The next fortnight represents a tipping point with many Atol licences due for renewal at the end of March, says Simon Stibbons of business advisory firm FRP
I’ve been advising businesses for more than 25 years and know from previous economic crises that more firms fail when the economy starts to recover than during the depths of a downturn.
At the moment, the worst of the pandemic appears to be behind us and things are looking up for most Atol holders, despite the numerous inflationary pressures and the situation in Ukraine.
We recently commissioned research for a new report, Travel & Tourism: Time for Take-Off, which found more than half (59%) of travel firms expect more bookings in 2022 than in 2019 – which was a record year for the sector.
However, many firms find themselves in a precarious position with cash reserves depleted after two years having to refund travellers for cancelled holidays or issue refund credit notes.
As a result, almost one in four (24%) of firms we surveyed feared they would not meet the CAA’s financial criteria to renew their Atol licence, which requires they have enough liquidity to weather future storms. With around 660 firms’ licences due to expire at the end of this month and more than 800 in the autumn, the next few weeks and months will be crucial.
A close eye on cash flow
Despite pent-up demand, cash flow is likely to remain under pressure in the coming year. Two-fifths (40%) of the operators we surveyed said that, on average, as much as 40% of their 2022 revenues would come from refund credit notes.
As such, a significant amount of income, which may well have already been used, is unlikely to represent fresh liquidity – leading to additional working capital requirements to get through the peak holiday season.
At the same time, 95% of respondents said suppliers are now demanding pre-payment, payment in full or both, squeezing travel firms from both ends.
That said, the potential for a strong recovery in the year ahead is plain, so it is critical firms do all they can in the next few weeks, including engaging early with regulators where they have concerns, to ensure they are ready to capitalise on the expected upturn in bookings.
That means keeping a close eye on cash flow to identify any issues as soon as possible and forming a clear and credible plan to navigate the next 12 months.
At times like these, cash really is king and forward visibility of your cash position and trading prospects is critical.
Stakeholder support
We recommend building a 13-week cash flow model where one doesn’t already exist to capture weekly and monthly receipts and payments plus quarterly payments such as VAT, as well as rent and interest charges.
This will help inform the immediate operational and financial changes needed and develop a clear and robust medium and long-term plan.
Stakeholders, including lenders and investors, can be alerted to any red flags at the earliest possible opportunity so everyone can work together to find a solution with the widest range of financial, operational and restructuring tools at their disposal.
Almost three quarters (74%) of the firms we surveyed said they still have headroom on their existing lending facilities, while 97% said shareholders and/or lenders would provide additional funding should Covid-19 disruption return.
It is important to obtain buy-in to any additional investment needed as early as possible.
There is every reason to believe the travel sector will take off again over the next 12 months despite the troubles of the past two years. It is as important as ever to ensure stakeholder engagement is transparent and there is a clear plan to navigate the coming months.
Simon Stibbons is a partner in the restructuring advisory team at specialist business advisory firm FRP