Opinion: Adapt and reduce costs to navigate the choppy economic waters

Mike Saul, head of hospitality and leisure at Barclays Corporate

With the economic crisis hitting new levels this week, last week’s ONS figures should not come as a surprise. 

In the three months to September there was a 5% decline in the number of visits abroad by UK residents, this decline is mirrored for the same period last year. 

There has been a raft of bad news in recent days; the revised Eurozone growth forecasts to 0.5% from its previous forecast of 1.8%, combined with UK trade deficit running at £3.9bn is doing little to boost business or consumer confidence. 

If we factor in the potential contagion from any further fallout in Europe, then the outlook for the UK is far from rosy. 

Against this backdrop, consumers are naturally having to think twice before spending what limited disposable income they have, tightening their belts where they can, and those who are going abroad are spending less. 

Given this environment many of the travel businesses we are speaking with have forecast limited growth this year and next, and are renewing their focus on protecting cost lines.

We have already seen TUI AG seek to introduce measures to protect itself should Greece leave the euro, and whilst such pre-emptive action may be premature, it does bring a fresh focus on how to proactively manage cost lines, including currency exposure in the current environment. 

At Barclays we have started to see a rise in the number of firms looking to trade in local currencies as a means to reduce their overall cost of products and services. 

In doing so companies have been able to remove the exchange rate premium suppliers traditionally include in their pricing strategies and viably reduce an element of the cost line. 

Most outbound operators may have given this little thought given the traditional ease of trading in sterling, dollar and euro, but with the currency volatility of recent months, and cost lines as they are, the possibility of forex hedging may offer a vital tool in helping to maintain a competitive edge.

Businesses are additionally looking to manage their commercial operations in a far more efficient manner. 

The sluggish winter season has seen some airlines reduce capacity to reflect the subdued consumer demand, and with Christmas and New Year’s Day falling on a Sunday this year, operators may have to consider whether this is likely to have an adverse impact on the number of people wishing to travel on the Saturday before, and if so, should they be chartering flights for the Friday instead? 

As we look ahead, the expected increase in Air Passenger Duty, which is due to come into force next year, could see a consequent rise in the number of consumers opting for short-haul holidays. 

Whilst staycations have proved increasingly popular, results from budget carriers have shown short haul destinations to be the most active routes, and with BA this week announcing new flights to Bologna and increased services to a number of European cities next year, this is clearly becoming an area of focus for larger carriers too.

While the environment is tough and there are no signs that the challenges will let up any time soon, there is an opportunity for businesses to develop their commercial and competitive edge appropriately, and in doing so navigate this environment to emerge as one of the success stories.

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