A cash crisis will cause a rise in travel business failures in 2021, but those that survive should see a swift bounceback, a new report from accountancy and business advisory firm BDO has found.
The third edition of BDO’s annual report, The Travel Diaries, predicts that a looming liquidity crisis will squeeze certain operators to the point of failure, notably those with the "weakest business models" or those who entered the crisis with insufficient cash reserves.
BDO’s analysis of the balance sheets of many UK outbound travel operators conducted at the start of the crisis found that in many cases, where revenue was recognised on departure, deferred income exceeded cash.
"As travel businesses have always used customer cash as a permanent element of the working capital cycle, without cash flowing in it becomes almost impossible to pay overheads," said BDO.
Despite the market challenges, a number of firms including On The Beach and Love Holidays have raised significant funds from backers, in a sign that investors have confidence that the market will recover, with opportunities to gain market share following the failures of Thomas Cook and STA, the report added.
While outbound operators are experiencing severe difficulty, domestic UK operators have reported strong trading as consumers substitute overseas trips for domestic breaks.
Harry Stoakes, leisure M&A partner at BDO said: "This has unquestionably been a terrible year for the outbound travel sector and the recent news of another national lockdown is yet a further blow.
"While the travel sector hasn’t seen mass corporate failures to date, many have been running on fumes, surviving on deposits and cash received from advance bookings.
"As it’s likely to be some time before travel businesses can release profit from departures, this will result in a painful cash squeeze which will inevitably lead to more failures in 2021.
"After the crash in 2008 it took some eight years before overseas travel volumes returned to their pre-recession highs. If Covid-19 can be defeated and effective vaccines be rolled out in 2021, we would expect a much quicker recovery as a result of huge pent-up demand for a break in the sun.
"Confidence will return and those travel businesses still trading and with the firepower to acquire customers online will gain market share."
Commenting on the outlook for deal activity in the travel sector Stoakes added: "The outlook for private equity-led primary buyouts looks tricky for outbound travel operators over the next 12 months.
"My prediction is the recovery will be deals-led where cash-strapped businesses will combine to cut costs and benefit from scale. I expect deal activity between corporates to increase, driving consolidation in the sector.
"Deals for domestic holiday parks, self-catering aggregators and other domestic travel businesses which appear to be trading strongly since the crisis started will continue as before.
"Despite the current gloom, it is worth remembering what a success story the travel sector has been in recent years, accounting for 10% of global GDP and growing faster than global GDP. That success is down to the unrivalled emotions and memories travel gives us and that’s why it will return strongly."