The full administrators report on the collapse of Lowcost Holiday Group in July reveals the forced sale of its stake in software firm Intuitive had a serious impact on the firm’s finances.
The 64-page update from Smith & Williamson sheds further light on the background to the animosity between Lowcost and the UK regulator the CAA.
This led to OTA Lowcost Holidays leaving the UK jurisdiction of the CAA in 2013 to operate under Spanish regulations, a move also said to have played a crucial role in the firm’s collapse.
Explaining the background to the move to Spain, the administrators say that due to changes in the Atol regulations in the UK Lowcost was required by the CAA to strengthen its balance sheet.
A long-standing legal dispute over the scope of financial protection in the UK resulted in new Flight-Plus Atol introduced requiring firms to pay a £1 levy per booking, since raised to £2.50.
This change required Lowcost to either sell assets or secure investment and resulted in it selling ground handler Resorthoppa, to rival A2B Transfers, and Croydon-based Intuitive.
The report states: “The sale of these two businesses resulted in a significant fall in earnings, particularly the sale of Intuitive, which had given the group a distinct advantage in terms of software development.”
The result of this deterioration in the firm’s finances saw the decision taken to “harmonise” licencing agreements for all B2C businesses under one EU licence to reduce regulatory costs and burden.
The move to Spain prompted the CAA to investigate the substance of the relocation but this was “closed following the provision of detailed information by the Group’s lawyers, to the CAA”.
Under the following section of the report entitled “Factors contributing to the Group’s financial difficulties”, the report notes:
“From 2014 onwards, the Group experienced software difficulties arising from the sale of Intuitive.
“A number of in-house software development programmes were commenced, with a launch scheduled for 2017, which were expected to improve delivery and provide a competitive market position.”
Travolution understands Lowcost had considered plans to switch its technology ahead of its failure, although it opted to licence Intuitive’s iVector technology instead and continue to develop it in-house.
The administrator says Lowcost’s financial difficulties meant it was not able to respond when rival OTAs and operators introduced low deposit deals in the UK thanks to new banking arrangements.
Lowcost was able to agree a short-term overdraft facility allowing it to match these deals for a limited time, but “external concerns regarding the general decline in business performance” meant this could not be extended.
Further challenges associated with Lowcost’s “poor historic profitability” meant it was not able to secure preferential prices and payment terms with hoteliers so it lost out further to competitors.
In an enlightening line in the report about the underlying profitability of the OTA model, the administrator says:
“Telephone bookings (which had traditionally resulted in higher margins) decreased, with customers opting to utilise online facilities via mobile searches.
“The online market was extremely competitive with only the largest travel companies able to absorb the increasing cost of advertising.”
The report says “it was clear by the end of 2014 that the Group required investment” but bank financing could not be secured due to the “low asset values of the Group”.
Lowcost entered into negotiations about potential mergers or further asset disposals in 2015/16 but these “fell away due to the rapidly deteriorating financial position of the Group”.
Administrators note a number of external factors that exacerbated Lowcost’s plight including the June Brexit referendum which made potential investors reluctant and hit sales.
Terrorism, poor payment history with hotels and industry rumours about Lowcost’s poor financial stability were also cited as factors which compounded the “negative trading environment”.
Smith & Williamson holds out little hope for creditors recouping their money due to the lack of assets left in Lowcost, although it says most customers have been recompensed by their banks.
The administrator is hopeful of recovering £3.4 million in VAT following another long legal battle in the UK over liability under the Tour Operators Margin Scheme (Toms).
A court case relating to Lowcost’s claim to have VAT refunded is not due to conclude until later in 2017.
The VAT dispute was said to have been the cause of the failure of Lowcost rival On Holiday Group in 2014 which was waiting for a £4.5 million pay out after former lastminute.com-owned bed bank Medhotels successfully challenged an HMRC claim for unpaid VAT.