Interest: The Overlooked Profit Boost for the Travel Industry

Given the prolonged phase of low interest rates over the past decade, the profitability of cash flow seems to have faded from the memory of many travel enterprises.

Nonetheless, with present interest rates surpassing 5% on long-term deposit accounts, the way customer cash reserves are managed has become exceedingly vital.

An enterprise yielding £120m per annum and retaining customer balance payments for 8-10 weeks before departure would amass £23m annually. This permits the company to generate £1.15m exclusively from interest. For numerous businesses, this could represent 25% or more of their net earnings, thus making the optimisation of interest a strategic priority in the current economic climate.

Regrettably, numerous travel businesses that function as part of consortia are not benefitting from interest on funds held by the consortia on their behalf, thereby missing out on a substantial potential revenue source.

Some might contend that the Civil Aviation Authority (CAA) Trust regulations prohibit them from depositing customers’ funds into interest-bearing accounts, but this is a misconception.

Provided that transaction records for each booking are maintained, a transparent payment line for all components of the package is established. This ensures that the “excess” cash can be allocated to long-term interest-bearing accounts, as the continuous cash flow guarantees a foundational level always accessible for investment.

Therefore, travel businesses should be renegotiating to ensure that they can earn interest and look at their business models to make tweaks that maximise this profit stream.

Here are my top five suggestions:

  1. Implement monthly payment schemes. Customers appreciate low deposits and many are open to paying for their holidays monthly. This approach aligns expenditure with income by evenly distributing the final balance payment and consequently enhances cash flow, maximising interest.
  2. Amplify the proportion of Dynamic Packaging. As we transition out of the Covid disruption phase, Dynamic Packaging is regaining its appeal due to its higher margin opportunities and enhanced cash flows. ATOL bonded tour operators typically permit agents to hold customers’ funds for a few weeks, whereas bed banks or hotels rarely receive payments before departure.
  3. Re-evaluate low deposits. The pressure to compete with low-cost carriers’ tour operations often drives the implementation of low deposits. However, even with a low deposit, it’s advisable to introduce a monthly payment scheme or secondary deposit 30 days after the initial payment.
  4. Introduce “payment in full” discounts. Offer dual pricing, with the lowest price contingent on full upfront payment. If the customer opts out, charge them a 5% premium to compensate for lost interest. Remember, customers often focus on the headline price when comparing holiday options.
  5. Understand your cash flow. A detailed analysis of cash flows on a per-booking basis allows for a comprehensive understanding of your cash flows. This enables you to maximise higher interest long-term deposits without ever being short of cash to pay suppliers.

Interest might currently be an overlooked profit driver in the travel industry, but given the present interest rate levels, it won’t be long before it takes centre stage in the business strategies of most enterprises.

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