UK Travel Industry – The uneven road through recovery and beyond
October 20, 2015
Last week marked the 8th annual T20 forum, and it gave us the opportunity to reflect on the travel industry’s performance since the lows of the financial crisis, as well as debate where we are in the recovery cycle and consider the outlook for 2016.
Since 2010, the UK leisure travel industry has experienced volume growth in every year except 2012, and recent data published by the ONS indicates 2015 will be a bumper year for the industry (July YTD leisure trip volumes are up c.12% YoY). But we are often asked whether the growth is sustainable; will the industry break through the 2008 pre-crisis peaks; and, why have some leisure travel operators grown exponentially through the recovery while others have not? In order to answer some of these questions, we need to review some of the underlying facts.
Consumers have historically considered spending on holiday as one of their top spending priorities, and even today it continues to feature in consumers’ top 2-3 non-essential spending priorities. However, we find that consumer aspirations aren’t enough to drive growth. It is consumer confidence and disposable income that are the true predictors to growth in leisure travel. And now the good news…. the fundamentals at an industry level are in place to support continued growth.
Consumer confidence is back!
2014 marked the first time in 7 years since consumer confidence moved into positive territory with consumer confidence gaining further momentum in 2015, and for good reason. The economy has posted real GDP growth in every year since 2009 surpassing the pre-crisis levels in Q3 2013. Unemployment rates have fallen to a seven year low, and the outlook for growth continues to be positive. Furthermore, disposable income is starting to grow again.
An additional £1,200+ of disposable income per annum compared to 2012
2014 marked the first time in many years that earnings growth surpassed inflation, resulting in greater household disposable income. In fact, according to the ASDA household disposable income tracker, households have an additional c. £1,248 per year of disposable income compared to 2012. With earnings growth tracking upwards in recent months, and no near term sign of fuel or food price inflation returning, this should signal more disposable income growth and an increase in holiday spending.
Recovery dynamics - maybe the financial crises isn’t a distant memory
However, once we peel back the headlines figures it becomes apparent that not all consumers and not all leisure travel operators have benefited equally in the recovery…
A quick scan of the latest results of the leading UK mainstream tour operators indicates they’ve experienced modest growth in recent years, while the likes of online dynamic package operators and premium tailor-made tour operator have been experiencing double digit growth. While some of this is due to changing consumer behaviours (e.g. shift to online, shift to experiential travel), much is also down to microeconomics and the 2-speed recovery occurring in the consumer base.
In the consumer base, our recent consumer research indicates that improvements in consumer sentiment aren’t equally shared across socio-demographic segments and this is translating into diverging spending patterns and diverging performance across travel operators. As an example, one only needs to look at performance of the industry by price point to see the upper price point of the market (i.e. >£200 per night excluding flights) was more insulated during the downturn and has performed better in the recovery.
Outlook for 2016
The outlook for the overall industry remains positive and we expect to see volume growth in the leisure travel industry, assuming there are no one-off shocks (e.g. Grexit, EU referendum). The industry still remains off its 2008 peaks (in volume terms) and there is no reason to believe it won’t return to, and exceed, these levels in the future. However, we expect the trajectory of growth to vary across travel category as we see both consumer preferences as well as the 2 speed recovery – with online dynamic packaging, the 55+, and premium tailor-made travel categories continuing to outperform the overall market.
Implications for M&A
This positive consumer sentiment, combined with the underlying changes in the industry, means the M&A market is likely to see considerable levels of activity over the coming months. Further, the successful IPO of On The Beach in September demonstrated that companies who have both strong growth and a point of differentiation will be valued at multiples towards the top of the historical range in the sector. This strong pipeline of other companies in the travel sector keen to move to the next stage in their development - be it IPO, private equity or corporate - is driven by successful management teams looking for investors to help fulfil their ambitions, on both the domestic and international stages. This may be supplemented by disposals from the larger players in the sector (Tui, Thomas Cook, Kuoni, REWE...) seeing some portfolio businesses and brands as non c0re to the new corporate strategies following their own transactions.
What volume growth have you experienced? Share your thoughts below or schedule a meeting to discuss your situation in confidence.