By Christopher Photi, head of travel and leisure, White Hart Associates
The sad demise of On Holiday Group last week came as not unexpected to many travel insiders who know they have been trying to find a buyer or raise finance for some time.
More broadly it has thrown the spotlight on the future of bed banks and perhaps focuses attention on the viability of the dynamic packaging model.
There is little doubt that bed banks are the poor cousins in the profit league of dynamic packaging which still continues to flourish.
No frills airlines (please do not call them low-cost airlines – they are not) are the winners, despite having taken a long time to really understand the benefits of the volume driven to them by online travel agents, closely followed by the OTAs themselves.
The continuing success of OTAs has been underlined by the recent acquisitions of Travel Republic and On The Beach, for very substantial sums – one by the trade and the other by private equity.
OTAs command commissions of up to 20% from bed bank suppliers and this in an industry where margins are tight and the market hyper-competitive.
If a bed bank makes a variable commission of say 25% from the supply of hotel accommodation to the OTA, after paying the OTA a 20% commission, you do not have to be a genius to work out that they survive on very small margins.
This is partly offset by ‘stack ‘em high, sell ‘em cheap’ volumes and continuing efforts to control overheads.
However, the model cannot withstand the loss of one sixth of the total variable commission to TOMS VAT for all EU destinations.
TOMS VAT is calculated by HMRC on the 25% variable commission, not the 5% retained after the OTA commission. It was this imbalance that contributed most to the failure of On Holiday Group.
That is why the Secret Hotels 2 (also known as Med Hotels) Supreme Court ruling in favour of the taxpayer last week was so important to the much beleaguered bed banks.
On Holiday Group’s finances have been weak throughout its financial history – the group was undercapitalised and therefore substantially overtraded – but the loss of £4.5 million from its cash flow by HMRC, which almost certainly will be repaid at some stage to the OHG administrators, was a bridge too far.
Cash is king in the unregulated bed bank market place – you can trade with a minimal free asset base but not without cash.
The order from the tribunal provides for a stay of 60 days after the Supreme Court decision in Secret Hotels 2 so do not expect HMRC to start dishing the cash out to other bed banks for some time yet.
Nevertheless this should be a workable timescale for the other bed banks to avoid failure.