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It’s well-known that working in the oil and gas industry comes with more risks than the average office job, but now it seems there’s a heightened risk managing travel within the sector too.
Following the collapse of one specialist travel agency, experts are warning that fault lines are starting to appear. One described a “Catch 22” situation for those agencies that bankroll their customers’ travel as they struggle with cashflow problems caused by airline refund delays.
And there’s more uncertainty ahead for an industry hit by weaker demand for jet fuel and a growing movement towards more sustainable energy production.
Pandemic-related restrictions are also taking their toll on complex travel requirements, and range from self-isolating helicopter pilots to hotel capacity squeezes.
It wasn’t always the case. During the pandemic, the wider energy sector — alongside medical and key workers — was regarded as a resilient one compared to traditional corporate travel. “With oil and gas coming under the essential workers classification, passenger numbers in the energy sector have not seen the dramatic drop that other sectors have,” said Graeme Fyvie, strategic operations director at corporate travel agency Reed & Mackay.
The offshore oil and gas business is big business. In the UK alone, it supported 260,000 jobs during 2019, with around 50,000 traveling offshore for their work. Half that number will spend 100 days offshore every year. But the pandemic now stands to bring about significant long-term changes.
Loss of a Historic Name
On November 11, UK-based Horncastle Executive Travel, shuttered. Its marine and offshore travel division originated from the travel department of the Common Brothers’ Shipping Company, which was founded in Sunderland in 1893.
In 2010, Horncastle’s managing director, Peter Drummond, who ran the business alongside his wife, Christina, was appointed member of the board at the Guild of Travel Management Companies (which has since rebranded to the Business Travel Association).
Despite a wealth of experience, it becomes the latest agency to fall victim to the pandemic. Its closure has affected more than 30 employees, across offices in Edinburgh, Newcastle and Norwich.
Skift was unable to reach Horncastle for comment, but Abby Penston, CEO of UK consortium Focus Travel Partnership, to which Horncastle belonged, said: “It was incredibly saddening to hear the news that Horncastle has ceased trading. Horncastle has been one of our longest serving partners. On behalf of the entire partnership, I wish Peter and his team all the best for the future.”
Clive Wratten, CEO of the Business Travel Association, said Horncastle’s collapse comes amid ongoing calls for the UK government to step up efforts to protect smaller businesses.
“After 40 years as a successful travel management company, I’m saddened to see the failure of Horncastle Executive Travel,” Wratten told Skift. “This is a reflection of the very challenging environment we face today, and I urge the government to take action to get travel moving again.”
In September, Mark Colley, managing director of Sunways Business Travel — a member of the BTA — told Skift the travel industry was going to come out in a very different shape and size as travel agencies weren’t getting the financial support they needed. One reason is because many were unable to furlough staff at the start of the pandemic as they were needed to process thousands of refunds.
Re-examining the Business Model
While most people will be familiar with the likes of BP and ExxonMobil, these companies will contract out drilling work and other tasks to a range of specialist firms and consultants. Horncastle, for example, will have worked with ship owners, marine engineers, salvage operators, tug operators, exploration teams and offshore workers, among others.
This complex hierarchy is now causing headaches, according to one corporate travel agency boss, because with so many contractors involved, traditional procurement methods tend not to apply.
“Most of the big corporate travel agencies, dealing with the likes of BP, will only take payment upfront, or credit card, so they’re guaranteed to be paid,” said Adam Knights, regional managing director, UK, Europe and Middle East, at ATPI, which specializes in marine and energy travel. “But with this other set of customers, they don’t pay (upfront) because they manage suppliers.”
Knights said this set of customers will not want credit for credit’s sake, but require it from a reconciliation perspective. “For them it’s much easier to work through on an invoicing platform than a credit card. A credit card for them puts another process in the middle. That works, but if you don’t manage it properly you can get into difficulty.”
And as contractors, these consultants and specialists are unlikely to be given their own company corporate card.
Another agency managing director, who preferred to remain anonymous, agreed: “It nearly always needs to be on account. We had huge outstandings for one client we used to look after. Because they’re so vast as organizations, they don’t really have a handle on procurement, if they use procurement at all. Obviously managing traveler safety is important to them, and that’s why they use specialist agencies, but they don’t check bills because they’re generally cash rich.”
When the coronavirus outbreak forced airlines to cancel flights, the lack of refunds exposed a weakness when doing business this way.
“Although we in the travel industry get direct debited by the airlines, it’s a constant explanation to those clients you can’t delay payment to us in the same way you might to someone delivering steel, for example,” Knights continued. “As such, you need strict credit control and cash control with those clients — to the point when you have to not ticket if they’re not paying you.
“We specifically saw this coming with the refund issue, and were quick to say to our customers: we’re a critical supplier to you, you need to rotate your people to oil rigs, you’ve always paid us on time and you’ve got to continue to do so. And by the way, here’s this bubble that’s coming with refunds. I spend a lot of time speaking to some of the managing directors of some of these companies, saying: I know you think you’re waiting for a refund, but it’s the same thing as if you booked a ticket for a holiday with Ryanair.
“A number of customers said, ‘we’re not paying until we’ve got the refund in.’ You have to tactically manage all these customers, and explain how you haven’t had the money back from the airline, but you still need to pay for the tickets. It will be a while for those refunds to unwind.”
The amount Horncastle was owed by debtors totalled £2.07 million ($2.7 million). On October. 5, it extended its reporting period from June 30, 2020 to Aug. 31, 2020, according to its most recent financial report for the year ending June 30, 2019, filed February 10 this year. No financial report has been filed since.
Knights said he was unaware of the circumstances behind Horncastle’s collapse, and was therefore not in a position to comment specifically, but noted many travel agencies will have had to “watch that piece very carefully.”
A Catch 22 Situation
“In normal times, you manage that cashflow, you get into routine. Some agencies are better at managing it than others. If you offer extended payment terms to those customers, and manage your business through an overdraft or something, then any further extension of that puts more pressure on your cashflow,” Knights added. “The airlines are processing refunds. It’s not perfect. But if you’ve got the (refund) cash, and are using it to pay staff, and then you have to refund the customer, you’ll have cashflow issues.”
Extending a line of credit has been highlighted as a dangerous business practice in some parts of Africa, but in the oil and gas sector it’s seen as one way to win new business. “Small travel agencies will compete on price and credit terms,” Knights said.
“Some oil and gas companies will only go with an agency if they offer an account,” added the industry source. “And the agency will take a lot of risk because they’re so desperate for the business. It’s a Catch-22, and legacy travel agencies are going to struggle. Most travel management companies, from my understanding, are pretty much in arrears. They are working on a low capital most of the time.”
The source added many smaller agencies needed to adopt more digital booking technology, and introduce oil and gas clients to features such as virtual cards, which are better for reconciliation. Some 7 percent of Horncastle’s transactions were categorized as online.
Reed & Mackay’s Fyvie noted that the agency has been enhancing its own technology to provide further efficiencies in the booking process for companies operating in this space.
The culture of the sector can boost the risk factor, too. “You’ll have a range of companies, and some that are better capitalized than others,” Knights said. “Some have private equity backing, some are entrepreneurial startups, then you have listed ones like Haliburton and Weatherford.”
The source recalled a previous Nigeria-based startup client, in the oil sector, that went from having two people in an office in London to 600 employees in the space of five years. “Nobody blinked an eye on what was being spent. It was high risk for a travel management company. They were spending £12 million ($16 million) a year on travel, mostly private jets and luxury hotel suites. The executives lived that lifestyle.”
A Bumpy Ride
Meanwhile, the pandemic has made it a more difficult environment, technically speaking, to operate in.
“Although volumes remain higher for the oil and gas sector, there are still challenges with limited airline services and last-minute schedule changes. Add to that the changing rules on entry and there’s a lot to navigate,” said Reed & Mackay’s Fyvie.
“There are limited hotels open to support crew changes, so operationally not only do we have to find a hotel that is open, we also need to ensure they are able to access a meal. Crew mobilization also has to be looked at as border controls prevented regular crew mobilization, and a new process of ‘who could fly’ was adopted.”
Even helicopter travel has been impacted, with operators suffering pilot shortages if they need to self-isolate, while social distancing meant passenger numbers initially dropped from 19 seats to 9, until the introduction of face coverings.
The sector is also having to contend with weaker demand for jet fuel, diesel and gasoline. As a result, oil prices have dropped and like many other industries it’s not immune to the need to restructure.
Royal Dutch Shell plans to cut 10 percent of its global workforce before the end of 2022, and could be permanently closing its Louisiana refinery, ccording to reports. BP, meanwhile, is reportedly axing more than 250 jobs.
However, ATPI’s Knights doesn’t predict this alone will have a significant knock-on effect on travel management.
“Some companies will have been struggling since 2014 when the oil price collapsed. It’s been a tough time in the oil industry, separate to Covid,” he said. “Pre-Covid, there was an element of stability. The oil price was plateaued low, but it was relatively stable, and companies were recapitalizing. Things were getting back to normal, but it wasn’t booming.”
Specialist travel agencies will continue to be in demand for their expertise dealing with the sector’s complex requirements, but now might be the right moment to push for business on their terms.