Ian Oakley-Smith of PricewaterhouseCoopers has dismissed the idea of a short term recession in the travel industry and warned agents and operators to prepare for three to five years of reduced activity.
With an 80% increase in travel company insolvencies from Q4 2008 to Q1 2009, the beginning of this year mirrors the level of insolvencies last Autumn, when 13 companies in the XL Group collapsed.
This time around no single group accounts for a large number of failures, there are simply more small travel businesses falling at the first hurdle.
Oakley-Smith said: “History shows that there has always been a strong correlation between total consumer spend and consumer spend on travel. Travel businesses should therefore expect this trend to continue, which is likely to mean that spending on travel will decline for some time yet.
“In the last recession, holidays were impacted at both volume and value levels. This is likely to recur and will take its toll on travel companies.”
The combination of the wide variety of ways in which holidays can now be booked, with the move away from just the standard two-week summer break towards multi-trips of varying length and destination, may leave the industry more vulnerable than in the previous recession.
“It is now easier for consumers to skim off the number of discretionary short breaks and keep the standard, traditional holiday. This will hurt an industry geared up to offering lots of pre-planned and last minute, mini trips,” he added.
Insolvencies in this sector have risen by 145% over the last year, but as in all recessions there will be winners as well as losers.
“The travel market has swollen with both supply and demand over the recent boom years, but we are now headed into a new reality. 2009 will be a journey of discovery to assess how deep the recession actually is and therefore how long it will impact travel,” Ian continued.
“The fundamentals suggest that demand will not return to the previously high levels, quickly. Travel companies must avoid making any short-termist decisions now and focus on guiding their business through a medium term industry recession. In turn this will help them create a sustainable business model for the years ahead – both good and bad.”
Weak financial management is the primary reason why travel businesses fail. All efforts should be made to utilise good quality and regular information to predict the impact of any reduction in bookings, set aside cash reserves, and, if necessary, discuss financing arrangements with lenders and shareholders to ensure that businesses remain in control.
Constant analysis and the collation of in-depth financial information are vital to foresee the market outlook.
Oakley-Smith explained: “The travel industry is almost unique as it holds consumer cash months before it delivers the product. It is therefore easy to mistakenly believe the business is cash rich. In reality, a lack of bookings can catch up with cash flows very quickly.”
“Monitoring website and telephone enquiries, for example, can ring the alarm bells well in advance of any drop off in bookings – giving companies the time to plan for this scenario. Winners will be forward thinking and open-minded – and decisive action will distinguish them from those who will succumb to the pressures of the downturn,” he concluded.