FRP Travel and Tourism Report

Travel and tourism: time for take off

Analysing the challenges and opportunities that will shape the sector frpadvisory.com

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Report

Travel and tourism: time for take off

Turning a corner

Many firms are approaching an inflection point where they are considering their ability to take on new business. Simon Stibbons Restructuring Advisory

It’s hard to overstate the impact of COVID-19 on the UK travel and tourism industry. The sector was thriving prior to the pandemic, with Brits making a record 93 million overseas trips in 2019. But this fell by almost three quarters (74%) to fewer than 24 million trips in 2020* 1 and travel restrictions continued largely unabated during 2021. As a result, more than one in 10 jobs were lost in the aviation, tourism and travel industries, despite billions of pounds in Government financial support.

At the time of writing, things are improving.

The UK Government has announced the removal of all travel testing requirements for fully-vaccinated people – which represents more than four in five Brits* 2 . Around the world, border restrictions are beginning to be lifted, travel rules are being relaxed and tourists’ confidence is returning. So, is this the year that travel bounces back? For this report, we spoke to 250 executives from ATOL protected businesses across the sector to understand their current position, the steps they have taken to survive the pandemic, their outlook for the year ahead and the challenges and opportunities that will shape their futures. We’re sharing this intelligence, which covers large, small and mid- market operators in equal measure, with the sector at a time when many firms are approaching an inflection point where they are considering their ability to take on new business. FRP has extensive experience in the sector and we hope you find this report both insightful and helpful in shaping your plans for the future. Are you forecasting an increase or decrease of customer numbers in 2022 vs 2019?

32% Remain the same

58% Increase

10% Decrease

*Results based on responses from 250 executives from ATOL protected businesses

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Travel and tourism pulse report

Travel and tourism: time for take off

Risky business

What, if anything, do you consider to be the biggest risk to your business in the next 12 months?

As we have come to learn, pandemics progress in unpredictable ways, which means there is still a level of uncertainty hanging over the international travel sector. Many operators are in a precarious position, having run down their cash reserves with fewer credit options, while consumer confidence still looks shaky in the face of rising inflation and a cost-of-living crisis. The pressure firms are under is thrown into sharp relief by the results of our study. Almost a quarter (23%) of the ATOL protected agencies and operators we spoke to said they weren’t confident they could survive the next 12 months without the need for further lender, stakeholder or Government support. With close to 1,700 ATOL members currently in operation, that could translate to more than 380 company failures if these fears are realised.

New UK travel restrictions

42%

New overseas travel restrictions COVID-19 impact on staffing Cost of testing for travellers New COVID-19 variants

41%

While there appears to be significant pent-up demand for overseas travel, the potential for further travel restrictions stimulated by new outbreaks and variants still exists. Simon Stibbons Restructuring Advisory

40%

35%

34%

Inflation/cost of living No particular risk

33%

Is bigger better?

1%

Smaller firms appear more bullish about their prospects, with fewer than a sixth (15%) of firms with a turnover below £5 million forecasting they would need support, likely because they were able to minimise any ongoing costs during the crisis. Indeed, it is mid-sized travel firms that feel the most vulnerable, with a third (33%) saying they are concerned about future trading without a boost from backers, suggesting they have been unable to react to the crisis as quickly as smaller competitors while lacking the inherent resilience of their larger rivals. In response, firms have followed a range of measures to shore up their working capital during the pandemic. More than three quarters (78%) have moved to negotiate new payment terms with suppliers, while similar numbers (77%) have secured investment from stakeholders for ongoing trade. Many firms have also been forced into some difficult decisions, including cutting jobs or reducing hours (both 40%), not paying rent (38%), not paying pension contributions (34%) and deferring VAT or other tax obligations (33%). As a result, almost a quarter (24%) say they are not confident of securing their next ATOL licence at the end of March. Again, we can see these fears are felt more strongly in the mid-market (35%) than among smaller firms (12%).

*Results based on responses from 250 executives from ATOL protected businesses, who each selected up to three risks

The supply chain domino effect

The pandemic has impacted global supply chains for everything from steel to silicon chips. For ABTA members, their supply chain is made up primarily of hotels and other accommodation providers, as well as airlines and other transport companies, predominantly based overseas. These are businesses that have experienced the exact same pressures as travel operators in the UK, with plummeting demand and revenues forcing many to take some of the same measures to support their cashflow and avoid failure. That has an impact all along the supply chain, with more than two thirds (68%) of firms surveyed saying they had experienced losses from failures in their supply chain over the previous 12 months. Looking ahead, more than two thirds (68%) of the businesses we spoke to expect to come under pressure from creditors in the next year, including potential winding up petitions and County Court Judgements. For one in five firms (19%) that pressure is expected to be extreme.

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Travel and tourism: time for take off

Cashflow crunch

When we asked firms how confident they are that all the businesses in their supply chain will continue to trade through the next 12 months, it was reassuring to hear that 80 per cent felt their trading partners would go the distance – though that does leave one in five (20%) expecting distress in the supply chain. And the cashflow crunch means that the overwhelming majority (95%) of suppliers are demanding either pre- payments, payment in full, or both, for their services.This presents a severe short-term challenge for firms that have been weakened by the crisis and are over-indebted or under-capitalised, presenting the danger of a corporate insolvency domino effect through the supply chain.

Open and honest

The good news is that firms have time to plan for and mitigate these risks. Products like trade credit insurance, which protect businesses against customer and supplier insolvency risk, can be part of the solution, along with investment in payment monitoring and debt recovery services. And, while interest rates are rising, the cost of funding remains comparatively low. Clear and honest communication with all stakeholders, including lenders and debt providers, will therefore be key. How confident are you that all businesses in your supply chain will continue to trade through the next 12 months?

Spotlight on: The Bucket List Company

The year ahead

The Bucket List Company was founded in 2017, providing group trips to off the beaten track destinations in Africa, Asia, Europe and the Americas – from trekking the Inca Trail in Peru to mountaineering in Nepal. While the business did manage to take limited numbers to green list countries including Morocco and Malta in 2021, most of its usual destinations have been off the agenda for the last two years. Though Managing Director and Founder Keith Crockford is bullish about the year ahead, he says the pandemic forced the firm to ‘batten down the hatches’ temporarily. He said: “Back in 2020 we had a five-year plan. We’re basically starting that again in 2022, so we’ve lost two years of growth.” The Devon-based business, which has six employees, did benefit from Government support during the pandemic, including a Bounce Back Loan and the furlough scheme. Keith added: “Furlough was difficult for the industry because we still had to communicate with our customers and deal with postponed and cancelled trips.

“Fortunately, when part time furlough came in, it meant we could put some staff on a 2.5 day week and maintain a good level of customer service.” And Keith says his suppliers overseas have also weathered the pandemic well, without having to raise prices - yet. He said: “We locked prices in with our Destination Management Companies (DMCs) two years ago. We haven’t seen an increase in cost yet, though that may change going forward. It will be interesting to see what the effect has been on the ground, as businesses in the countries we visit haven’t had the support we’ve had in the Western world.” Ultimately, Keith says his firm’s niche providing once-in- a-lifetime experiences has helped protect its future. He said: “The type of trips we offer aren’t just holidays, we’re fulfilling people’s dreams, so more than three quarters of our customers chose to defer their trips, rather than asking for refunds. It means we now have a super busy 2022 ahead of us, running trips at full capacity. We’re raring to go!”

16% Not very 4% Not at all

52% Somewhat

28% Very

*Results based on responses from 250 executives from ATOL protected businesses

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Travel and tourism pulse report

Travel and tourism: time for take off

Focus on cashflow and risk management

Have you accessed support from the Coronavirus Business Interruption Loan Schemes?

From our experience of previous economic crises, more businesses fall into insolvency due to lack of cashflow to fund working capital during the recovery stage than in the depths of the downturn. The travel and tourism sector finds itself in a precarious position, with cash reserves depleted after having to refund travellers for cancelled holidays or issue credit notes. That threatens their future ability to trade, as their ongoing ATOL membership is incumbent on them hitting certain financial criteria that prove their robustness. On average, the firms we surveyed said 40 per cent of their revenues for 2022 would come from refund credit notes. And for almost a third (30%), refund credit notes would account for more than half of their 2022 revenues, which is likely to reduce the availability of working capital as firms play catch up on credit notes. It’s certainly telling that 100 per cent of the businesses we surveyed had taken steps to preserve cash in the past 12 months. That said, the funding environment does look positive.

38%

Yes, from CBILS

59.6%

Yes, from BBLS

The travel and tourism sector finds itself in a precarious position, with cash reserves depleted after having to refund travellers for cancelled holidays or issue credit notes. Simon Stibbons Restructuring Advisory

32.8%

Yes from CLBILS

6%

No

*Results based on responses from 250 executives from ATOL protected businesses, who each selected all schemes that applied to their business

Stakeholder support

What steps have you taken in the past 12 months to preserve cash, if any?

Almost three quarters (74%) of the firms we surveyed say they still have headroom on their existing lending facilities. Again, smaller firms appear to be in a better position, with 87 per cent saying they still have headroom, against just 65 per cent of mid- sized businesses. But, while smaller firms have the confidence of their lenders, they appear to have used up shareholders’ resources, likely because so many smaller businesses are owner operated and don’t have the deep pockets of larger organisations, many of which enjoy the backing of a private equity partner. So, while just over three quarters of the firms we spoke to (76%) had already received further funding from existing shareholders during the pandemic, that rose to 84 per cent of smaller firms, and fell to 67 per cent among mid-sized firms. When we asked if existing shareholders and/or lenders would be prepared to provide additional funding should they experience further disruption due to COVID-19, only three per cent said that door would be closed – a statistic that may well prove overly optimistic. Notably, just one per cent of smaller firms said shareholders and lenders would withdraw their support in the event of further pandemic disruption, compared to six per cent of medium sized businesses.

Extend terms with suppliers

41%

40%

Cut jobs

40%

Cut hours

Non-payment of pension Non-payment of rent

38%

34%

VAT and tax deferrals

33%

*Results based on responses from 250 executives from ATOL protected businesses, who each selected all steps that applied to their business

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Travel and tourism: time for take off

Conclusion

Reflecting on the results of this report, the travel and tourism sector appears to be turning a corner. The outlook is no longer all doom and gloom; 59 per cent of operators are expecting an increase in customer numbers in 2022 against 2019, which was a record year, while a further 32 per cent think their business will return to pre-pandemic levels by the end of 2022. However, despite these positive indicators, there is still a degree of concern regarding potential and latent failures in the sector. Tourism was one of the first industries to be hit by the pandemic and it is likely to be one of the last to emerge from this crisis, so the sector still has a way to go before it bounces back entirely. Not only is there the possibility for further travel disruption if a new coronavirus variant were to emerge, but experience tells us that the biggest danger comes not at the height of the downturn, but during the recovery, when pressure on working capital rises rapidly. Liquidity is even more essential in a highly regulated sector where there are strict financial criteria for all operators. A short-term cashflow forecast is key to managing immediate liquidity and we recommend a 13-week model, which will capture weekly and monthly receipts and payments, plus quarterly payments such as VAT, as well as rent and interest charges. Firms will also need to engage with key stakeholders as early as possible or risk running out of cash. If you don’t have the available cash to cover your potential liabilities, then your business may be denied the ATOL licence it needs to continue selling ATOL covered holidays. FRP can help, so please do get in touch to discuss the options available. There’s every reason to be confident that the travel sector will take off again in 2022.

The outlook is no longer all doom and gloom; 59 per cent of operators are expecting an increase in customer numbers in 2022 against 2019, which was a record year. Simon Stibbons Restructuring Advisory

Simon Stibbons Partner Restructuring Advisory London +44 (0)20 3005 4039 simon.stibbons@frpadvisory.com

Notes * 1 https://www.statista.com/statistics/290516/total-annual-visits-abroad-by-united- kingdom-uk-residents/ * 2 https://www.ons.gov.uk/peoplepopulationandcommunity/leisureandtourism/ bulletins/attitudestowardscovid19amongpassengersarrivingintotheukfebruary2021to- june2021/february2022

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February 2022

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