It only took four days to bring the first big UK travel casualty of 2017.
The fact that it was All Leisure Group shouldn’t come as a surprise to anyone who has kept an eye on the sector for the last couple of years.
In interviews after the collapse Chairman Roger Allard painted a bleak picture, highlighting the fallout from the UK’s Brexit vote as another reason for his company’s failure.
While bosses are often guilty at blaming external events for sinking their businesses, rather than looking closer to home, there is some truth in what Allard says.
Travel companies tend to operate on very thin margins and any upset has the potential to throw them off course. Brexit is one example, others include terrorism or strikes.
It is true that All Leisure was in a particularly risky situation because of its unhealthy finances. When it was a listed company one stock market observer said called the company “uninvestable.”
Nevertheless, it doesn’t mean others aren’t susceptible to the same forces of currency depreciation and general business uncertainty created by Brexit.
“Any business which has high operating and financial gearing (including cruise lines, airlines, hotels but also some travel arrangers) is at particular risk as a result of a fall in profits and cash flow. There is only so long a businesses’ reserves can ride out the storm,” said Rajeev Shaunak a partner at accountancy firm MHA MacIntyre Hudson.
“As regards 2017, the 20% decline in sterling will suppress demand with increased costs being passed on and it could well be a difficult year with more casualties to come.”
There are other warning signs too. Insolvency firm Begbies Traynor has said there was a 10 percent quarterly increase in financial distress across the UK Travel and Tourism industry, with 2,679 companies in the sector suffering from “significant distress” at the end of 2016.
While Partner Julie Palmer believes Brexit isn’t the only reason for companies to struggle, she says it is playing a part.
“I don’t think it’s really hit in the six months since June and that’s partly a feature of the fact that we do have this Brexit uncertainty at the moment,” she said.
A hedging headache
One thing that is likely to cause problems for the travel industry this year is foreign exchange hedging.
Companies typically pay for things like overseas accommodation in dollars and euros. To guard against fluctuations and to ensure some pricing stability, businesses will hedge their exposure and lock in a certain price.
The problem they now face is that with the pounds depreciation when they next come to hedge their dollars or euros it will likely cost them much more. To get around the increased cost of doing business, prices might have to rise.
Companies that were able to hedge have been protected. Those that weren’t or chose not to have had to deal with the repercussions.
“All Leisure would still be here without Brexit,” said Chris Photi, Head of Travel and Leisure at accountancy firm of White Hart Associates.
He said that others might find themselves in difficulty because of the pounds struggles as the year continues.
“Most travel businesses will not feel Brexit impact until 2017 because most businesses were hedged.”
However, not everyone agrees with these dire predictions.
What happens next?
Aside from the initial stock market collapse and the devaluation of the pound against the euro and dollar, there has been little indication that Brexit has done anything to the economy.
This has delighted those who wanted Britain to leave the EU and confounded those who predicted a crisis if there was a “Yes” vote.
So far there has been no financial reckoning, but that doesn’t mean to say it won’t happen. What looks to have averted it so far is a sustained household spending and there are those who think this will not go on forever, especially with higher inflation.
All this paints a worrying picture for the travel industry. Traditionally January is a busy period with consumers booking their trips for the summer, although many now wait until later on in the year in the hope of bagging a bargain.
At the moment the UK economy is still carrying on almost as if the Brexit vote did not happen, a situation that is unlikely to continue forever.