After a torrid 2020, there is light at the end of the tunnel for the travel sector.
Vaccinations are being rolled out, and with them, there is the expectation that restrictions will steadily lift – and a somewhat normal life will resume.
But what is increasingly clear is that there will be no big bang end to Covid.
While alternative strains circulate and travel corridors continue to open and close, staycation and short-haul markets will be popular in 2021.
Pent-up demand, bolstered savings, and a nation’s rediscovered love of the great outdoors means the UK travel market is set for a bookings surge.
This is supported by renewed confidence among those considered at greater risk from the pandemic.
As vaccination protects an increasingly large portion of the over-50s market, operators and airlines are beginning to see a dramatic ramp-up in appetite for holidays – both within the UK and Europe.
EasyJet has announced a 250% per cent increase in summer bookings; half of Tui’s online bookings are currently from over-50s, and National Express coach bookings are up 165% among those in the over-65s demographic.
The road to recovery for the UK outbound market, and business travel, is going to take longer.
So what does this mean for M&A? After almost of a year of inertia, activity will return in 2021 as larger trade and private equity (PE) backed companies look to consolidate – but with caution.
The market outlook varies significantly across the sector, but will remain challenging for some time yet.
Larger trade companies with stronger balance sheets and who are beginning to see green shoots of recovery will look to M&A to drive revenue through their existing model and diversify their offering.
Divestiture of underperforming or non-core assets will also feature as companies seek to generate cash and streamline their business.
Similarly, as a well-trodden sector for PE, many portfolios include travel assets which have spent the majority of 2020 "bunkered down".
Both will be keen to demonstrate growth and shareholder returns, but lavish spending is unlikely to feature.
Distressed or "bolt on" acquisitions to existing assets will be a key focus of M&A activity, with many buyers turning to the restructuring markets as a source of deal flow.
An increase in company administrations is expected as the gradual withdrawal of government support forces businesses to survive unaided. Unfortunately, not all will make it.
To add to the turbulence, banking markets – traditionally a provider of cheap debt and a key driver of deals – are severely distorted.
Banks have committed almost £70 billion to finance the government’s coronavirus loan schemes since April 2020. Many are resigned to writing off significant portions of those loans.
And with a lot of travel businesses having taken advantage of that support, some lenders will already feel an uncomfortable exposure to the sector.
As a result, in situations where debt is accessible it will be more expensive, curbing the leverage available to buyers. Valuations are therefore likely to be conservative and M&A opportunistic.
The next twelve months is not going to be a smooth ride. Sentiment and activity will rise and fall with the news flow. There will be shocks and surprises as we go.
However, there is now a line of sight to recovery. Good or bad, businesses will emerge from their bunkers. Strap in, hold tight.
Natalie Ord is audit, tax and consultancy firm RSM’s M&A and private equity partner.