High-street travel agents consider sale and lease-back deals – 12 Oct 2006

A plan to relinquish the leases on high street travel outlets and rent them back – a version of the sale and lease-back property deals that have become common on the high street – is being considered by at least one of the big four travel agency chains.

The move is driven by dire package holiday sales this summer. It would aim to give a short-term cash boost, at the risk of hitting long-term profits and imposing added costs on agencies.

The big four have suffered one of the worst summers on record, with a drop of up to 12% in overall sales.

The traditional autumn trough in cash flow is putting some companies under increased pressure to release cash from assets.

British Retail Consortium head of property and planning Paul Browne said: “Retailers use sale and lease-back as a short-term measure to get some money back. It allows them to re-gear the business.”

The travel majors are ahead of the game in this respect. Thomson and MyTravel hold the leasehold on virtually all their shops. The figure for the high street as a whole is nearer 75%.

However, the proposal being considered involves relinquishing leases to raise cash and negotiating shorter rental agreements with the new leaseholder.

A leading industry source said: “Travel agencies are not generating cash. Other than First Choice, they will all be looking at selling leases.”

First Choice is in a different position from the other majors, having about 300 outlets compared with the 1,800 across its three rivals. It has unveiled plans to grow by tripling its franchise network, adding 100 outlets to its existing 55 over the next 18 months.

The other groups rely on leasing shops, typically for 10 years and almost always for between five and 15. Shorter rental agreements would make it easier to close stores if trading does not improve.

Industry consultant and former ABTA head of legal affairs Alan Bowen said long-term leases pose a problem. “A number of large operators would like to get rid of outlets. Lease-back would raise capital,” he said.

“All the large guys will be looking at the option. The question is whether the rent [they would pay] would exceed the costs they pay now.”

Andrew Burnham, travel and leisure principal at accountancy firm MacIntyre Hudson, said: “Sale and lease-back is an established practice for companies under cash pressure, but it could weaken profitability in the long term.

The rents would take no prisoners. There is a short-term cash benefit, but a long-term profit hit.”

Matthew Stone, head of strategy at property consultancy Cushman and Wakefield, said such arrangements were uncommon on the high street and the likely rents would outstrip the market value of premises.

But Michael East, chief executive of travel consultancy Eastcastle Management, believes a ‘lease, lease-back’ arrangement could work for older shops on long leases. “It’s something companies would do if they were broke, to release capital,” he said.

The news comes amid predictions of sharp reductions in the size of the majors’ high-street networks. Advantage managing director John McEwan, former boss of TUI agency chain Lunn Poly, said: “Five hundred multiple agents will go over the next three years.”