] but these are on a back-burner at the moment to focus on the main business. It’s time to focus and grow what we have.”
He admits city breaks, another area the group earmarked for growth, have been hit by the economic downturn.
In November the group took a number of three-star hotels out of its portfolio and has held continued negotiations with hoteliers to bring down prices. “There has been a lot of negotiation on prices and the way deals are structured; they have been very receptive and understand what is going on,” says Nichols.
Any growth this year for the business is likely to come mainly from the group’s existing international markets, which enjoy double-digit margins but only made up 10% of turnover last year.
The bed bank operates in Germany, Sweden, Italy, France, Israel, Greece and Slovakia, mainly selling through travel agents or online portals, and aided, it claims, by developing websites in different languages. Eastern Europe is earmarked for further growth.
International business is up 80% year on year from a relatively small base, and sales are predicted to rise to 20% of turnover this year.
“If you think of the extra margins, that could really improve the bottom line,” says Nichols. “We think international business could grow to 50% of turnover CK in three years.”
In contrast, youtravel.com has revealed growth will be difficult in the UK this year, where margins are lower and competition more cut-throat. Nevertheless, Nichols is hopeful the UK business will end up at least in line with last year and could improve its bottom line as a result of some new distribution deals.
Impact of Med Hotels acquisition
Consolidation in the bed bank sector has seen Thomas Cook snap up Youtravel’s rivals hotels4u.com and Med Hotels. The impact so far for Youtravel has been to pick up new agency accounts, as agents are keen to work with more than one company in the sector.
“We have started to see more business following the Med deal,” says Nichols.
What will be critical to the sector is how parent company Thomas Cook uses its power in terms of pricing.
“They could decide to take bigger margins and we will get more business and make more money, but if they decide to just go for volume and use their power to reduce prices, they will trash the market.
“Manny [Fontenla-Novoa, of Thomas Cook] has said he is going to keep margins up and I hear what he says: it is a very professional organisation.”
But hopes the Med Hotels acquisition will lead to rising prices in the sector have yet to materialise, with the sector “as competitive as ever”.
Whichever way the market leader takes prices, one thing is certain – rivals will follow. “We would like to see margins higher. If the market leader puts prices up to take higher margins then of course the market will follow. If they go down we have to compete. You cannot sit there and let someone do that to you,” says Nichols.
Despite fears there would not be enough flight capacity following the collapse of XL Leisure Group last September, Nichols says the industry’s worst fears have yet to be realised.
“There is still sufficient capacity at the right place. Quite a lot of capacity has been put back in; in Sharm el-Sheikh extra flights have been put on and they are selling like hotcakes,” he adds.
But pockets remain where flight capacity is an issue, such as Scotland. Flights taken out of the Scottish market as a result of the collapse of Seguro have yet to be replaced – and this means sales for bed banks will be affected in certain regions.
In terms of destinations, Youtravel, like other bed banks, has reported an increase in bookings to non-euro destinations such as Turkey, Croatia and Tunisia, as well as the Caribbean and Mexico.
But, importantly, Spain still remains around 45% of the bed bank’s business, in part due to the flight accessibility in the destination.