UK’s summer travel demand boon fails to mask rising headwinds

Buoyant travel demand over the summer has given the travel and tourism industry some much-needed respite in recent months. However, the outlook has already begun to soften as accelerating macroeconomic and geopolitical headwinds start to blunt the growth momentum.

Global travel companies and UK airports reported stellar travel demand in the third quarter. Heathrow, the UK’s largest airport, served 29 million passengers during the summer months, increasing the nine-month tally to the end of September to 59.4 million passengers, representing a 34.4% increase on the same period last year. Inbound tourism and business travel both saw improvements. Following the strong summer, Heathrow revised its annual traffic forecast to 79.3 million passengers and expects 2024 traffic to return to 2019 levels. However, strong demand failed to translate into profitability with the airport reporting adjusted pre-tax loss of £19m for the first nine months of the year, down from a £442m loss for the same period in 2022. A 30% jump in nine-month revenues and a 21.5% climb in operating profits were offset by rising debt servicing costs, amid a higher interest rate environment weighing on corporate performance.

Last month, the Civil Aviation Authority (CAA), the UK’s aviation regulator, raised the fees that NATS (the UK’s air traffic controller) can charge airlines by 26%. The controversial final decision upheld by the Competition and Markets Authority (CMA) on 17 October appears to have disappointed both sides. Airlines remain indignant about the additional charges that inevitably must be passed onto consumers in higher ticket prices at a time of a cost of living squeeze, while airports claim the charges cover operating costs necessary in the path back to sustainable profitability. “The charges we are allowed to levy are too low”, Heathrow’s Chief Financial Officer Javier Echave reportedly said. “The change in inflation and interest rates should have been factored in by the regulator, but unfortunately they have not got it right.” By contrast, Virgin Atlantic’s CEO Shai Weiss wrote on LinkedIn that the CMA’s final decision “doesn’t go far enough to protect consumers” from “excessive charges” by airports. During August, Gatwick Airport was forced to cancel more than 160 flights due to air traffic control (ATC) staff shortages as 30% of tower staff reported sick, principally due to covid. Gatwick later extended the cap on the number of flights operating from the airport, limiting travel in the early weeks of the fourth quarter. 

UK retailers, travel and hospitality firms have also warned that scrapping tax-free shopping for international tourists’ risks reducing inbound UK travel demand from high-spending tourists. For example, Chinese tourists are prepared to travel to France, Italy and Spain –where VAT-free shopping is still available – over the UK, according to the Association of International Retail (AIR). The research group estimates the UK could lose up to £750 million annually from the loss of Chinese tourist spend.

Returning to travel demand trends, travel platforms including Expedia Group and Airbnb reported resilient domestic and short-distance travel while longer-distance and cross-border travel demand both improved in the third quarter compared to last year. Urban travel demand also has increased across the board as consumers continue to spend on leisure travel, despite inflationary pressures. Airbnb reported a record summer travel season in Q3 as revenues grew 18% year over year to $3.4bn, driven by significant growth in Asia Pacific markets such as Taiwan, Thailand, and Indonesia. However, travel demand is expected to slow after the summer travel boon, as macroeconomic headwinds and geopolitical unrest in the Middle East soften the near-term outlook. “We are seeing greater volatility early in Q4, and are closely monitoring macroeconomic trends and escalating geopolitical conflicts that may impact travel demand,” Airbnb wrote in its Q3 earnings shareholder letter. Expedia Group, the online travel platform, posted record quarterly revenue in the third quarter but moderated near-term expectations. Peter Maxwell Kern, Expedia group’s CEO and Vice Chairman, told analysts on last week’s earnings call: “We are mindful of the potential volatility from [the conflict in the Middle East]”.

The picture that emerges from travel companies and airports is the enduring consumer preference for travel over buying goods. Almost three-quarters (72%) of UK travellers say the cost of living squeeze will affect future travel plans, by opting for fewer holidays, cheaper accommodation and eating out less on holiday, according to a survey by the Association of British Travel Agents (ABTA).

While travel demand remains on an upward trajectory for now, downside risks are evident. Risks include the economic slowdown in the UK, Europe, and beyond, ongoing inflation, geopolitical risks which could send oil prices back higher, as well as constraints on airline capacity growth due to aircraft and spare parts supply issues. There is also significant variance in the performance of travel companies and airports. For example, Luxtripper, the UK-based luxury online tour operator, fell into administration on 27 October, after failing to find a buyer or secure emergency funding to shore up its balance sheet. Luxtripper’s 60 UK employees were made redundant and advisers are seeking to conclude an asset sale. The current economic climate was cited as influencing tepid investor support for a business rescue, underlying the importance of swift engagement of independent advisors for companies in financial distress.

As we head into the final weeks of the year, the overall outlook for the UK travel industry is mixed. Though there is still strong travel demand, the number of headwinds that could slow demand is evident and many companies are still in a challenging financial position having battled through the impact of covid and will be less able to cope with softening demand.   Unfortunately, this is not an environment in which travel demand is on a sustainable growth trajectory that will lift all market participants as customers become more price and quality focussed. 

Travel companies with weaker balance sheets should be mindful of stress-testing their profitability and cash flow forecasts across multiple demand scenarios and remain cognisant of rising costs in the current inflationary environment. BTG Advisory is well placed to advise travel companies in need of an independent business review, as well as offer support on raising capital or restructuring. Companies in distress always have better outcome prospects the sooner they act quickly. Do not hesitate to contact our team if your company would benefit from our independent confidential advice.