The deepening economic gloom should not detract from the fact the travel trade broadly had a good summer, despite the collapse of XL Leisure Group. Advance bookings also suggest this winter should be decent.
Latest figures from Ascent Marketing Intelligence show overall trade revenue this summer up year on year. Where there was a decline, it was in cheap packages and eurozone destinations – Greece, Cyprus, Portugal and Spain.
The US market was up – a trend admittedly likely to reverse with the rise in the dollar – and so were bookings to Mexico, Egypt and Turkey.
It is too early to draw conclusions about summer 2009, but September bookings were only 3% down year on year. Even more encouraging, bookings for this winter appear marginally up on last year.
So there is little cause for alarm in the latest figures. How does this gel with the developing UK recession?
The nationalisation of high-street banks on October 8 has done little to stem the sense of crisis. Prime minister Gordon Brown and Bank of England governor Mervyn King talked openly of recession as official figures showed the UK economy shrank 0.5% in July-September – surprising analysts who had predicted a 0.2% fall.
It was the first contraction in the economy in 16 years and led the Financial Times to warn of “a much deeper recession than had been thought”.
That realisation is driving down the value of the pound, with important consequences for travel. Having bought $2 in the summer, £1 bought $1.50 this week – making a US holiday 25% more expensive and pushing up the price of a good deal else.
The pound also fell to its lowest ever rate against the euro, despite the European currency also falling. The expense of eurozone destinations shocked many UK tourists this summer – in the past three months they have become 17% more expensive.
At the same time, the oil price was down to about $60 a barrel at the start of the week – despite a cut in oil production – way below the $147-a-barrel it hit in July and the lowest it has been for 17 months.
This is good news for airlines, tour operators and all of us paying fuel bills – which means more cash available to consumers. But the price fall will take time to feed through and be offset by the drop in the pound, since oil is traded in dollars. Put simply, a $60-barrel of oil now costs £40 – the same as an $80-barrel a year ago.
Also, since airlines and travel groups hedge on fuel – fixing prices in advance – they will not enjoy the full benefit of the price fall. At the end of September, TUI Travel reported 87% of its fuel this winter was hedged and 78% next summer and Thomas Cook was 92% hedged.
The big two have also hedged on currency – Thomas Cook on 91% of its dollar and 94% of its euro requirements and TUI Travel at similar levels. That provides stability in an otherwise frantically changing situation, but it does not come cheap.
The big question is what impact the falling pound will have on consumer spending.
ABTA head of development and FTO director-general Andy Cooper says: “The pound has plummeted – there is no other way to describe it – and it is not a nice position for the industry.
“It is very hard to say what will happen. I take a little comfort from forecasts that the main summer holiday will be one of the last things consumers cut, although I suspect people will trade down.
“Demand for the summer holiday will be there, but people almost always delay buying decisions [in such circumstances]. There has definitely been a slowdown since early October.”
However, Cooper believes the industry is in good shape to weather the worst of the recession. “We are coming off the back of a reasonably strong summer and that will be a saviour for people,” he says. “Most companies are in a more positive position than two years ago and there is a more sensible view of capacity.”
ABTA head of financial services Mike Monk agrees next year is likely to be “very difficult”. “Members will find credit reduced or drying up when they need it and should be thinking now about reducing overheads,” he says.
“It will be difficult for quite a while, but I do not expect Armageddon. People are not just going to sit at home.”
Economic indicators
- The National Institute of Economic and Social Research predicted a 3.4% fall in consumer spending next year compared with this year – more than double the falls in spending in previous recessions in 1974 and 1991. There was a negligible overall fall in consumer spending during the recession of the early 1980s, despite a sharp rise in unemployment.
- Business secretary Lord Mandelson warned this week: “We are facing an unparalleled financial crisis. I do not think people have realised what the impact is going to be on our real economy, on businesses and jobs.”
- The pound hit its lowest rate against the dollar since 2002 this week. The only time it has been substantially lower was in 1985 as the UK emerged from its longest post-war recession.
- A Confederation of British Industry council representing small and medium-sized enterprises warned: “Banks have shut up shop.”
- The Credit Management Research Centre at Leeds University reported major companies are taking longer to settle bills with small firms. SMEs wait twice as long for payments on average as large companies.
- The British Bankers Association warned business failures are “inevitable” despite government pledges to help small companies.
- National Express scrapped a bus service from Heathrow to London’s West End and Canary Wharf, introduced last November, owing to lack of traffic.
