Covid has left the travel industry’s finances in a perilous state, argues Steve Endacott
In the next 12 months, the UK travel industry faces the biggest squeeze on cashflow that I have seen in my 30-year travel career.
Many companies improved cashflows in summer 2020 by issuing Refund Credit Notes (RCNs) to be utilised in summer 2021, and had hoped for a rush of new bookings as we exited Covid-19 restrictions and outbound travel restarted from May 17.
This is still broadly the roadmap, but the industry is expecting a very limited number of destinations on the government’s ‘green list’, with the mass market Spanish, Turkish and Greek volume drivers likely to be classified ‘amber’.
Travelling to ‘amber’ destinations will be expensive in terms of testing, requiring an outbound PCR or lateral flow test, followed by another lateral flow test 72 hours before returning and three PCR tests in order to use the shorter five-day test to release scheme rather than isolate for the full 10 days at home.
Even with companies offering PCR tests for £60, this still equates to an extra £280 per person in testing costs alone. Customers who are already committed to a holiday may decide to pay the extra and travel, but will customers who have not booked yet?
My view is a firm no, and I’m predicting travel in May and June will only be about 15% of 2019 levels.
Jet2holidays, which has postponed its restart until June 24, seems to agree. To me, this is sensible as it allows the operator to deal with refunds now and prepare for a peak season starting July 1. From this date, I remain hopeful that the UK population will receive a vaccination bonus and travel to most major beach destinations for the school holidays and beyond.
However, I don’t expect the government will update the May 17 traffic lights destinations until June 30, creating uncertainty for airlines and ultra-late booking conditions, which I believe will suppress flight supply down to between 50 and 60% of 2019 levels.
So although summer 2021 may still happen, Refund Credit Notes remain a noose around the neck of many businesses’ working capital, squeezing available cash.
If travel does restart, then suppliers will have to be paid and, if not, customers will need refunding. So it follows that cashflows will be hit either way. Only new bookings improve cashflow and the volume of these is under serious threat.
Low deposit schemes mean summer 2022 bookings only deliver about 20% of the cash flow benefit of a late availability sale, so even a buoyant summer 2022 does not ease the cash squeeze.
It can be assumed that working cash will be lower than normal entering the quiet winter months, and this is likely to be when travel business failures peak.
The biggest squeeze on cashflows yet to impact is being imposed by the Civil Aviation Authority (CAA) which is tightening ‘trust fund’ rules markedly, with agents’ commission no longer payable until customers return under the new ‘golden trust’ we expect to be forced on the industry.
In September, the CAA will try to force mass market tour operators like Jet2holidays and easyJet holidays into the same trust fund structure already imposed on Tui. This will cause a massive squeeze on their working capital as their tour operating divisions will not be able to pay for flights on booking, with cash only released on customer return.
The big airlines clearly have better lobbying and power than most travel companies to fight this but, legally, the CAA is forced to operate a level playing field and it’s difficult to see how such a move can be avoided.
Debit and credit card merchant acquirers are also nervous about the travel sector, with some pulling out completely and others holding on to cash for longer as a buffer against potential refunds resulting from further Covid-19 disruption.
It may not be a ‘perfect storm’, but the Covid-19 pandemic has left the travel industry’s finances in a perilous state, with many factors creating a massive squeeze on the lifeblood of business, cash!
It’s not all doom and gloom, but we have a rocky ride ahead of us over the next 12 months as we try to ride out the big cash squeeze.