Capacity
Matching supply with demand will be key for the trade. TUI Travel and Thomas Cook have slashed capacity for the year – TUI is offering 25% fewer seats this summer, with reductions mainly to the western Mediterranean.
XL Leisure, now the UK’s third-biggest group, has reduced capacity by 20%. However, availability is more difficult to control than in the past and the reductions could be offset by the expansion of Ryanair, easyJet and other carriers.
Federation of Tour Operators director-general Andy Cooper said: “You have to worry. [Tour operator] capacity is much more in line with what it should be, but Ryanair or Jet2 can increase the market overall and that is a serious concern.”
Pressure on ABTA members
The past 10 years have been relatively good for travel. Yet an average 60 ABTA members or ATOL holders have still failed each year and many more have been restructured to stay in business.
ABTA has seen a 40% decline in agency members over the decade, the number falling from 2,012 in 1997 to 1,205 in October 2007.
The total number of outlets and offices fell over the same period from 7,229 to 5,842. However, consolidation rather than business closures lie behind much of the decrease. A downturn will apply fresh pressure on many members.
Fuel prices
Short-term spikes in the oil price are less important than the long-term trend. Fuel costs have tripled since 2003 and now comprise 30% of average operating costs for airlines.
Fares have lagged behind the fuel-price rise so far. Carriers typically buy 20% to 50% of fuel up to a year in advance at lower prices – a practice known as hedging. This has kept many aircraft flying with fuel bought at two-thirds of the market price.
This situation cannot continue. Current hedging arrangements will run out soon, leading to fare rises unless there is a substantial fall in the price of oil – which appears unlikely.
Risk
The biggest companies appear least at risk from a downturn. “Our members have stronger balance sheets so they have a better chance,” said Federation of Tour Operators director- general Andy Cooper.
Jonathan Wall, managing director of accountancy firm Elman Wall, agrees. “Thomas Cook and TUI Travel have huge resources and can see off anyone,” he said.
However, the two major groups may suffer from their size in one respect. The pair joined the FTSE 100 list of companies on Christmas Eve and could fall victim to a general fall in share prices if the UK economy suffers more than others.
However, the real pressure will be on small to medium companies. Cooper identifies a “middle band of businesses” at risk – “those not so small as to be specialist or so big as to have the critical mass to survive.”
Smaller companies also have fewer resources to devote to solving problems. Wall says: “Companies that are under-funded will struggle, those that don’t add value will struggle, and those that have had a bad couple of years will struggle.”
He warns: “The number of companies with no financial resources or poor finance departments is scary.”