Hope for a bounce-back in sales, plan for a drop

One advantage of being a travel industry veteran is that I have already lived through enough shocks to holiday demand, such as the first Gulf War, the 2008 economic meltdown, Covid and the war in Ukraine, to know that we will get through the war in Iran and that a travel bounce-back will come.

 

However, the key question is whether it will come before the fuel-hedging shield protecting low-cost carrier flight prices runs out this summer.

 

EasyJet’s latest trading update on April 16 was rightly pitched very positively on the fact that the airline has hedged 70% of this summer’s fuel at low rates, meaning it did not need to impose surcharges or dramatically increase prices in the short term, which is clearly great news.

 

However, the accountant in my soul immediately focused on the negative: 30% of their fuel is not hedged.

 

With current fuel prices, double their hedged price of $706 a barrel, it does not take a genius to work out that unless the Strait of Hormuz is opened before easyJet needs to buy that final 30%, its only option will be to heavily consolidate flying and reduce capacity, as it will not get the consumer price needed to cover this increased cost in the lates market.

 

Similarly, the secondary winter market will be hit by a sharp rise in fares, as the UK economy goes into reverse amid inflation spikes, rising interest rates, and redundancies as businesses slash costs by adopting AI to remain competitive.

 

Now, if I were a betting man, I’d put my money on the issue with the strait being resolved by the US bombing Iran into submission by hitting its key infrastructure, such as power stations, bridges and their oil production facilities or in the worst case, American boots on the ground, as young Donald is not known for accepting a score draw.

 

However, I have never been a betting man, and I am ensuring that all my travel interests are prepared for the worst-case scenario, as we simply have no guarantees of anything else at this stage.

 

Fortunately, we do not have to worry about the collapse of a major tour operator this time, because unlike the “vertically integrated” operators of the past, which had massive fixed overheads in the form of hotel guarantees, high staff levels and large retail networks, the current airline-based players such as easyJet Holidays have digital and flexible models that can be scaled down easily with volumes.

 

Admittedly, Tui still operates a shrunken vertically integrated model, but because of its point-to-point long-haul Dreamliner fleet, it has benefited from the demand shift caused by the Iran war and the closure of the Middle East hubs.

 

However, for other travel companies and tour operators, it is time to batten down the hatches. For example, it amazes me that more travel businesses have not followed easyJet holidays’ lead by outsourcing at least part of its call centre operations to Travel Solutions Network (TSN).

 

The TSN Virtual Call Centre model is staffed by experienced travel homeworkers who, in exchange for flexible rostering and the ability to work from home, are paid on a “success-only basis” in the form of a commission.

 

The relevant tour operator, therefore, is exchanging a “fixed” cost for a variable overhead that can be scaled up or down based on demand. They still control call quality because they train TSN trainers and have access to every call that is recorded, transcribed and data-mined for compliance.

 

If you already have an existing call centre with experienced staff, I would never advise closing it, but I would advise the business to scale it down, assuming a potential 30% drop in demand, and to have a contract in place with TSN to provide extra staff if things are resolved and demand does bounce back.

 

This, however, does take planning, and with TSN already receiving multiple enquiries, I would advise interested parties to wake up and start preparing for a potential worse case now, because it never hurts to have a more flexible overhead.

 

Secondly, all travel businesses should use this threat as the impetus to start driving operational efficiency with AI, because the people who prepare to ride out the storm are normally the winners when the bounce back comes.

 

Lastly, remember that in a crisis, cash flow management is the top priority. Set up a dedicated team to manage it, approve every item of expenditure, and reforecast inbound cash weekly to ensure your cash buffer never gets too low.

 

Businesses don’t go bust because they lose money; they go bust because they run out of it. Prepare for the worst and hope for the best, but don’t rely on things outside of your control.