Are changes in credit terms by IATA going to lead to fundamental changes in the structure of the travel industry? Are they part of a wider change? And is it one that is actually overdue?
One of the attractions of the travel industry, besides its massive growth over the past 20-30 years, has been the opportunities that the industry offers for entrepreneurs, both honest, and shall we say, slightly less than honest. Forget the chance to travel to interesting places, or to join an incredibly social industry, for many, the major attraction is the fact that services are booked, and paid for, many months in advance of their actual delivery. That gives those businesses working in the industry significant cash flow benefits. Intermediaries, like travel agents and tour operators are able to retain customer money for several months at a time, with presently little or no legal obligations on how that cash is used.
This has some important consequences for the industry. The fact that the industry can be cash rich can encourage the less scrupulous to set up in business with the express intention of making a “bust out”, walking away with customer monies, leaving suppliers unpaid, and customers without holidays. Whilst this is not a daily occurrence, it is sufficiently commonplace to be regarded as endemic in our sector, and I would argue is the major cause of regulation, whether it be the ATOL scheme in the UK, or the financial protection provisions of the Package Travel Directive, as well as supplier protection schemes, like the IATA Bank Settlement Plan (BSP).
In addition, those businesses operating in the sector have come to regard the customer “pipeline” monies as their own cash, and will treat this money as working capital, or worse still, as the means of funding extravagant lifestyles.
All this would not be a problem if there were reasonable profit margins in the industry, where business owners could afford to take large sums of working capital out on a regular basis. Unfortunately, in the internet world, we face a situation where customers have almost perfect information, and can shop around for the best deals. As most travel businesses add relatively little value to the consumer transaction, this results in a downward pressure on prices, and ever thinner profit margins – which becomes a vicious circle, as it increases the dependence on cash flow.
When I first joined the industry, more than 25 years ago, the business I joined made more than a third of its net profit from interest and earnings on currency movements, rather than from its core trading. I am not sure that the industry is radically different now – other than the fact that earnings on interest will have dropped almost to zero.
Compare the travel industry to the historic professions, and in particular, to solicitors. They are obliged to treat client money entirely separately to their own cash, and place that money in a “Client Account” which they may only use on behalf of the client, or to draw down for their bills and external costs when these have been delivered and agreed with the client.
Whilst regulators have managed to get their claws into those parts of the sector that they understand, like the traditional models of travel agent and tour operator, the slow progress of reform of the Package Travel Directive shows that new business models can escape regulatory intervention for a good number of years. Sooner or later though, if consumers do find themselves out of pocket in sizeable numbers, regulators will feel the need to intervene.
In the meantime, the industry continues to rely on customer money as working capital.
It is therefore not surprising that suppliers eventually reach the point of discomfort about this, and take action like IATA airlines, to change the payment profile of BSP, and reduce agent credit to 14 days, rather than monthly. Bear in mind that if the airline took the booking direct, it would generally receive payment at the time of booking, and not at a later point. Interestingly, this is not necessarily the case in Germany, where consumer organisations have challenged the practice of full payment in advance, and the German courts have agreed with that challenge in some instances, resulting in later payment to airlines and their agents for flights. Might this be a sign of things to come for the whole of Europe?
More importantly, if the scheduled airlines are changing their payment profiles, how long before other suppliers in the sector follow suit. It has always concerned me that when travel businesses fail, they leave massive liabilities to hotels across the world. If I were a hotelier, or a financial institution supporting them (as happens in many cases!), I would be asking questions about the amount of credit extended to intermediaries, whether that be tour operators, travel agents or bed banks, and the level of risk this creates.
Furthermore, this has already been a risk which the CAA are starting to address in relation to the ATOL scheme. They have introduced requirements for Accredited Bodies to set up trust accounting systems, to reduce the exposure of the ATOL scheme to possible failures. It doesn’t take a massive leap of faith to see such arrangements being extended more widely to other travel businesses – and the impact of such a move would be much greater than moving BSP collection from monthly to fortnightly.
It may therefore be that intermediaries in the travel industry are on borrowed time, and actually, the cash flow benefits which have been enjoyed for the past 50 years may be coming to an end.
If that were to happen, how many existing businesses would be impacted, and how would those businesses cope?
Are we at a tipping point, and are we going to see fundamental changes in the structure of our industry? The industry has survived wars, terrorism, natural disasters and much else besides. We should be adaptable enough to survive, but we do need to start thinking seriously about cash.