Opinion: Agents must stop passing the buck on cash flow

Carnival UK sales director Giles HawkeOver the years, one of the most frequent discussion points in the trade has been around consumer protection and what happens in the event of agent or operator failure.

There are all sorts of organisations offering various types of bonding. Some types protect the operator, some the agent and some the consumer. However, there is still confusion over the exact nature of consumer protection dependent on how the consumer books and who with.

One thing remains clear – principals carry the lion’s share of the cost burden if a travel agent fails. If a principal fails, the CAA, credit cards, or in some cases Abta, carries the cost.

It is rare, unless a travel agent is acting as a tour operator, that travel agents are left significantly out of pocket if a tour operator fails. The reverse is not true.

There seems to be some misunderstanding over credit terms, Abta’s Single Payment System (SPS) and how some agents are “encouraged” to discount and trade on wafer-thin margins.

Very few tour operators extend credit terms to travel agents unless they have good insurance cover. Interestingly, some of the big insurers are pulling back from covering travel agents who they consider too high-risk.

SPS is a good system and means money passes through Abta and on to tour operators. But it isn’t fool-proof. There can be a ten day gap between money becoming due to operators and it appearing in their banks, during which time it can become clear that the money is not actually going to materialise.

No tour operator wants to trade with a financially unstable travel agent due to the potential for failure and lost money. Therefore, it isn’t in the interest of any principal to encourage a travel agent to work on low margins which could cause their failure.

The financial risk comes, to a large degree, where travel agents use customer balances to fund the cash flow of their business and overspend this money.

It is worth being clear on this one. The moment a travel agent collects money from a customer, the law considers that it is in the hands of the principal who is on the hook for providing that holiday, even if the travel agent goes into liquidation without having passed a penny of that money across.

As travel agents see their financial situation deteriorating, for whatever reason, the temptation is there to start collecting monies ever earlier to shore up their bank balances. This continues the cycle of having more money in the business which doesn’t actually belong to the agent, and more risk to the principal if that agent then fails.

Sometimes agents collect eight weeks in advance of balance due date and hold that money for this period prior to paying it to the principal – not exactly a case of “offering extended credit”.

It’s notable that there are very few financial failures of travel agents in the US, where the travel agent pays the principal directly using the customer credit card.

There may be business challenges for some agents to move to this arrangement in the UK, but it is the way forward for Complete Cruise Solution and we understand a number of other principals are considering the same move.

This means that the customer’s holiday is as safe as it has ever been, it means that the principal is not in a position where they will suffer heavy losses due to financial mismanagement of a travel agent and it means that travel agents have clear visibility of the money which is theirs.

Of course, some agents are asking what happens if the tour operator fails. If this happens Atol bonding covers consumers for any holidays with flights included. Other forms of protection cover customers for cruise holidays where there is no flight involved. 

Agents also have a choice of which tour operators and cruise lines they sell and should equally look at their financial stability and security to be certain of the likelihood of the customer not having any issues with their holiday. 

Nothing is 100% guaranteed apart from taxes and death, but publicly listed companies have to publish accounts and are prone to stock exchange scrutiny, so would appear to be pretty good partners for agents.

This is also good for the whole industry in the eyes of the consumer. Every time an agent fails, negative press is created, headlines are written and programmes such as Watchdog get very excited.

Moving to these new payment terms should make it much harder for an agent to get into financial difficulty in a way that would lead to this level of bad press for the travel profession overall.

As with any other business, if cash flow is required then it is worth creating a business plan and speaking to a bank, where security on loans will be required and interest will be paid. It is no longer viable for principals to offer interest-free unsecured “loans” to travel agencies in the UK. It’s time for agents to stop passing the buck.

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