Trouble in the UK travel business

Every sector in the UK's travel business has suffered since 2008,

Airlines are now operating on margins of 0.7% and unusual factors in addition to general economic woes have contributed.
These include high oil prices, disasters like the earthquakes in New Zealand and Turkey, political unrest in the Arab world and a general sense of fear.

Travelers have reacted by having holidays closer to home; short city breaks rather than the normal fortnight holiday and the search for value. This is why some low cost carriers like Ryan Air and Easy Jet are bucking the trend. Others like BMI are being consolidated into the International Airline Group (the owners of BA and Iberia) who value its Heathrow slots. Further away, Air Seychelles are abandoning many of its international routes and India's Kingfisher has huge debt problems.

Travel Agents have been closing down at an unprecedented rate and losing business to online and price comparison sites where deals are popular.

These online sites like E bookers have created the expectation of low and attractive deals, which inevitably damage the tour operators business.
Thomas Cook decided to delay release of its full year results with catastrophic effects on its share price.
They said: "We intend to seek agreement from the banks to adjustments that will improve our resilience if trading conditions remain difficult".

And they will.

Relying on the banks may be necessary, but remember the old adage: Bankers lend you an umbrella when it's sunny, but want it back when it's raining.

Beware of bankers offering loans

It may be true that Greece has bought its troubles on itself. They weren't honest about their economic health when they applied to be part of the eurozone.
State and public corruption was tolerated and they borrowed money they never had a chance of repaying.

However some responsibility surely lies with the banks that lent Greece so much money. Even a cursory analysis of Greek finances would have caused most lenders to hesitate, unless they believed that the debts were underwritten and secured by the eurobank or the richer countries within the community.

This crisis is not about sovereign default. It is about the real possibility of major banks in Germany and France going belly up. Commerzbank is apparently owed €130 billion alone.

The German Chancellor and her French partner appear to be buying time for their banks. The help they are providing Greece is barely enough to pay the interest on their loans. The offer of a 50% write down is seen as preferable to a 100% hit on the banks.

The chances of Greece being able to pay back even half of its debts is questionable, so this is a problem deferred not eliminated.

Germany is a rich country, the only major European state with a trading surplus and a sovereign wealth fund. It exports to its neighbours who are encouraged to borrow to buy Germany's products. Countries with sovereign wealth, created by manufacturing exports, are mirrored by countries with deficits.

Martin Wolf the economist noted that one country cannot keep its surplus and fail to finance its customer countries deficits.

Meanwhile financial volatility is everywhere and John Donne's poem ‘For whom the bells toll’, starts: ‘No man is an island...’ and ends ‘Therefore, send not to know for whom the bell tolls; It tolls for thee’.

Sky high taxation

APD is a lucrative tax, generating about £ 2.5 billion in 2011 for the UK's tax coffers. Originally conceived as an environmentally fair green tax, this pretence has been dropped in these hard times.

As a revenue generating tax it is very successful, but as constituted very unfair. Now pressure is building up for reform ahead of the 10% anticipated increase.
At present the tax is paid on departure from UK airports, so domestic passengers flying internally from the UK pay twice as much as a passenger flying from London to Turkey.

The tax paid was intended to be based on distance traveled as follows:



The distance from London is based on where the country's destination sites it's capital, so because Washington is nearer than Jamaica, Los Angeles passengers pay less than those traveling to Kingston, Jamaica.

The Caribbean countries are heavily dependent on tourism and this tax hits them hard.

Sadly everyone in the UK travel and tourism industry has been adversely affected too. Other overseas countries can retaliate or reduce their own version of APD taxes.
The Republic of Ireland abandoned its taxes, which made it cheaper for people from UK's Northern Ireland to travel from Dublin to the USA. Continental Airlines threatened to cancel its Belfast flights and The UK chancellor helpfully reduced the APD for this particular situation.

Now posters in Heathrow have appeared, accompanied by advertisements in the National newspapers highlighting the importance of the tourism industry to the UK and its friends abroad.

Will George Osborne listen?

I suspect that he will address the domestic travel issue, help the Caribbean countries and once again postpone the planned increase. If this happens, it will be a case of "Being thankful for small mercies".

Where do we go from here?

A response to that question is: “I wouldn't start from here”.

Here is an uncertain place with no road maps or place signs to direct us. History is no guide and past practice useless.

Economics is not a science and even the elders and wise men cannot see how Governments can pay back their debts whilst simultaneously boosting demand.

So we have set the scene for stagnancy. People will spend less and try to pay off their credit card debts.

For the Government, paying back debt means reducing costs by spending less and making public sector workers redundant. While raising tax revenues!

Vat at 20% and a 50% income tax ceiling does not guarantee increased revenue as the Laffer curve shows. Increased petrol prices should have benefited the Government coffers but didn't because ordinary people used their cars less.

Similarly high Air Passenger Duty simply accelerates the drift away from long haul destinations.

John Maynard Keynes explained the problem by stating that:
Markets are never perfect because information is rarely complete or accurate, because people did not always behave rationally and because there were often obstacles. In his words “there is always irreducible uncertainty"

Tourism is a business which has been diminished by the recession. In 2008, UK residents made 69 million trips abroad. The estimates for 2011 will probably not exceed 57 million, a reduction of 17.4%. The shrinking pound doesn't help.

Countries like the USA have increased flights and targeted businessmen, while India seeks to attract UK citizens with Indian ancestry.

For countries that cannot do that, the solution must be: To make the offering more affordable. Improving access by providing more flights and promoting the destination as highly desirable, unique with reasons why a visit should not be deferred.

Canada is doing all that and despite it's distance, high APD, and an exchange rate disadvantage, deserves to succeed.

Statistics and linear thinking.

In a recent issue of New Scientist, I found this great quote, attributed to Aaron Levenstein.

"Statistics are rather like bikinis: what they reveal is suggestive, but what they conceal is vital."

Consider the latest press release from IATA, which reports that the aviation industry expects an increase of 800 million more passengers by 2014 compared to 2009. This is a staggering improvement from 2.5 billion to 3.3 billion.

Peek a bit closer and you may see more.

Isn't 2009 a bad choice as a base year, because air travel fell by 15%?
So a predicted growth of 32% over five years reduces to 12%.

And of the total 3.3 billion, 2.0 billion will be domestic travel. So lets ignore predicted domestic growth in China and India and concentrate on International travelers by air.

IATA forecast a growth in international passenger traffic to China of 10.8% presumably on an annualised basis, to the UAE of 10.2%, Vietnam by 10.2 % and so on.

Nels Bohr, the Danish physicist said it best: "Prediction is difficult, particularly when it applies to the future ".

Was the IATA consensus arrived at before the extent of the jasmine revolution was understood and before concerns about inflation were expressed in China and India?

One of the reasons given to explain the recession was the imbalance between the very rich and the very poor. In 1929 and 2009, in western nations, the range was 128 to 1, leading to conspicuous consumption and speculative high yield gambles.
The stage is now set for revolution and they will be bloody.

Tourism to Egypt and other Arab countries are already badly affected and Dubai will suffer too.

John Maynard Keynes warned of the dangers of linear trend forecasts. Markets are never perfect because information is rarely complete, because people are not always rational and there are sometimes obstacles to action.

There is always "Irreducible uncertainty".

The cost of failure

David Tebutt's murder and the kidnap of his wife provoked outrage from the establishment and fear from potential western tourists.

Wealth does not guarantee safety. Indeed it provokes envy and motivation for the Somali pirates for whom this is a lucrative business.

Their hunting ground covers wide stretches of the Indian Ocean, as far south as the Seychelles and now even the pleasure beaches of Kenya are now within reach of the speedboats they use.

Kenya's tourism Minister said: "We strongly condemn this senseless act of violence on innocent visitors to our country."

It obviously made a lot of sense to the pirates.

The managing director of the tourist board, after promising justice and apprehension of the criminals went on to say:
"We further wish to reassure the travel trade that the safety of our tourists is paramount and the Government has proper machinery in place to ensure high level security of our tourists".
So what went wrong this time and what positive new steps have been taken to prevent a re-occurrence?

This and other recent calamities, natural and unnatural, accidental or deliberate make the case for every tourist office to have a Crisis management programme in place. One that is carefully thought through, researched and rehearsed.
Crisis management is not about being in a crisis. It involves:

* A continuous process of risk assessment and being proactive about dangers we face.

* Professional management involving timely and effective communication through the key media channels by the right people.

This means having a semi-permanent team in place, determining who will be in charge, who will be the spokes-person and who will monitor media reporting and response. The plan will identify both the internal team and those in each tourist providing country as well as the key media contacts.

Regular updates of risk and how you will respond needs to be planned and rehearsed, so if tragedy occurs, the tourist office responds with sympathy and positive action.

As the old adage says: ‘Fail to prepare, prepare to fail’.

The Lion and the Hyenas

As a child I remembered being moved by a story of an old and sick lion being attacked by a pack of hyenas.
The lion was noble and the hyenas cowardly in the simplistic and empathetic way a child sees things.
This analogy comes to mind in the spectacle of Rupert Murdoch at bay.

Mr. Murdoch is however not a noble lion and as a man subject to the adverse effects of power. Unlike Caesar, he did not have a man riding in his chariot repeating the mantra: "Remember, you are only a man."
His victories were noteworthy. He easily bested Robert Maxwell, outmaneuvered the print unions and was given an own goal by the people who launched the British Satellite Broadcasting company. You know, the people who gave us the squarial.

Rupert Murdoch's early opponents under estimated him. They described him as an Aussie upstart. That was a huge mistake. David Frost, fresh from his successes with shows on London Weekend Television, demolished Dr. Emil Savundra, an arrogant bombast who had owned and bankrupted a motor insurance business. His next victim was to be the young Murdoch on what I remember may have been on live TV. Frost failed to dent Murdoch’s composure and resorted to badgering his subject. Murdoch's revenge was to acquire a significant stake in London Weekend Television from which platform Frost was excluded until suitable reparation was made.

Mr Murdoch is a good listener. His people organised meetings over one week during breakfast, lunch and dinner with people with ideas and opinions from the Advertising Agencies. He asked relevant questions and we were happy to tell him our thoughts. Mr Maxwell had the same notion, but talked all the way through the meetings.

Murdoch has had some luck, and survived mistakes such as My Space. Overall he has been the most successful media baron ever.

Only a fool will write him off and he is still capable of striking out.