Travel: Bumpy take off – opportunities in the travel sector
Travel and in particular cancelled flights have been in the headlines recently and the rise in bookings suggest the appetite to travel is recovering post pandemic. There are reasons to be optimistic, but many uncertainties remain; on the supply side, businesses operating air holidays cautiously await possible ATOL reforms from the Civil Aviation Authority (“CAA”), whilst on the demand side, the appetite for travel will almost certainly be hit by the cost-of-living crisis and inflationary pressure in the long term.
Staycation or overseas; we still want to go on holiday
Trading so far seems to be resilient to the diminishing levels of disposable income amongst households. The booking cancellation spree that was feared by some has not materialised. Agents are confident that the summer season will be good; pent up demand and deferred bookings are likely to be offsetting much of the impact of reducing budgets for now.
Much of the UK population are showing signs that they need a holiday for relaxation and for some time away from home. A recent YouGov poll suggests this is a bigger driver for UK holidaymakers than aspirations to visit dream tourist destinations. The staycation boom may have started in the pandemic, but there is also the growing desire for shorter, more frequent and more flexible get-aways. This is an interesting trend to watch as investors look carefully at a company’s future growth plans.
Cheap airfares are history
Demand and soaring fuel costs are also likely to result in increased airfares. UK travellers have yet to experience any major price hikes due to some airlines hedging some of their fuel exposure. Given the expected rise in airfares, and continued heavy media coverage of flight cancellations, it’s possible that bookings will be impacted sooner rather than later. Holidaymakers may also be looking even closer to home with the cost of petrol and likely increase of rail fares, all of which suggests holiday and caravan parks will remain an attractive sector for investors.
Staffing remains a critical issue
Given the currently strong volume of bookings and the need to service exceptional levels of demand, addressing staffing shortages is vital for businesses; inadequate staffing must be resolved if organisations are to effectively use this period to repair COVID impacted balance sheets. Traditional sources may no longer be an option as EasyJet’s chief executive Johan Lundgren pointed out recently in an FT article, 35 to 40 per cent of potential Easyjet recruits were being rejected because of their nationality, up from 2.5 per cent before Brexit.
Travel businesses may need to have more flexible working arrangements and think carefully about their reward schemes to attract and retain the talent they need for the longer term. Management teams will need to be able to present a clear plan of how they are addressing staff shortages now and in the future.
Changes to the ATOL scheme a real concern
Many tour operators are also braced for the cash flow implications of possible changes by the CAA to the ATOL scheme, the timing of which could be catastrophic given the precarious position many businesses find themselves in following the pandemic.
Failures in the travel industry which ultimately resulted in the collapse of Thomas Cook in 2019 mean the CAA has proposed amendments to the APC (“ATOL Protection Contribution”) (which protects travellers in the event of insolvency). As a result of these collapses the air travel trust fund has been depleted. Currently a fee of £2.50 per passenger is paid by tour operators to the CAA. This is not considered appropriate because it is not related to the booking value, and therefore the CAA is seeking to build a better system and also replenish the air travel trust fund.
This fee is likely to increase alongside other possible amendments. Customer accounts could be segregated so that customer funds are held separately from operating cash. This would mean operators would have no access to the funds until the customer returns from holiday and would result in severe cash flow pressure for many tour operators.
Although the industry has bounced back and travel sector management teams’ confidence appears to be growing following a precarious period, many challenges remain, and the travel trade is still fragile.
Technology should help protect against market headwinds
Innovations in technology continue to be a differentiating factor for many businesses; contactless payments, electronic COVID passes and streamlined bookings processes can all help improve customer satisfaction. These factors should protect businesses against any booking reluctance caused by market headwinds. Furthermore, the appetite for bespoke holidays appears to be increasing, with consumers often opting for a personalised experience. Those firms that can harness technology and tailor itineraries to individuals’ preferences should be well placed to grow despite challenging market conditions.
Please contact Jack Hibbs to find out more about opportunities in the travel sector.
Jack Hibbs, Engagement ManagerEmail Jack