Steve Endacott explains how higher interest rates have modified industry attitudes to deposits on bookings
With interest rates below 1% for a decade up to May 5, 2022, the travel industry grew less concerned about holding customer funds.
This spurred a rise in low-deposit schemes, with online travel agents (OTAs) like Love Holidays gaining a competitive edge by deferring final payments from the traditional 12 weeks to just two weeks before departure.
Consumer research reveals that holiday buyers focus on the total cost and initial deposit, with little regard for the payment schedule or final payment date. So, why would Love Holidays adopt such an unusually generous approach?
As always, the details lie in the fine print. Love Holidays charges a £4.95 admin fee per payment, which is excluded from the headline price since customers can opt to pay in full at booking.
The hidden profit varies based on the number of payments, with a minimum of £14.85 potentially rising to £49.50 for bookings made 12 months in advance
Love Holidays might argue the need to offset lost interest from offering a low £25 deposit given that the average low-cost carrier flight booking costs £150.
However, the cost is typically zero, as customers must pay a ‘top-up deposit’ within 30 days, aligning with the 30-day credit terms usually provided by the virtual credit card companies used to book these flights. So, in reality, it’s a clever profit booster.
Travel agency consortia profits have surged due to interest earned from holding customer cash, with Hays Travel reporting profits of £73.4 million driven by £2.55 billion in total transaction value (TTV).
Contrary to a common misconception, travel businesses can maximise interest on funds held in trust and protected by an Atol licence. If you’re a consortia member missing out on this windfall in interest, it might be time to renegotiate.
While deposit levels appear lower than ever, with Tui offering zero deposits for summer 2025 holidays, the fine print reveals a different trend.
The zero deposit applies only to customers enrolling in Tui’s monthly direct debit scheme, which calculates payments based on the departure date. This typically results in cash being collected earlier than the traditional three-payments process, increasing the amount of cash Tui holds.
Notably, ‘full deposit’ levels across the industry have risen, with most players now charging £200 for short-haul holidays and £250 for long-haul trips.
This increases cash holdings and reduces cancellation risks, as these deposits typically exceed the costs of securing a replacement booking.
For tour operators, the final balance payment date typically has the greatest influence on a travel business’s customer cash holdings.
Vertically integrated travel companies historically maximised cash holdings by collecting final balances 12 weeks before departure, a practice Tui continues to uphold.
Jet2 Holidays has consistently adhered to a final balance requirement 10 weeks before departure, disregarding easyJet Holidays, its nearest competitor, and the sole player to allow final payments just four weeks before departure.
Given easyJet Holidays’ £1,137 million turnover in the 12 months to September 2024, the six-week difference at a 4% interest rate could have cost the company £4.8 million in lost interest.
In a high-interest environment, don’t be surprised if even easyJet adopts a less customer-friendly approach.
Steve Endacott is a travel industry entrepreneur