The industry could be hit by a spate of insolvencies in September, when ATOLs are up for renewal, because some travel businesses use customers’ payments as working capital.
The warning from PricewaterhouseCoopers (PwC) insolvency partner Ian Oakley-Smith came in the week that long-haul specialist travel agency Miles Travel became the latest casualty of the recession and ceased trading.
The Kent agency, which had been in business since the 1960s, said it hit the rocks because the economic downturn had caused bookings to dry up.
Oakley-Smith said the company’s demise was an indication of the torrid times ahead for the industry. Hut he also urged travel businesses to remember even though they have taken their customers’ cash, often months in advance, it’s not theirs to fall back on.
He added: “It’s endemic that travel businesses view customers’ money as part of working capital. When things get sticky, it’s tempting to hold onto the money a bit longer.
“Typically, many travel businesses receive payments in advance, which can mask problems. They have got money in the bank, things don’t look so bad, so they are lulled into a sense of false security.
“In reality, a lack of bookings can catch up with cash flows very quickly. Therefore, performance can [suddenly] nose dive.”
The crunch could come for many businesses in September when ATOL renewals are due. If businesses experience a poor summer, they may be unable to satisfy the Civil Aviation Authority that they are sufficiently financially robust.
There are ways to avoid disaster. “Regular analysis of good quality information is needed to plan for the inevitable reduction in bookings going into the summer, long-haul winter holidays and next year’s ski trips,” said Oakley-Smith.
“It’s about forecasting. Whereas a lot of businesses do it in a cursory fashion they need to think what would happen if sales dropped by 10%-15%.”
The dangers of using customer payments were highlighted recently when customers who had paid Harvey World Travel for Affordable Car Hire bookings, before the agency went under, discovered their bookings would not be honoured because the car hire company had not been paid.
According to PwC the travel industry experienced a 145% increase in travel company insolvencies from spring 2008 to March 2009, and an 80% quarterly increase from quarter four to quarter one this year.