September 12, 2008

It was highly likely that there would be a significant casualty at the end of the peak operating season due to the over-capacity in the UK package holiday market resulting from the competition that now exists from the budget airlines and the increasing popularity of DIY holidays. Of course the cost of oil, the strengthening dollar and the economic downturn causing a downturn in sales were the key contributory factors along with financial backers whose sole motivation in life is profit hence the fact they cut their losses and saved the most profitable parts of XL for themselves - the French and German counterparts were more profitable simply because nationals of these countries are accustomed to paying more for their holidays.

 

This is the largest collapse of this decade and echoes previous decades where giants like Clarksons/Court Line, Laker & Intasun/Air Europe have all failed at this time of year and all because their airlines overstretched their resources. The difference this time around though is that there is far less competition left to pick up the pieces with the four giants of the business merging last year to stave off collapse themselves. Interesting that Thomas Cook/Airtours and TUI/First Choice are now both German companies and that their mergers have resulted in massive savings and an unhealthy buying power which given the XL collapse places them in an even stronger position than before with the prospect of them exploiting their market dominance through higher prices and less choice. The only true remaining major competitor now for these giants is Cosmos Holidays which although privately owned is the sister company to Avro Flights and Monarch Airlines, major players both in the charter business and the low cost flights arena, and thus whilst it has possibly been strengthened by XL's collapse it is still more vulnerable than its German counterparts. Whilst Virgin Holidays is a major player it is simply a vehicle for filling seats on Virgin Atlantic's long haul routes, a scheduled airline, and thus more impervious to the mass market Mediterranean/Canaries market.

 

XL's collapse follows the recent failure of Spanish charter airline Futura and the low cost Canadian carrier, Zoom. In the space of a few short weeks three substantial long-established airlines have failed and along with them half a dozen or more tour operators. Earlier in the year three business class only airlines (Maxjet, EOS & Silverjet) all failed as well as Oasis Hong Kong, a low cost long haul airline, whilst merger talks continue between scheduled airlines and governments stave off the collapse of their state airlines (eg Alitalia) with financial aid. All this means less choice and flexibility for the UK travelling public who have enjoyed great variety both in destinations and holiday durations as well as incredible value for money.

 

The bigger picture however is that many airline pilots and crew are now redundant with slim prospects of finding alternative employment in an industry that will continue to retract; airports have lost some big customers and will struggle to remain profitable without increasing their own charges to compensate for the reduction in income and under-utilised facilities; overseas hoteliers will have been hit the hardest having provided their guests with services throughout the summer for which they will not be paid and the smaller family businesses in Greece will no doubt lose everything if they have relied purely on business from the UK. The specialist tour operators who used these failed airlines will find it increasingly difficult to secure seats or charter aircraft and many people who have already booked their next summer holiday will soon discover the consequences of the removal of this significant airline capacity from the market which will undoubtedly be reflected in higher prices all round. However the collapse also means unemployment for not only the 1700 employees of the XL group here in the UK but also their suppliers - the printers who produced their brochures, the software company that supplied their technology systems, the landlords who housed their operations, the aircraft maintenance company, the airline caterers and so the list goes on.

 

Unfortunately we have not seen the last of the failures in the travel industry this year as the forecast recession will mean that many more consumers will not be providing the cashflow of advance deposits during the next few lean months. Those with plans for Christmas, half term and Easter holidays will undoubtedly struggle to find replacements should further collapses occur. With short haul destinations there is no solution but if travelling long haul then it is probably best that you fly with a scheduled airline rather than a charter - this advice has always held true regardless of the financial vulnerability of the charter market as seat pitches are better, frequencies allow flexibility and fares are often comparable, especially for families. Of course it's unlikely that the airlines operated either by TUI (Thomson) or Thomas Cook will disappear in the immediate future as their aircraft can be moved around the group and the wealth of management experience at the top of these giants should ensure their continuiing financial viability but nonetheless a potentially lethal cocktail of recession, inflated oil prices and unfavourable exchange rate fluctuations would be sufficient to tip the balance for an industry that operates on wafer thin margins and thus survives principally on cashflow.