In a tough UK market, online travel's On the Beach is doing better than some others. Still, it remains to be seen how long it can outperform the rest, especially with the general gloom surrounding the United Kingdom.
Buried inside online travel agency On the Beach’s interim results announcement on Tuesday is the estimate that the UK outbound travel market is down around 10 percent, thanks largely to “ongoing uncertainty regarding Brexit.”
The UK was supposed to have left the European Union on March 29, but Prime Minister Theresa May’s inability to get her deal through parliament meant she needed to secure a postponement.
Kicking the can down the road may have taken Brexit out of the spotlight for at least a few months, but travel businesses are still dealing with the consequences of the original deadline.
“Looking forward, we continue to remain cautious of the consumer environment until a Brexit resolution is found, but the resilient and flexible nature of our business model allows us to focus on profitable growth and gives us confidence in the group’s outlook. We will continue to evaluate opportunities to enhance our market share position,” On the Beach CEO Simon Cooper said.
Customers who would ordinarily have booked their vacations at the start of the year — still a key booking period throughout much of northern Europe —were less inclined to do so.
“On the whole, the Brexit delay is undoubtedly a good thing for the current season. It has eased the concerns and bookings are now starting to come in. However, tour operators and agents are still having to work very hard,” said Martin Alcock, director at the London-based Travel Trade Consultancy.
“People undoubtedly deferred making bookings in that first quarter. Tour operators are generally more highly geared in terms of commitments. Either because they own the assets or they are contractually committed to paying for them.”
This matters less for a company like On the Beach, which is more flexible than traditional tour operators with no stock commitment for hotel rooms, but it still comes at a cost.
“In such a competitive market, if a tour operators slashes prices or deposits, online travel agencies have to follow suit.” Alcock added.
We’ll likely know a bit more later this week when TUI and Thomas Cook — which both have substantial operations elsewhere in Europe — update the market, but won’t get the full picture until later this year because tour operators recognize revenue on departure, that is, mostly over the European summer months, whereas online travel agencies like On the Beach do so at the time of booking.
small But Growing
Although it has more flexibility than some of its rivals, On the Beach is pretty exposed to the UK market. Over the years it has expanded into Scandinavia, with operations in Sweden, Norway, and Denmark. However, this makes up a tiny fraction of the overall revenue pie, and it was hit by the collapse of Primera Air at the end of 2018. During the first half of its financial year, international revenue fell 56 percent to $0.5 million (£0.4 million) and it didn’t make a profit — although it reduced losses.
Still the business as a whole is profitable, with a pretax profit of $15.4 million (£11.9 million), up 12 percent over the prior year. Group revenue rose 41 percent to $82 million (£63.5 million). This increase is mostly down to last year’s acquisition of Classic Collection Holidays, which added an intriguing offline strand to the core online travel business.
Part of the reason for On the Beach’s recent success has been its ability to build a brand and differentiate itself. Previously it was one of many unknown online travel agents fighting it out on Google, but spending on television commercials and other forms of offline advertising have helped boost awareness.
Branded and free traffic increased to 68 percent of overall traffic (versus 62 percent in 2018), and the percentage of revenue spent on marketing decreased 5 percentage points to 43 percent.
“The market is clearly terrible for some key competitors, but On the Beach continues to diversify, improving its long-term growth prospects,” analysts at broker Peel Hunt said.
A recent analysis of the top 10 listed online travel agencies put On the Beach at the bottom in terms of revenue, but noted that it had the fastest revenue growth of any other.
The company’s share price has risen steadily since the start of the year, but following the release of the results on Tuesday, it gave up some of these gains.
Perhaps investors were spooked by the sluggish market and are worried about the potential of Brexit to further damage consumer confidence.
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Tags: brexit, earnings, online travel agencies
Photo credit: On the Beach has used a sandcastle character in some of its advertising campaigns. The company suggested the UK vacation market was down because of Brexit. On the Beach