As recently as October, industry leaders were dismissing the impact of the banking crisis on travel, but events are unfolding at speed.
Crude oil prices reached a new record last week, almost double the price of January 2007 and five times that of five years ago. A US recession that would pull down the rest of the world appears in prospect and analysts suggest the UK will be hardest hit of the major economies.
The twin collapse of tour operator Travelscope and carrier MAXjet Airways before Christmas may be a sign of things to come. MAXjet blamed rising fuel costs, intensifying competition and a decline in business confidence. But the crunch came when, after raising £43 million on the London markets in July, an effort to raise fresh capital failed.
Travelscope attributed its descent into administration to cash-flow problems – but then companies generally do. Apart from the size of the failure, affecting 47,000 clients, the most notable feature was the timing. A Civil Aviation Authority spokesman confirmed it was unusual, pointing out tour operator failures normally occur in September or October.
There will be specific reasons for both collapses and industry insiders suggest the pair had been in difficulties for some time. But what they had in common was their failure to obtain the cash to see them through a crisis and that is a result of the credit squeeze.
This has serious implications. The CAA points out creditors will usually allow a failing company to continue in business until the low season to minimise the costs of a failure.
But in the current climate, a downturn in the economy will expose the weaker companies and they will struggle to secure funds to keep them going.
The situation for many carriers appears especially serious, with aviation analyst Chris Tarry describing it as “dire”. Collectively, the world’s airlines only returned to profit in 2007 – the first since 2000. IATA warns: “Airlines are still £190 billion in debt. We could be heading for a downturn with little cash in the bank.”
A series of problems are coming together. The price of oil means travel costs more, while consumers have less to spend.
The credit crunch will strangle firms suffering cash-flow problems and push creditors to demand payments early. It will also cut funds to indebted consumers, reducing their spending.
The pound hit a record low against the euro last week, making imports from and holidays in the eurozone more expensive. The fall in the price of the dollar is only a partial compensation.
Add in falling house prices, rising personal debt, rising mortgage payments for millions coming off fixed-rate mortgages, cuts in Government spending and an increasing cost of living and the picture is not pretty.
The headline rate of inflation may not be high, but it is kept down by the inclusion of flat-screen TVs and PCs, which are falling in price. The cost of essential items – housing, fuel, food and transport – is rising faster and eating into family budgets. For example, energy firm Npower increased its domestic electricity prices by almost 13% last week and gas bills went up 17%. Other power firms are sure to follow.
At the same time, six million public sector workers face a second year in which pay rises will be capped at 2%. A recession will not stop most people going away and the wealthy will not be affected. But many consumers may take fewer or shorter breaks and book less-costly hotels or destinations.
Federation of Tour Operators director-general Andy Cooper says: “The situation is a little unnerving. Holidays remain a key part of expenditure, but people probably will trade down.
“We had two or three bad years until the second half of summer 2007 and you could argue we have not seen the collapse you might have expected. But that situation can only last so long.”
