Both business and leisure travel are rapidly becoming victims of the worldwide recession and credit crunch. The industry has been surprisingly resilient in the face of failing retailers on the High Street, and whilst volumes initially fell, the worst aspects of the credit crunch seemed to be avoided towards the end of 2008. 2009 is a different story. Most of the major airlines have announced substantial reductions in traffic and profits. The International Air Transport Association has forecast losses for the global airline industry of $4.7 billion, with passenger traffic contracting by 5.7% on average with much greater falls in first class and business cabins and with cargo. On the leisure side, at the German Travel Trade Show ITB in early March 2009, significant cuts in capacity were announced as commonplace across the tour operator industry with experts advising against price wars to try to keep some degree of profit.

Opportunities for Passengers

With the real possibility of deflation occurring, and with fierce competition between airlines, hotels and other travel services, the business traveller and travel managers should be able to find special rates, discounts and savings in the market place, particularly if they are buying in volume. There are risks, however, including paying insolvent airlines and hotels and the possibility of putting pre-payments for services at risk. Passengers should consider always paying by personal credit card to obtain the protection under Section 75 of the Consumer Credit Act, or considering scheduled airline failure insurance. Those suppliers offering the cheapest price might be the greatest risk.

Assistance from Suppliers

Large travel service providers, such as airlines are unlikely to want to take the pain completely themselves and significant suppliers are likely to be forced into cutting charges to retain business. For example, Deloitte predict that airports are likely to have to reduce landing charges in view of falling demand from airlines resulting in reduced airport capacity.

The Regulators

Both IATA and the CAA (regulating the ATOL regime) are under increasing pressure to protect airlines passengers and consumers from the effects of insolvent agents, operators and travel providers. This has lead to a tightening of the financial fitness requirements and far greater scrutiny of licence holders accounts to ensure adequate net free assets are met to meet their financial criteria and for groups of companies, that inter-company debt is taken into account. This has led to an escalation in the value of bonds being sought from some agents and for some TMCs to be pushed towards fortnightly BSP payments rather than on a monthly basis. These increasing regulatory requirements are resulting in some agents placing themselves up for sale.

Travel Management Companies

Many TMCs are based on a low cost volume business model, where any substantial fall in the number of bookings, reduces profitability considerably and is likely to result in redundancy consultation in an effort to reduce fixed costs. Some have considered keeping their teams together by reducing working time or salary. At the same time, TMCs need to control their cash flow and ensure that any outstanding payments are collected urgently and if necessary to take action by a statutory demand under the Insolvency Act.

Employees

For many employees, the consequence of redundancy is to move into an uncertain world where few positions are available. For employers carrying out redundancy consultation, this leaves a difficult issue about whether to allow employees to work out their notice period if redundancy is the only answer, where some employees might hold bad feelings. For many TMCs in this process, the better option has been to negotiate a Compromise Agreement and not to require departing employees to work their notice.

Security and Opportunities

There have been a number of reports of fraud in the business travel sector where some businesses and individuals have only been able to survive by acting dishonestly or by trading whilst insolvent and taking payments with no possibility of being able to perform the services booked. This means that all businesses need tighter controls and monitoring to ensure that they do not fall victim to any fraudulent activity.

Even though times might seem bad, there are real opportunities in the sector. Some good businesses are struggling and looking for business partners, investors or a trade buyer. The merger and acquisitions activity in the sector is strong and there are golden opportunities for businesses with the funding to grow their business by purchasing competitors at distressed rates. Many transactions are business sales, rather than share sales so that the purchaser does not acquire all of the liabilities of the target company.

Although there are inevitably victims of the financial downturn, those that survive are likely to come out of the recession far stronger than when it started.

For further information on this or any Aviation & Travel issue, contact Ian Skuse, Head of PSW's Aviation & Travel Department