Taylor on Travel

Goldtrail is going to prove an even more costly business failure than first thought, and that was costly enough.

A tour operator primarily to Turkey, Goldtrail Travel ceased trading on 16 July. The reasons for its failure at the start of the school summer holiday have still to be clarified, as does the whereabouts of its owner and sole director. So let's stick to what we know.

Initial estimates that the company had 50,000 forward bookings and up to 16,000 holidaymakers abroad were wide of the mark. The Civil Aviation Authority subsequently arranged the repatriation of 20,500 customers and reported "nearly 112,000 disappointed by missing out on a holiday".

The CAA's decision to arrange refunds for customers regardless of whether they booked a package holiday - and to split the cost with ATOL-holding companies - was welcome. But it will push up the cost to the Air Travel Trust fund.

(Note: not ALL Goldtrail clients will be refunded. Those who bought a flight with Goldtrail from a retailer outside the ATOL scheme may miss out. The CAA has yet to decide.)

My previous guesstimate of the cost to the fund was about £16.8 million, based on three assumptions: that the cost of repatriation would be similar, pro rata, to the bill for Scottravel which failed last year with 1,300 abroad; that the bill for refunds might come in somewhere between those for Scottravel and for Globespan, the other significant failure last year; and that the fund might reimburse about 80% of bookings.

Let's stick with those assumptions. Scottravel's 1,300 customers cost £540,000 to repatriate - about £415 apiece. If Goldtrail's 20,500 cost about the same, the bill could be £8.5 million. Those holidaymakers are home and the bills paid so we should know soon enough.

Scottravel refunds worked out at £247 per passenger and Globespan £322. If we split the difference and assume £285 per person for Goldtrail (refunds per booking must be higher), we get a bill of £31.9 million.

We can assume the fund won't pay out fully to everyone - some bookings won't have been protected, others will be met by a combination of the CAA and ATOL-holding travel companies that took Goldtrail bookings. But even if we stick with 80% of forward bookings at £285 apiece, it comes to £25.5 million.

So, the bill for Goldtrail's failure could be close to £34 million.

That is uncomfortably near to the total amount paid into the fund through ATOL Protection Contributions (APCs) on holidays in the last financial year - £35.7 million. There is no cause for panic when perhaps £50 million will be paid in over the course of this financial year - assuming there are no additional major failures. But then who foresaw Goldtrail as a major failure?

Just don't expect the APC rate to change any time soon.

Tui Travel's third-quarter results may disappoint some in the financial markets, but they demonstrate an underlying resilience in a weakening UK market.

The group forecasts full-year results "at the lower end of expectations". As analyst Nick Batram of KBC Peel Hunt points out, this is "by no means disastrous".

UK summer 2010 bookings for the three months to August 1 were 2% down on the previous quarter. However, cumulative bookings for the summer were 2% up year on year. That is not bad - about in line with Tui's capacity increase for the season. UK summer trading looks even better when a 10% rise in average selling price is included.

Other markets including Europe's largest, Germany, are generally up by more - Germany by 3% for the season and 12% for the quarter, while the Nordic Region, Tui's third major market, is up 17% to date.

So Tui can report an underlying operating profit for the nine months to June 30 almost unchanged on a year ago - £103 million for the current financial year against £102 million last time, despite a 4% fall in revenue.

That £102 million underlying profit after nine months last year became a £443 million underlying profit at year's end - although this transmuted into a £52 million loss before tax after all other costs were tallied.

However, the current underlying profit (£103 million) excludes the cost of the volcanic ash cloud - a bill Tui now puts at £95 million for aid to passengers and cancelled flights and a further £10 million in "lost contribution". In other words, it wipes out the underlying profit - and is money neither Tui nor anyone else is going to see back from government.

It is the ash bill coupled with the deterioration in the UK since May that led Tui to lower its expectations. The group reports: "The UK market has slowed markedly . . . Since our last update, industry booking volumes were c. 10% down on the prior year . . . margins are lower than previously forecast."

Even this deterioration must be seen in context. UK market analyst GfK Ascent reported cumulative summer sales down 5% year on year at the end of July and 12% down for the month. In all respects, Tui appears to be outperforming the market - with overall sales up in a market that is down and a higher average selling price.

Bear in mind this follows a global financial meltdown reminiscent of 1929-31 and the most severe downturn in the world economy since World War Two. The world's biggest outbound travel group appears to have weathered these shocks rather well.

Like almost everyone else, Tui blames the UK decline on a combination of factors through the spring and early summer: "The recurrence of airspace closures, the emergency budget and subsequent austerity measures, the better than average UK weather combined with quiet trading during the World Cup." These are all valid explanations, but it is the economy that drives demand.

The realisation that a substantial recovery is not around the corner is key to understanding the current UK market.

The only real surprise in the circumstances was the 4.25% leap in the Tui share price the day before the results - three times the overall rise in the FTSE. Such feverish expectation says more about the uncertain state of the financial markets. Watch out for the next market plunge.

The value of the Tui Travel Group fell by £250 million today, its share price falling close to 10% on the London Stock Exchange.

That 9.97% decline came against the backdrop of a gentle 0.63% drop in the FTSE 100 of which Tui is a member, and followed a 4.25% rise in the group's share price yesterday when the FTSE rose by one third as much.

Tonight the value of Europe's largest travel company is its lowest since the dog days of the financial crisis in 2008, when yesterday morning the financial pages were singing the group's praises.

The sole trigger for this see-saw in market perception was the Tui quarterly statement released this morning.

My God, the results must have been bad . . . But no - the figures Tui reported were remarkably solid in the circumstances, with sales up year on year in the all-important summer season in its three biggest markets and evidence Tui is outperforming the market in the UK.

If anyone needed a fresh, albeit small, lesson in the absurdity of the financial markets and of the idiocy of worshipping them, this was it.

Latest results from the big two travel groups Tui Travel and Thomas Cook provoked a predictable response in the media.

"Holiday prices set to be slashed", reported the Daily Telegraph suggesting a "glut of unsold packages", while The Guardian was more definite, headlining its main inside news page: "Troubled holiday firms slash prices".

The newspapers' excitement stemmed from Tui's announcement that it has 650,000 flights and holidays left to sell in the UK before the end of the summer. The Guardian concluded with a quote from Bob Atkinson of price comparison site travelsupermarket.com advising: "Keep looking right up to the last minute. If you are prepared to take anything, you will get bargains."

Well, a price comparison site would say that, wouldn't it? And when could you not get a bargain if you were prepared to take anything? Bargain hunters should also bear in mind the season runs into October, so 650,000 holidays left to sell need not mean agency bargain buckets full of August departures.

But the point about the lates market is serious. Tui was sanguine about late trading a year ago, despite the summer 2009 season going on sale two months later than usual.

There are two differences this year: Tui added capacity for summer 2010 - though to nowhere near the levels of 2007 and 2008 - and it reported much better trading up to the start of April. The problems set in since the last quarterly statement.

Thomas Cook's view of the lates market, released a day later, does not support the suggestion that bargains will be more prevalent than last year. The company did not specify how many UK holidays it has left to sell, but declared its UK summer programme 85% sold "in line with last year".

Both groups, which together account for a lion's share of the UK market, reported average selling prices for the UK summer season up on last year - Thomas Cook by 3% and Tui by 10%.

That is a marked change from last summer and fits the data from industry analyst GfK Ascent which reported a 2% rise in average price across the sector up to July, leading GfK Ascent managing director Sarah Smalley to conclude: "There is no need to discount."

Of course, we have to see how the rest of August unfolds. But just last week the country's third-largest charter carrier Monarch Airlines was sufficiently confident to lay on an additional 22 flights to the western Med over August Bank Holiday. The move came after Monarch carried record passenger numbers in July.

It's true the UK market has deteriorated since the promise of early spring. A poll across many economies, published today by Ipsos Mori, suggests UK consumers are now among the most pessimistic in the world. This probably represents a realistic expression of the UK outlook and is the reason demand has faltered.

But far from the Tui and Thomas Cook statements justifying headlines such as "Holidays put on hold" and "Thomas Cook adds to travel industry gloom" (both in the Financial Times), the figures suggest a remarkable resilience in the circumstances - and certainly no reason for Tui to lose 10% of its stock market value, as it did yesterday.

So you wait till the last minute if you want to - I've just booked my October break.

The failures of Flight Options and retailer Sun4U plunged the trade into a crisis at least as serious as September 2008 when XL Leisure collapsed.

However, the timing is worse and the affliction more contagious, with suppliers and retailers nervous of one another and rumours rife. More failures will follow.

Add the impact of Goldtrail Travel, which ceased trading in July, and the number of customers affected broadly matches XL - with 35,000 overseas across the failed companies and close to 185,000 booked to travel.

Such failures in peak summer are a major worry. They suggest more to come through the autumn, the traditional failure season.

The underlying situation is worse than two years ago. Credit remains tight - so a firm in trouble cannot find funding - but now an 18-month recession has taken its toll, compounded by renewed economic uncertainty and the impact of the ash cloud. Companies on the edge have no room for manoeuvre.

The media reaction can only stoke consumer concern. XL faded from the newspaper front pages immediately. This time, travel has been in the headlines for days thanks to downbeat trading statements from Tui Travel and Thomas Cook, the threat of strikes over August Bank Holiday and now the failures.

The irony is that the big two appear in good health despite the media stories of bargain-basement holidays, with average selling prices up year on year into early August. Indeed, UK number-three Monarch Airlines felt sufficiently comfortable with the state of late sales to lay on additional August Bank Holiday flights to the western Mediterranean.

The overall market does not appear in distress, just sections of it. The question is how far the fall-out will extend.

The failures highlight the urgent need for Atol reform and should spur the Department for Transport to move quickly. It has been considering the industry response to proposals to enlarge the Atol scheme for months. Hopefully, it will now make a decision and we will see detailed proposals next month.

There are limits to how far the process can be speeded up, however. It will require a fresh consultation, making the earliest implementation March 2011 - and probably later.

Calls for measures beyond those laid out already will probably be a waste of breath.

The date at which the charge for Atol protection on holidays falls from £2.50 will be postponed. The CAA has made clear it will only look again at the rate when the Air Travel Trust fund approaches a surplus.

The differences in experience for customers of Kiss and Sun4U highlight the problem reform must address. The CAA believes every Freedom Flights/Kiss client was Atol-protected. It is feared most Sun4U clients were not and will foot the bill themselves unless covered by travel insurance or a credit-card provider.

A CAA spokesman said: "Kiss shows the benefit of a simple system. People thought they were protected and they were."

Sun4U held an Atol, but dealt largely in unprotected bookings direct with airlines. It appears people did not know whether they were protected, or thought they were when they were not.

This is not about a right or a wrong way to do business. But reform has to produce greater clarity and that will mean wider cover of trade sales.