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Heatwaves and holidays

Hot weather across Europe encouraged travellers to stay put – presenting a problem for some travel groups
August 30, 2018

Think back to June this year. The sun is out, and the parks and pubs are full. You can hear cheers of "it’s coming home". Britain is buzzing. Why – if you’re a football fan or sun worshipper – would you want to be anywhere else? Staycations have proved popular this summer thanks to the recent heatwave, with a number of travel groups' financial results suggesting would-be travellers opted to stay put.

The UK isn’t exactly known for its good weather, so when the sun shines, people take advantage. This year the good weather started as early as April and has – unusually – stuck around, presenting a problem for UK-listed travel companies, as fewer people needed to escape the rain.

European tourists are still travelling, but volume growth is slower compared with international peers. Similarly, destinations outside of the European Union (EU) have proved more popular in the year to date, both for EU nationals and global travellers. This might suggest a lack of demand for more local, continent-based holidays, while long-haul routes that tend to be booked further in advance have still gone ahead. Data from Eurostat also found that nights spent in tourist accommodation by international travellers outpaced that of EU residents – a pattern dating back to 2013.

For some tour operators, weather patterns don't always make a difference, especially for the types of holidays that tend to be booked months in advance. Scheduling for trips such as cruises can take place years in advance, which means they aren't likely to be disrupted by unexpected sun at home.

For other travel groups, this just isn't the case. Bookings that can be made closer to the time means tourists can choose to save money and stay at home instead. 

 

Not on tour

Ask a millennial, and they’ll tell you walking into a travel agent on the high street is a pretty old school way to book a holiday. Fortunately, most customers – and businesses – are finding a balance between physical locations and online. However, travel companies can still be highly vulnerable to changes in consumer spending, the UK economy, terrorism, weather and entertainment events.

Management at travel company and tour operator Tui (TUI) has warned that the prolonged period of good weather makes outperformance at the full year unlikely. High levels of early bookings may have helped offset the worst of the decline, but cash profits still fell by 13 per cent during the third quarter to €193m (£175m). Other factors were at play too, including an 80 per cent squeeze in cash profits from Northern Europe, while weaker sterling acted as a drag on margins. Air traffic controller strikes in France added to costs, with compensation costing €13m during the period.

Profits at Tui tend to be second-half weighted, especially once the peak summer months of July and August are included in the fourth quarter. But this poor third quarter makes the year look all the more disappointing. One bright spot was cruises, where profits were up by a third to €91m. Holiday 'experiences' – which offer more authentic, local accommodation options – sales of which rose 14 per cent during the third quarter to €181m, make up the bulk of group cash profits.

European airlines have also become a notoriously difficult market to navigate given the rise in capacity from budget operators. This made the third-quarter update from Thomas Cook (TCG) pleasantly surprising, as the group’s Condor airline made up for fewer package holiday sales. In fact, chief executive Peter Fankhauser said better capacity across Condor encouraged some European customers who had delayed decisions about summer holidays “to enjoy the record temperatures at home” to book last-minute trips. But a weaker pound and hotel bed cost inflation, especially in competitive, popular destinations such as Spain, means management still expects growth in full-year underlying operating profits to be at the lower end of expectations.

 

Digital age

Millennials are known for their love of travelling and technology – a winning combination for travel booking websites. But this summer, not even the ease of booking online could protect travel website operators from the disruption caused by good weather and sports fixtures at home.

Even worse, it seems budget-constrained travellers aren't willing to splash out on fancy hotels. But budget sites such as Hostelworld (HSW) haven't been immune to the warm weather pressures either. Chief executive Gary Morrison attributed "softness in bookings" during the months of July and August to the World Cup and hot weather across Europe. This also coincided with the introduction of free cancellations for bookings worldwide, giving those on the fence the option to cancel altogether. Overall, this could leave bookings at the full year flat on last year.

On The Beach (OTB) has done well to mitigate the worst of the impact. Management cut marketing spend after sales slid during the summer months, so revenue growth after marketing costs looks better. This has been reassuring, after the Monarch collapse prompted a target miss during the first half and, thankfully, management is confident of hitting full-year targets.

 

Right place, right time?

Recent commentary around hotel groups has focused more on geographical patterns. For Millennium & Copthorne (MLC), London has proved challenging. Revenue per available room (RevPAR) in the capital fell 15.1 per cent during the first half, while occupancy rates fell 9.6 percentage points to 71.9 per cent. Chief financial officer Kok-Kee Chong said snow at the start of the year hadn't helped.

Meanwhile, at InterContinental Hotels Group (IHG), management is turning to Asia for future growth. Of the 46,000 rooms approved for development during the first half, around a third are slated to open in Greater China. Management believes the government is more open to tourism, as demonstrated by a 10.1 per cent increase in RevPAR during the first half. Domestic travel has proved less popular. Overall sales per room in the UK were flat, but in London fell 1.4 per cent.