Travel company insolvencies up 145%

Travel companies are being warned to prepare themselves for up to five years of suffering due to the recession.

Based on a 145% year-on-year increase in travel company insolvencies, PricewaterhouseCoopers LLP is predicting that the industry’s decline will be long term.

It said an 80% increase in travel company insolvencies from Q4 2008 to Q1 2009 mirrors the level of insolvencies last autumn, when 13 companies in the XL Group collapsed.

But PwC director Ian Oakley-Smith said that instead of one large company going under, this year more small travel businesses are falling at the first hurdle.

“History shows that there has always been a strong correlation between total consumer spend and consumer spend on travel. Travel businesses should therefore expect this trend to continue, which is likely to mean that spending on travel will decline for some time yet.

“In the last recession, holidays were impacted at both volume and value levels. This is likely to recur and will take its toll on travel companies.”

PwC said the industry might be more vulnerable than in the previous recession because of the wide variety of ways in which holidays can now be booked and the move away from just the standard two-week summer break towards multi-trips of varying length and destination.

“It is now easier for consumers to skim off the number of discretionary short breaks and keep the standard, traditional holiday. This will hurt an industry geared up to offering lots of pre-planned and last minute, mini trips,” added Oakley-Smith.

“The travel market has swollen with both supply and demand over the recent boom years, but we are now headed into a new reality. 2009 will be a journey of discovery to assess how deep the recession actually is and therefore how long it will impact travel.

“The fundamentals suggest that demand will not return to the previously high levels, quickly. Travel companies must avoid making any short-termist decisions now and focus on guiding their business through a medium term industry recession. In turn this will help them create a sustainable business model for the years ahead – both good and bad.”

According to PwC, weak financial management is the primary reason why travel businesses fail.

“The travel industry is almost unique as it holds consumer cash months before it delivers the product. It is therefore easy to mistakenly believe the business is cash rich. In reality, a lack of bookings can catch up with cash flows very quickly.

“Monitoring website and telephone enquiries, for example, can ring the alarm bells well in advance of any drop off in bookings – giving companies the time to plan for this scenario.

“Winners will be forward thinking and open-minded – and decisive action will distinguish them from those who will succumb to the pressures of the downturn.”

* Do you agree with PwC’s bleak predictions? What is your company doing to survive the recession? Who will survive, and who will go under?

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By Bev Fearis