More UK Tour Operators Expected To Face Insolvency
18 August 2010 - 4:59PM
Dow Jones News
More U.K. budget travel companies are facing insolvency after a
combination of the economic downturn, volcanic ash, bad weather and
strikes resulted in a sharp fall in holiday bookings this year.
Kiss Flights, which sold holidays to Greece, Egypt, Turkey and
the Canary Islands, went into administration Tuesday, the
seventeenth U.K. travel company protected by a customer protection
scheme to go out of business this year, according to the Civil
Aviation Authority. Another 33 companies under the same scheme
failed last year. The total is likely to be higher as not all
travel companies are protected by Air Travel Organisers' Licensing,
which ensures customers are compensated for any money paid and
repatriated to their homes.
The companies have been hit by several factors. Holiday bookings
have been hit by the economic downturn, a volcanic ash cloud closed
most of Europe's airspace for a week in April and caused continued
disruption into May, freezing weather in January that led to flight
cancellations, and labor disputes have hit flights at British
Airways PLC (BAY.LN) and threatened disruption elsewhere in the
airline industry.
Kiss Flights said it hadn't been able to pick up enough new
bookings to cover its costs after the ash cloud that drifted down
from a volcano in Iceland caused chaos for travellers in April and
May.
"On top of poor yields and very late booking trends, our fate
was sealed by very poor forward sales," said Gary Ash, chief
executive of Flight Options, Kiss Flights' parent company.
Companies were forced to compensate millions of passengers for
the disruption caused by the Icelandic ash cloud on top of the
costs of looking after and repatriating stranded passengers.
Earlier this month, TUI Travel PLC (TT.LN), Europe's largest
tour operator, said the total impact of the volcanic ash on its
revenues was GBP105 million.
TUI could afford the hit as it made GBP3.4 billion in revenues
in the three months to June 30, a 4% decline from a year
earlier.
Still, the company, which makes about a third of its revenues in
the U.K., warned that its U.K. bookings were down 2% since May 11.
It said it was outperforming the U.K. industry, where bookings were
down 10% over the period.
Thomas Cook Group PLC (TCG.LN), Europe's second-biggest operator
which also makes a large chunk of its revenues in the U.K., also
said bookings in the country were worse-than-expected. It said
demand for all-inclusive holidays had risen because customers pay
the bulk of their costs up front.
While large companies like TUI Travel and Thomas Cook will
survive the downturn, the smaller, low-budget operators are under
huge pressure.
"Budget businesses work off low margins and emergency reserves
have been eroded during the downturn," said the consultancy firm
PricewaterhouseCoopers, or PwC. "This year's shock events, such as
the lingering ash cloud, have forced them to price low to win
business. This discounting has been enough to push some over the
edge."
PwC said travel companies were at greater risk of insolvency
because unlike other leisure-sector businesses like pubs or hotels
they had no assets to offer in a controlled restructuring. Instead,
they relied on new bookings to pay suppliers, which made late
summer a dangerous time for tour operators.
"This is a tricky time of year in terms of cash flows," said
Douglas McNeil, transport analyst at the stockbroker Charles
Stanley. "That seems surprising in the middle of the holiday
season, but cash flow is at its strongest in spring and early
summer. Companies have to pay out to their suppliers about now, so
this is the time of maximum vulnerability."
Although the U.K. emerged from recession late last year,
concerns over the slow pace of the economic recovery and tough
public sector spending cuts announced by the new U.K. government
have led many potential travellers to worry about their jobs - and
alter their budgets accordingly.
"Most people try to preserve their holiday plans, but they might
trade down from two weeks to 10 days or a week," said Charles
Stanley's McNeil. "All the budget companies are now feeling the
squeeze and there might be another handful of insolvencies before
we're done."
Competition in the market is fierce, adding to the tour
operators' problems.
"Suppliers are cutting distribution costs and trying to provide
services through their own websites directly," said Euromonitor
travel and tourism industry analyst Nadejda Popova. "At the
upmarket end, Hilton have been discounting heavily which is unheard
of in this segment of the market. That has led to weaker sales for
highstreet tour operators."
"Most companies were hoping the crisis was over because the
holiday peak was over," Popova added. "But in the autumn we will
see quite a lot of companies going bust."
-By Angus McDowall, Dow Jones Newswires;
angus.mcdowall@dowjones.com, +44 20 7842 9237
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