Brexit dominated discussion of the year ahead at a Travel Weekly Business Breakfast last month. Ian Taylor reports
The impact of Britain’s Brexit vote has yet to truly hit, but whatever problems ensue should be surmountable, say industry leaders.
Deloitte lead partner for travel and hospitality Graham Pickett told the Business Breakfast audience: “Not a lot has changed [since the vote] apart from the depreciation of sterling.” But he added: “We’ve seen sterling depreciations in the past [and] it’s going to have an impact. I see some inflationary issues. The uncertainty will [also] gradually dampen things.
“I look at the household economy and government debt. The biggest issue for the government is tax receipts. Government debt will rise. We’re going to see challenges around that and the household economy.”
Pickett said: “I’ve talked to a lot of chief executives of airlines and big travel groups, and we’ve seen quite an increase in passenger numbers, but the yield is coming down. People are spending less – it’s impacting aviation in a big way.”
Amadeus UK managing director Champa Magesh said: “We haven’t seen any impact [from the Brexit vote]. But it’s not just one market that affects our business. The global travel industry has been growing at 4% and we’ve been outperforming that – we’re seeing 6% to 8% growth, depending on the segment.
“The online travel space is outperforming all industry averages. The UK leisure market has continued to be strong. We see average 8%-10% growth there. Corporate travel is underperforming leisure, but certainly not shrinking.
“For us, Brexit is not a massive risk consideration. [But] free movement of highly skilled people across our markets is important.
We’ve certainly benefited from free movement in the EU. I hope the question marks around free movement will be resolved satisfactorily.”
Colin McKinlay, finance director for Tui UK and Ireland, said: “We looked at a lot of scenarios around Brexit [and] we predicted an impact on sterling, [but] the impact still needs to be assessed.
“There is an obvious point on input costs, but that is one of many considerations that go into the cost of a holiday. There are other drivers, including influences on demand more generally, the quality of product and service, and the nature of that product and service. A high percentage of our product is all-inclusive, for example. Quite possibly, customers will want to fix more of the price of their holiday upfront.
“None of us likes uncertainty. [But] we don’t know yet what the impact will be. The process hasn’t even started yet.
“Making it easy for people to travel is clearly important. [But] overseas travel from the UK is important when we look at the economies of the rest of Europe. The contribution to some economies is significant, so we may have alignment in ensuring travel can continue efficiently because it will be as good for continental Europe as for the UK.”
Monarch Group chief executive Andrew Swaffield warned: “These things take time. It’s dangerous to get into [saying] ‘nothing has happened since the Brexit vote’.
“Take the impact on sterling. Airlines and operators are hedging positions, so the collapse of sterling isn’t going to have an instant impact. But in two years’ time, food [prices] will probably have crept up and consumers might have less money.”
Brexit: ‘We need clarity on flying rights and tax issues’
The industry needs clarity on post-Brexit flying rights across Europe, currently conferred by membership of the European Common Aviation Area (ECAA), and on the movement of labour.
Deloitte lead partner for travel and hospitality Graham Pickett said: “We need the right deal. Some areas of compromise on the ECAA wouldn’t be acceptable. It’s important the industry makes clear where it stands. It’s in our interests to remain in the ECAA, and in the interests of Europe. Deloitte’s message to the industry is: ‘Speak with one voice.’”
Monarch chief executive Andrew Swaffield warned: “We have to be careful of complacency, that we’re going to stay in the ECAA and somehow not have all the rules that come with membership.
“As a business person, you can’t just say: ‘We’re going to find a way to stay in the ECAA and not have free movement.’ We don’t have that power and European politicians say it’s not going to happen. They may make an exception for the ECAA, but we should have an alternative. If nothing else, it’s a better negotiating position to say: ‘We want to stay in, but you’re not going to hold us over a barrel.’ The UK is big enough to negotiate a deal in its own right and, if all else fails, to negotiate bilateral deals.
“We should accept it’s not going to be easy to stay in [the ECAA] and we should have a plan B.”
Amadeus UK managing director Champa Magesh said: “I don’t think we can say whether Europe will say ‘no’ or ‘yes’ to something because Europe itself is in the process of making decisions.”
The sector also requires clarity on the tax implications of quitting the EU. Tui UK and northern region finance director Colin McKinlay said: “There could be any number of scenarios. It’s naive to think the Tour Operators’ Margin Scheme isn’t going to be replaced. But this isn’t the only tax under consideration. We’ve been challenging Air Passenger Duty (APD).”
However, Pickett said: “I can’t see changes in the immediate future. APD is the easiest tax to collect.” He warned: “There is going to be more tax. The chancellor has to balance the books.”
Consultation: ‘Government has listened to sector’
The government has listened to the industry as it prepares its Brexit strategy and can’t be criticised for “taking its time”, according to Monarch Group chief executive Andrew Swaffield.
He said: “I’ve no criticisms of the way the government has behaved thus far. I sometimes think I have a difficult job, but imagine having to take Britain out of Europe. I don’t criticise the government for taking its time to figure out what to do.”
Swaffield added: “The press don’t make it easy. [But] you don’t go into a negotiation and give away your position. It would be crazy.
“I’ve had dialogue with the aviation minister and transport secretary. They’re asking for views. They seem clear they want to trigger Article 50 by March.”
— Alistair Pritchard (@a_j_pritchard) December 1, 2016
Terrorist attacks: ‘Clients’ attitudes are changing’
Terrorist attacks continue to pose a threat everywhere, a fact highlighted by the atrocity in Berlin, bombs in Turkey and killing of tourists in Jordan before Christmas.
Thomas Cook joined Monarch in pulling out of Sharm el-Sheikh in December, as the Foreign Office showed no sign of lifting its advice against flights to the airport.
Monarch Group chief executive Andrew Swaffield said: “It’s not helpful to have a story every few weeks about Sharm el-Sheikh [so] we decided to take it out of the schedule completely. It just reminds everyone about terrorism.
“Hopefully that will be the last time there is a story about Monarch and Sharm until the airport reopens.”
Swaffield added: “If a market is closed to us again, we would probably approach it differently – just remove it and focus on something else. You have assets in an airline that are expensive and you have to plan their deployment.”
He said: “The impact of terror has been quite direct for us. We lost Tunisia. We lost Sharm – where we flew 18 times a week, [taking] £70 million a year in revenue.
“We saw Turkey down 65%, although it’s starting to recover. We’ve also had event impacts – Paris affected confidence for a while, Brussels the same.
“However, we’ve been surveying customer attitudes to terror since last October and the impact is reducing. Partly there have been fewer events and partly people are growing used to it. There is an inbuilt resilience. People adapt.”
Colin McKinlay, finance director for Tui UK and Ireland and the group’s northern region, said: “These things are in the news, [but] it’s not stopping people booking overseas travel.
“Looking at where we moved capacity, we’ve seen strong demand to mainland Spain, the Canaries, the Balearics. Cape Verde has grown significantly. But we’re still seeing demand to Turkey. As a tour operator, we need flexibility in our programmes.”
A coroner’s inquest into the massacre in Sousse in 2015, in which 38 people died, will begin this month. McKinlay said: “The 30 UK nationals [who died] were our customers. Our focus is to ensure we cooperate fully [with the inquest] and understand the events that led up to the incident.”
Consumers: ‘Finances don’t dictate travel’
Amadeus UK managing director Champa Magesh said she “vehemently disagreed” there is a link between sterling, discretionary income and volume of travel.
She said: “The seismic shift we’re seeing politically and economically around the world is because people are taking decisions counter to their economic interest. To assume economics is driving these decisions is pre-Brexit, pre-Trump thinking.”
Magesh told the audience: “One thing we can learn from all the uncertainty is a redefinition of trends. If you look at why people travel, there is a fundamental shift.
“Historically, you would segment customers on the basis of demographics. You can’t do that anymore. It’s contextual, it’s personal. You can’t stereotype. People take different types of breaks for different reasons.”
Magesh conceded lower incomes among young adults “will have an impact on the quantity of spending”. But she said: “What they spend on is changing. Where their parents were spending money on stuff, research suggests millennials want to spend on experiences. You might have less, but you spend a greater proportion of that with our industry, which is an experience industry.
“That is an opportunity for the travel industry.”
Geopolitics: Strain on global economy ‘is threat to travel’
Brexit is not the only threat to spending on travel, with the global economy “under strain”.
Deloitte lead partner for travel and hospitality Graham Pickett said: “Every forecast of global growth throughout 2016 and for 2017 has softened. Brexit aside, the global economy is under strain.
“Commodity prices are going to begin to rise. The oil price is going to rise – you’re looking at least at $55-$60 a barrel by this time next year – quite a sizeable increase. And if you’re not [trading] in dollars and sterling weakens further, it’s a double whammy.
“The political scenario in Italy could create a euro crisis. The banking sector has something like €360 billion of sour debt. Overlay on that the French election, Dutch election and German election.”
But he said: “The most alarming thing is the US position with China. If there is a trade war between China and the US, it will impact everyone, and it looks like quite a possibility. That would make Brexit look minor.”
Pickett warned of a possible impact on investment interest in the sector, saying: “M&A [merger and acquisition] activity could soften because of the sheer uncertainty.”
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