The government’s energy price cap will benefit the sector, but hard times lie ahead, argues Steve Endacott
I was highly pessimistic about travel’s outlook for summer 23 a few weeks ago, but the government’s £150-billion energy price cap will make a massive difference to travel prospects in the short term.
UK households saw a 54% increase in energy bills on April 1 as the energy cap for an average house was raised to £1,971 per annum and face a further 80% increase on October 1, and another 52% increase to £5,549 on January 1 2023, just as travel hopes to move into its peak holiday booking period.
Prior to the energy cap’s introduction, 8.9 million of the UK population were predicted to move into fuel poverty where they must make decisions between eating and heating.
A total of 25 million households were forecast to have virtually all their disposable income for non-essential luxuries eroded a few weeks ago, with most quickly running down any savings they have.
I love the optimism of the travel industry, but you would have to be an ostrich with your head in the sand not to realise the travel sector, like the hospitality and hairdressing industries, were heading towards ‘Armageddon’, given the weakness of businesses’ balance sheets post the Covid-19 disruption.
The government’s intervention is massively beneficial to the sector, as many customers will still have short-term disposable income to spend on an overseas holiday before the true impact of the recession is felt in the UK. This should save the Summer 23 early booking market.
However, the industry must remember that fuel prices have doubled in the last year which will greatly impact the winter second-holiday market as two holidays a year become a luxury that only the ‘haves’ can afford.
Whether Armageddon has been avoided or just postponed depends on how effective the government is in resolving the energy crisis in the next 18 months as a price cap is simply not sustainable.
Inflation is like a stealth tax that most UK households are aware of but assume they can counterbalance through wage demands. It therefore has a slower impact than interest rate hikes, which potentially make mortgages unaffordable.
Unfortunately, inflation is currently at 10.9% and the most effective control historically has been increasing interest rates, which immediately filter into mortgage rate increases.
The travel industry’s short-term challenge will be passing on the substantial holiday price rises required to offset dramatically higher aviation fuel prices, which are exaggerated as aviation fuel is purchased in dollars at a time when the pound is at a low of $1.15.
Combined with hotel price increases as hotels seek to recover increased operating costs, this is expected to cause about 15% inflation in holiday prices year on year.
As I’ve outlined previously, this will create a market divided between early booking ‘haves’ and a dramatically weaker late-booking market where the ‘have nots’ simply can’t afford to grab last-minute bargains.
The jury may be out on the impact of the energy crisis on travel, but caution is the sensible short-term option.
Here are my personal tips for companies selling short-haul beach holidays:
- Stop flogging a ‘dead horse’. If your business has a debt mountain that is going to take more than three years to pay off, consider protecting your customers and shutting it down. Launching a ‘phoenix from the ashes’ may be possible, but not unless you protected previous customers and even then you need to be sure the new business will be sustainable. I know from painful experience that at times soldiering on is not the best option.
- Cut overheads
- Consider your location. Highstreet properties with a rateable value of £15,000 or less do not pay business rates, dramatically reducing operating costs. Few of these shops are on mainstream high streets and therefore require local community outreach and social media campaigns to drive sufficient traffic.
- Revisit staff costs. Covid-19 removed most of the ‘fat’ from travel companies so any further cuts will be highly painful. It’s time to let senior people go and be prepared to roll up your sleeves. get involved and invest in junior staff to make up the deficit.
- Switch to selling third-party packages, which carry less re-booking and Atol risk at a time when further travel disruption is likely.
- Invest in community outreach. Avoid the easy but expensive Google route and invest in low-cost branding opportunities in local community projects such as sponsoring the kits of junior rugby or football teams. Don’t be afraid to market direct to potential customers via WhatsApp groups. Charity starts at home, but so does local marketing and if you’re smart both are tax deductible.
- Incorporate homeworking into your business model. This allows lower salaries and increased opening hours.
- Increase ancillary income. Every business needs to wring out every pound of income from each lead generated.
The future may not be bright, but as in any crisis, those who evolve and adapt will be the winners. Don’t put your head in the sand. Instead, create a prosperity plan that acknowledges the risks the future poses. Opportunity knocks!