On the Beach today highlighted the ability of its trust account model to refund customers for cancelled holidays with little impact on its finances.
The OTA also revealed that it had agreed with its bank to extend the term of a £50 million revolving credit facility until the end of 2023.
Boss Simon Cooper called on the industry to “reflect on financial protection” and how it can be made “robust enough to withstand future shocks”.
The firm has run “theoretical stress tests” of its business model based on assumptions of no bookings being taken across the travel industry until the end of September.
Under such a scenario all customers would be refunded in cash within 14 days of the receipt of cash refunds from airline providers.
In the event of airline failure, money paid for flights would be available via chargeback, as was the case with Thomas Cook Group and Monarch Travel Group.
Concerns over the financial viability of any airline would lead it being taken off sale by the company.
“It should be noted, however, that this is a stress test and not any expectation of the group’s future trading,” On the Beach said.
The group would end the first half of the current financial year with only a limited drawdown of its facilities and “significant headroom”.
“This headroom would allow the group to take advantage of the multitude of opportunities that these market conditions would present,” the company said.
“The aforementioned position, of course, does not include any customer funds received for untravelled holidays, as these would be held separately in the group’s ring-fenced trust account.”
Emphasising the On the Beach “asset light, flexible, no inventory risk model,” the company said in a Covid-19 update: “Perhaps more importantly in the current scenario, OTB is also the only listed UK travel business that operates a fully ring-fenced customer trust account in which customer funds are held until the point of travel.
“Therefore the group, unlike the majority of online travel agents, tour operators and airlines, does not rely on cash received for forward bookings to trade.
“Monies that have been received for holidays that are cancelled by a closure of airspace can be repaid to customers in cash with limited impact on the group’s working capital.”
Despite this, the firm took early action in February to manage risk and conserve cash.
“In this environment of limited demand and therefore limited revenue, the group’s marketing costs have reduced to almost nil and the group has taken further actions to limit other non-essential costs meaning that monthly cash costs are now less than £2 million across the entire group. The group has, however, maintained all costs associated with the delivery of its future strategy.”
But the company is suspending its full year profit guidance “until such time that the overall impact of Covid-19 on the group becomes clearer” and no interim dividend will be declared in the current financial year to September 30.
Chief executive Cooper is forgoing his salary and the remainder of the board have voluntarily agreed to a 20% cut in salary and fees with no bonuses being awarded in the current financial year.
He said: “The travel industry is prone to shocks: global recessions, natural disasters, terrorist attacks, and major airline failures to name a few.
“A closure of airspace was deemed inconceivable during contingency planning for a no-deal Brexit, but we now find ourselves in a position where airspace may be closed for a number of months due to the spread of Covid-19, and the travel industry needs to brace itself for a potentially prolonged period of significantly reduced, or even zero revenue.
“On the Beach was created with an asset light model to ensure its survival in the inconceivable market conditions in which we now find ourselves.
“Unlike the majority of larger tour operators, online travel agents and airlines, all OTB customer funds are held in a ring-fenced trust account so that if the scenario above prevailed and all forward bookings were to seek a refund of their prepaid holiday monies, in the main this could be facilitated without impacting group cash.
“This is not the case across the industry where customer funds are often held on balance sheet and if refunds were requested en masse, the funds would not be available.
“Against the backdrop of the impossible market conditions in which we find ourselves, the resilience of On the Beach’s asset-light and flexible business model becomes clear.
“The benefits of using a trust account structure – as opposed to the use of customer funds for working capital – become obvious, for consumer protection, for the financial stability of the business, and ultimately for the protection of the taxpayer.
“It would appear obvious that, as an industry, we need to reflect on financial protection and on how we can make our industry robust enough to withstand future shocks.
“In the days leading up to the closure of airspace, we were able to put a detailed plan in place to ensure that we are best placed to deliver operational and customer service excellence throughout this difficult time.
“As a technology company, we are also well placed to facilitate remote working for all of our staff. I am hugely proud of the efforts of everyone at OTB and would like to praise the dedication of my colleagues who have been working around the clock to provide the very best level of support for our customers.
“Whilst the coming months will continue to present a huge challenge, I look forward to the multitude of opportunities which lie ahead.”
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