2020: The big issues are achingly familiar

The new year is a time to look to the forwards. At least it should be. Sadly, as we return to our desks after the Christmas break, the three largest issues that will shape the immediate future look achingly familiar.

Brexit will be back at the top of the agenda in January. Yes, we’ve all had our fill,  but while the UK voted overwhelmingly to “Get Brexit Done” there’s still plenty of this particular turkey left for sandwiches. Assuming the latest Withdrawal Agreement Bill is passed and we leave the EU on 31 January, we then begin the long process of haggling with Brussels over trading terms. Much like their namesake’s sprouts passing through the alimentary canal. It will be slow, it will be painful and it’s sure to be explosive.

Secondly, Thomas Cook (TC) continues to ruffle feathers.  Many in the industry are still struggling to cope with the impact. In the immediate aftermath, cash flow is the biggest problem throughout the supply chain as lost commission income and the cost of replacing or refunding holidays bite. So far, it looks like we’ve made it through this phase better than expected with no further material failures.

Further challenges lie ahead, though when the true financial impact is disclosed in agents and operators’ annual financial accounts. Those accounts will be scrutinised by the CAA, ABTA, IATA, Insurers, lenders and credit card companies.  Demands for additional security will butt up against severely diminished insurance and lending capacity resulting in some very tough conversations at the March and September licence renewals.

Meanwhile, the UK’s remaining Goliaths will attempt to carve up the 2.5m former TC passengers. January has always been a pivotal booking month, accounting for up to 20% of all summer holiday bookings. Early signs are that all of the lost TC capacity will be immediately replaced as Tui, Jet 2 and Easyjet pile on new programs.

Thankfully, these groups are financially healthier than TC has been, so we should see more rational pricing behaviour in 2020. Nevertheless, the summer holiday market is likely to remain oversupplied, putting pressure on everyone’s margins.

Finally, environmental concerns jumped up the agenda in 2019 and the scrutiny of our industry will only intensify. While it represents the biggest risk to the travel industry over the next decade, it also represents a huge opportunity for the Davids to triumph against those Goliaths.

Increasingly, consumers are motivated by identity, values and emotion, and are seeking brands with purpose. Movements like the B Corporation are growing in influence, with well-known consumer brands like Ben & Jerrys, Danone, Ella’s Kitchen, and Innocent Smoothies all certified. Waitrose has even trialled “B Corp Only” aisles in their online store.

Whereas traditional capitalism was all about profit, and maximising shareholder return, B Corps must demonstrate a positive impact in all areas of their business, from governance, workers, environment and community. Currently only 2 UK travel businesses are certified B Corps, though I expect many more may apply as a way of it to differentiate from the competition.

Besides being good for the planet, operating with a clear, articulated sense of purpose has many commercial benefits. It builds trust and loyalty with customers, it can help you attract and retain talent. It may even help you attract investment: a number of private equity houses now run dedicated “Impact Funds”, investing exclusively in businesses with an environmental or social conscience.

Worth thinking about when setting your new year’s resolutions!

Written by Martin Alcock for the  Travel Trade Gazette on 6 January 2020

Counting the cost of travel distribution

For many years, Google’s relationship with the travel industry has been uneasy. It acts as both a supplier and a competitor, and its forays into meta search including the launch of its recent hotel booking tool have certainly caused concern

Right now though, the UK travel industry is dealing with a different sort of Google headache, this time related to the increasing cost of Google Ads.

Google Ad Nauseous

So what exactly is the problem? Well, it’s largely to do with the fact that Google’s holiday search volumes in the UK are suffering in the current climate of low consumer confidence.

Take a look at the following summary of travel search terms from 2 specific weeks during the 2019 peak booking period, compared with the same weeks in 2018.

 

You’ll notice that apart from the one bright spot of Turkey, the other destinations in our research were all substantially down on search volumes. There are may possible explanations for such big drops. The latest booking data from GfK suggests a nervous consumer is certainly a big factor. 

Whatever the reasons for the drop in search activity, many travel companies remain focussed on delivering a set number of enquiries into the top of their funnels, knowing they can rely on a certain percentage of them to convert into bookings. A scarcity of searchers drives up the cost per click and can dramatically increase the Customer Acquisition Cost. 

A strictly non-scientific straw poll amongst our clients revealed their spend on Google Ads for Q1 2019 has risen anywhere between 6% – 20% compared to their spend on the same keywords in the equivalent period of 2018. 

In any sector, that would be tough to take, but when you consider that some Online Travel Agents spend more than 50% of their net revenue on digital marketing, it’s clear that such cost increases are unsustainable. 

Spreading the load

No doubt Google will continue to be the dominant digital market channel for the foreseeable future, but just like petrol prices during an oil price spike, when Google Ad costs go up, they don’t usually come back down again. 

The step change we’ve seen in early 2019 seems to be having a profound impact on business strategies in the sector. 

More and more travel companies are looking to innovate away from Google and we are seeing our clients much more willing to diversify their marketing budget and experiment with alternative approaches.

Whether it be social media, voucher sites, flash sales, or meta search. Each can seemingly deliver customers at a more attractive price point than Google right now. 

A Non-Classic approach

Of all the innovations, the most eye catching has been On The Beach’s (OTB)  switch to offline sales following their purchase of Classic Collection in late 2018.

As a luxury tour operator with a large distribution network of high-street travel agents, Classic Collection is pretty much the antithesis of the Online Travel Agent.

However OTB has been acting more and more like a traditional tour operator in recent years. They switched their legal status from agent to package organiser; they moved away from bed-banks and began contracting directly with hotels. 

Now as a result of the acquisition of Classic Collection, they can distribute package holidays through offline, bricks and mortar travel agencies using the Classic Packages portal.

Selling package holidays on the high street is hardly a new idea, but shifting from online to offline flies in the face of conventional wisdom and could provide OTB with a natural hedge against the spiralling cost of digital marketing. That acquisition is looking smarter every day. 

Brexit: a ferry good reason to check your T&Cs

If anyone needs to book a holiday this January, its poor old Chris Grayling.

The Transport Secretary has been no stranger to catastrophy during his time in office but the latest effort plumbed new depths.

Tasked with arranging  additional contingency ferry capacity to enable us to import enough food in the event of a no deal Brexit come March 29th, his department awarded a contract to Seaborne Freight, a firm without any ships. Grayling’s confident insistence that they would nevertheless be fully prepared was somewhat undermined when it was revealed that Seaborne Freight had copied their business Terms and Conditions from a takeaway company.

If you were trying to write the perfect metaphor for our government’s handling of Brexit, you couldnt do much better than this. It’s another clear example of the lack of any kind of plan. Unless of course, the plan is to ward off a UK famine by ordering a giant Deliveroo from France.

The debacle also highlights a murky practice which we see all too often in the travel sector. The cutting and pasting of T&Cs.

Many travel companies (including some large ones who really should know better!) will happily copy their T&Cs from an unmodified, off the shelf template or from a competitor in order to save a few quid in legal fees.

Needless to say that such thrift is a false economy and can come back to bite with a vengence. Your T&Cs are your first line of defence against any kind of claim from your customer. They usually need tailoring so that they accurately reflect how your business operates in practice. Heaven forbid you find yourself up in the docks, trying to defend your cancellation policy as industry standard when your contract actually says “Delivery in 30 minutes or it’s free”.

If that wasn’t a good enough reason, consider that in 2018 an unprecedented number of new regulations came into effect.  We were force fed an Alphabeti Spaghetti of new acronyms like PTRs, LTAs,  PSD2, and GDPR that were as unappetising and as they were tricky to untangle.

These new rules wrought profound changes to the way many travel businesses operate, affecting how they collect payments, protect customers, process data and charge for cancellations.

If you’re looking for a new year’s resolution, then reviewing your T&Cs would be a good place to start. Coincidentally, my new year’s resolutions is to cut down on takeaways. Happy new year!

 

Written by Martin Alcock for TTG Magazine’s 10 January 2019 edition.

TTC blog: What travel agents can learn from the Casual Dining Crunch

When I need reminding of the magic that the high street can deliver, I invariably think of Pizza.

When I was growing up, special family occasions always meant a trip to our favourite tratoria. Stepping inside was a transformational experience. The gentle, Sicilian folk music on the Mandolin, the barely audible trickle from the miniature plastic Trevi fountain. Candles flickering in those straw covered wine bottles. Suddenly, you were no longer in the Gateshead Metrocentre, but somewhere balmy, somewhere “continental”. Meeting you at the door was an immaculately dressed waiter, resplendent in crisp white shirt and black bow tie. He was always so courteous at the door, but you knew he’d be flirting with your Mam before the starters had arrived. “Buona sera” he would purr in his barratone accent. It didn’t matter that his real name was “Kev” and he was about as Italian as Jimmy Nail.

Like so many other independent restaurants, that tratoria is long gone. Unable to compete in the crowd of casual dining chains that exploded throughout the last 5 years, fuelled by Private Equity investment and cheap debt. Last time I checked it was a Bella pasta.

The boot is on the other foot these days though, and its the chains that have taken a good kicking in recent months. Last week, Cote Brasserie was the latest to look at store closures as a way of shoring up its business model in the wake of difficult trading conditions. This comes after Prezzo announced in March it was closing nearly 100 restaurants as part of a Company Voluntary Arrangement (CVA), a process which allowed it to restructure its debts and ultimately saved it from going bust. Jamie’s Italian went through a similar process in February, as did Byron Burger in January. Strada, Carluccios and Franco Manca are all reported to be considering similar action.

Its no coincidence that these chains are all suffering at the same time. The casual dining market is massively over supplied. When you add in the hike in food import prices caused by the tanking of sterling and the rise in labour costs from new minimum wage legislation you have a perfect storm.

The travel industry has also seen a boom in Private Equity investment over the last 5 years, but the level of regulatory oversight has probably tapered excessive borrowing and growth has generally been more controlled as a result. Nevertheless, there are certainly parallels for the travel industry.

For example, in the restaurant business, the race to scale up has led to average service and high streets full of “me too” mediocrity. There is little to separate many of the offerings. Differentiation has long been a buzz word in travel too. The more successful travel agents on the high street are those doing something authentic and experiential. Agents passively punting without adding any value have a shelf life as limited as the brochures they are dispensing.

In an effort to fill all these new restaurants, many chains have aggresively courted new customers through discounting and voucher schemes but this may have backfired. Consumers have figured out that for the price of a few clicks and a bit of personal data you never need to pay full price. They no longer value the product and the resulting decline in brand value and profit margins is going to be very difficult to reverse as many Travel agents have learned the hard way.

These days I rarely venture to the high street to eat. Im much more likely to stay at home and order from Deliveroo. They are one of a number of convenient, reliable and technologically slick alternatives to leaving the house. These intermediaries are well funded and growing fast and they are literally eating the lunch of the high street chains. Yet another parallel that the travel sector is all too aware of.

Written by Martin Alcock for TTG Magazine 17 May 2018 edition.

TTC Blog: What Van Halen can teach travel companies about managing risk

The rumours of celebrity A listers and their outrageous dressing room requirements are legendary. As the urban myths go, Mariah won’t turn up unless a flock of newly hatched butterflies are there to greet her, while Madonna insists on a brand new toilet seat at every show she plays. The other day I came across a story about some unlikely divas: the American Hard Rock band, Van Halen and their “Clause 126”.

 

The story goes, that the contract terms with each of the stadium arenas that Van Halen toured would contain a strict clause. The band’s dressing room must have a bowl of chocolate M&Ms with all the brown ones taken out. Any venue breaking this rule would risk the concert being forfeited and the band being paid in full.

At first I assumed it was just another insane demand from celebrity egomaniacs who’d lost all sense of perspective but as it turns out, I couldn’t have been more wrong. This particular request was a clever risk management tactic.

Back in the day, Van Halen were one of the first stadium rock bands of their kind. They were early pioneers in creating complex stage designs and spectacular pyrotechnics. When they went out on their mammoth world tours, 9 large lorries would travel ahead of them carrying their stage and lighting equipment. Ensuring the production could go ahead safely and on time required a major logistical effort, a huge workforce, precision planning and attention to detail. The contractual terms with the arenas were hundreds of pages long, specifying all manner of important requirements from the door width needed to get the equipment in, to the density of the concrete needed to support the stage girders. If any of the arenas got the technicalities wrong the consequences could have been catastrophic, ranging from costly delays to serious casualties.

 

In order to test the arena management’s attention to detail, singer David Lee Roth, would insist on “Clause 126: no brown M&Ms” being buried in the back of the contract. On arrival at a new arena, he would march straight to the dressing room. At the sight of a brown M&M, he would insist on a full detailed safety check of the entire production, and if it wasn’t satisfactory they would cancel the show.

 

This might well be a tactic that travel companies could learn from. The current inquest into the Sousse tragedy has once again highlighted the long chain of liability that tour operators take on when delivering a holiday. The new Package Travel Directive which comes into force in 2018 will make many more sellers of travel contractually liable for the actions of their suppliers. A “Clause 126” might be a good way of ensuring those suppliers pay attention to the important details.

 

Now, if anyone needs help disposing of all those spare brown M&Ms….

 

Written by Martin Alcock for TTG Magazine on 26 Jan 2017.

The ATOL Financial Tests – 2 insights and 3 tips for a smooth ATOL renewal

As far as financial assessments go, the CAA’s old Free Asset Test definitely had its problems.

You could think of it as like a cantankerous old grandad.

It spent most of its time looking backwards at historic events; it threw out some strange opinions every now and then and it missed a lot of what was really going on.

Ultimately it wasn’t really working very well.

So its been bundled off to Dignitas to be replaced by a younger, fresher approach.

The CAA introduced its new ATOL Financial Test in June 2016, radically changing the way it financially assess ATOL holders with less than £20m ATOL turnover per year.

Here is our summary of the new approach, together with our insights on what they mean in practice for ATOL holders. We’ve also included some tips for ensuring your next renewal goes smoothly.

If you have any questions, comments or insights you’d like to share with us, please get in touch.

The Travel Trade Consultancy

What is the new ATOL Financial Test?

The new Financial Test comprises a weighted score based on a series of 7 financial ratios:

  • the first 4 apply to Small Business ATOL holders (ie those carrying less than 500 ATOL passengers and £1m ATOL turnover annually).
  • all 7 apply to Standard ATOL holders carrying up to £20m turnover annually.
  • Companies with ATOL turnover greater than £20m are still subject to a separate, individual assessment and the ratios do not apply to them.

The financial ratios are:

screen-shot-2016-11-22-at-16-08-08

ATOL applicants will receive a binary pass or fail result. For those that fail, they will be advised on the required cash injection to cure the position and pass the Financial Test.

While the CAA have released which financial ratios make up the Financial Test, they have not released any detailed guidance on what each individual ratio needs to meet to “pass”.

This creates an obvious problem when trying to make key business decisions. If you dont know what ratios are required to satisfy the regulator, how do you know for example:

  • how much dividend can be paid?
  • what can be spent on capex or marketing?
  • what is “free cash”?

One way around this is to use the ATOL Self Assessment Tool (ASAT) which allows you to submit draft accounts and receive an indication of the CAA’s assessment. You can submit multiple times enabling you to iterate when calculating dividends. However the results aren’t always instant. Nor are they binding until you submit your final accounts.

Some guidance courtesy of TTC

In an effort to provide some further guidance, we analysed the data from 70 of our clients who renewed their ATOLs in September 2016 and we learned the following:

  1. What it means for Small Business ATOL Holders

If you’re a Small Business ATOL (SBA) holder, its likely this will be the first time you have had to submit financial information. Our analysis of our SBA clients who renewed in September 2016 showed the following average scores:

screen-shot-2016-11-22-at-16-14-35

  • a current ratio of greater than 1 and a leverage ratio of less than 1 were the leading indicators of passing the Financial Test;
  • Many businesses were being financially assessed for the first time and were asked for cash injections or security bonding. In some cases, these were material amounts.

 

2. What it means for Standard ATOL holders with ATOL turnover < £20m

For Standard ATOLs our data indicated the following results:

screen-shot-2016-11-22-at-16-14-46

  • Profitability ratio and cash ratio were leading indicators of satisfying the CAA;
  • Some operators did not pass the Financial Test as an SBA but managed to pass as a standard!

 

Tips for a smooth renewal

Here are our top tips to ensure your renewal goes as smoothly as possible.

  1. Make sure you have appointed an ARA

The CAA introduced the ATOL Reporting Accountant scheme in 2016 and will only accept reporting from registered ARAs so make sure your accountant is on the ARA register. In the previous renewal, many ATOL holders left it last minute to appoint an ARA meaning they either didn’t get their ATOL renewed on time, or they paid a hefty fee for a new accountant to step in at short notice.

 

2. Use the ASAT

The CAA has introduced the ATOL Self Assessment Tool (ASAT) which you can use to get an an initial indication on how the CAA are likely to assess your accounts, and will give an indication of any likely cash injections required.

Pro tip: you’ll get a much quicker response from the CAA if you press the submit button rather than email a pdf of your ASAT.

3. Get in early

Invitations to renew your ATOL normally go out 4 months before the deadline. Ensure your accounts are ready on time and your ATOL application has been submitted as quickly as possible to ensure your renewal is processed. If you’re late to the party you run a real risk of not having your ATOL renewed which means you wont be able to sell air holidays.

The renewal fee also increases if you submit later than 2 months before the deadline.