Taylor on Travel

The current squeeze on household income will go a long way to shaping the short and medium-term outlook for travel, so I make no apology for banging on about it. The level of intensity of that squeeze and its duration will affect both the proportion of GDP devoted to consumption and the areas in which money is spent.

A study released yesterday by financial services firm Deloitte suggests UK household disposable income will fall an average £780 this year. Perhaps more alarmingly, Deloitte forecasts it will be 2015 before disposable income returns to the level of 2009 - the year when the recent recession was at its height.

Deloitte further notes that real earnings are "all but certain" to fall for the fourth year in a row - for the first time since the 1870s.

"Taking a broader look at household finances arguably leaves the position looking even worse," it says, suggesting 2011 could turn out to be "the worst year for households since 1977 (the depths of the recent recession aside). Were interest rates to rise, conditions would arguably be the worst for households since 1952."

Despite this gloomy prognosis - and a suggestion that the Office for Budget Responsibility is "optimistic" about the ability of households to use savings to support spending - Deloitte concludes on a broadly rising note. Its chief economist suggests: "I still think inflation will fall sharply next year and will be below target by the end of 2012 . . . Real incomes should be rising again by the end of 2012." That may prove optimistic.

It is interesting to note that research consultancy Capital Economics drew near-identical conclusions in its UK Quarterly Review published last month. (Indeed, not only many of the figures but much of the phrasing is identical - for example, Capital Economics noted: "We still doubt the private sector can compensate for the cuts in public sector employment." Deloitte suggests: "I still doubt the private sector can compensate for cuts in public sector employment.")

Capital Economics warns: "Households are already suffering the biggest squeeze on incomes in decades. But the worst may be yet to come. We expect real earnings to fall by about 1.5% this year . . . the fourth successive year of falling real earnings - the first time this has occurred since the 1870s."

It estimates the average cut in household income at £780 this year and predicts: "It will take until 2015 or so for incomes to get back to their peak in 2009."

In the same vein, Bank of England governor Mervyn King has spoken of the "biggest squeeze on real pay since the 1920s", suggesting pay has been squeezed by 12% compared to what it might have been under "normal" growth conditions.

As a result, Capital Economics concludes: "Real earnings will be no higher this year than in 2005." In fact, using the Retail Price Index measure of inflation, earnings will be no higher than in 2004. The household disposable income measure "paints a slightly better picture", but even on this measure, "real incomes are back to their 2008 level, having fallen for the first time since 1981" [the height of the Thatcherite recession].

This may be more detail than we need, but the conclusions should be obvious.

To put it another way, consumer spending accounts for about 65% of gross domestic product (GDP) and the volume of outbound travel broadly follows GDP, although they do not move in lockstep. Latest GDP figures suggest the economy has stagnated since the third quarter of last year. Latest Office for National Statistics figures suggest a further year-on-year decline in outbound holiday departures from the UK in February. Monthly departure numbers were 6% down on February 2010, 11% down on February 2009 and 32% down on February 2008.

Not only are we not out of the words, but the trees extend for a good way yet. I would wager beyond 2012.

We can say with certainty that the market for this summer has turned down, though not yet by what degree. Anecdotal evidence suggests parts of April were dreadful. The Thomas Cook half-year figures yesterday and Tui Travel's this morning support this picture, while being far from a cause for despair.

Both groups are benefiting from their pan-European businesses - and German trading in particular - as the UK stutters. Both report half-year group revenue up year on year, broadly in line with UK inflation, and while Thomas Cook reported a £36 million increase in underlying losses to £166 million, Tui Travel posted a £15 million reduction in losses to £307 million - for a period of the year when losses are expected.

The UK market is contributing rather more than its share of the losses. At Thomas Cook, the underlying loss in the UK increased 36% year on year to £159 million of that group loss despite cost savings. At Tui Travel, the operating loss for the UK and Ireland rose 7% on a year ago to £173 million.

When it comes to the latest trading numbers, the picture is complicated by the additional bank holiday last month, the annual shifting of Easter, the ash cloud last April and so on.

But the year started better. UK trading at both companies was up in the first three months, with Tui Travel reporting bookings up 2% year on year in an interim update to late March compared with a 1% increase at Thomas Cook.

The latter now reports cumulative bookings for this summer flat, though with the average sales price up 4%. Tui Travel's summer bookings are also flat to May 1 with average price up 4% - level with the lower of the latest UK inflation rates (the Consumer Prices Index).

Cook notes "the need to cut margins to stimulate demand" in the UK, "so that while customers migrated to all-inclusive and differentiated product, this was often achieved at discounted rates".

Tui Travel reports all-inclusive bookings now 46% of its UK total (up from 43% last year) and an increase in customers taking shorter durations - seven-night durations up 6% and 10-11 nights up 24% to date on 2010.

The summer-trading story may turn again once the peaks and troughs of holiday periods are ironed out by the end of the season. But one trend is clear. Thomas Cook reports its controlled distribution in the UK up almost 6% year on year to 71.5% of total sales.

In Northern Europe, broadly Scandinavia, the company's controlled circulation was 84% and its underlying operating profit rose 13% - a better performance than anywhere else in the group, including booming Germany.

Thomas Cook no doubt intends to produce a similar effect in the UK through its merger with The Co-operative Travel and Midlands Co-op, now in the hands of the Competition Commission.

We learned something of the government's intentions with the proposed flight-plus Atol this week - though not much - when the civil servant responsible for drafting the regulatory changes and pending consultation, Department for Transport head of aviation policy implementation Kate Jennings, appeared at an Abta law seminar.

We learned rather more of the tensions over flight plus in the trade, which have become more raw - certainly in public - as the changes move nearer. The ridiculous four-month hiatus between the DfT announcement and a sight of the detailed proposals might have been designed to foment this tension. That is certainly what it has done. Nature abhors a vacuum and various folk have filled it.

'The devil is in the detail', of course, and that is what Jennings would not - could not - discuss. She had hoped the consultation document would have appeared by now - it is obviously completed but awaits ministerial sign off. It should be out in June. Till then we're in the dark.

So what did we learn? The consultation will clarify the position on liability for VAT - "there is nothing in the proposals that would make flight plus Atol holders liable" and the consultation "will include paragraphs on that". Whether we get the signed declaration from Customs and Revenue that some appear to want is another matter. It seems unlikely.

The DfT holds the same view as the CAA - not a surprise - that flight plus is merely "a sticking plaster" and more change must follow. So there is no disagreement with anyone in the trade on that. But fundamentally, the change that most in the trade want - an extension to all flights - must wait for Brussels, so we're talking 2015 at best.

The government is upfront about one of the two core reasons for the sticking plaster - its desire to get the Air Travel Trust fund off its books. The other remains the need to protect consumers, who "pay upfront for services they do not receive for months and might be stranded overseas". No change there wrought by the web - hence the need, in the government's view, for the retention of repatriation and refunds.

The consultation will not be on the principles of consumer protection, Atol funding, regulation or flight plus - "we've already consulted on the principles" - but on the detail of implementation. My guess is the civil servants who scour the industry submissions in late September will strike through anything that strays from this.

However, it is hard to see the DfT hitting the deadline it has set for implementation even by ignoring much of what some industry figures appear set on submitting. When asked about the promised January start date for flight plus, Jennings' reply was interesting. "It's our intention the legislation be in place in January," she said. An intention is not the same thing as an occurrence. I intended to write a comment on fight plus on Tuesday, but here we are. Having the legislation in place is not the same as having it in operation, either. 

Two of the most striking contributions on the issue came from others at the Abta seminar, one of them not in the same session and not even on the same day.

Speaking alongside Jennings, Thomas Cook director of government affairs Andy Cooper said: "We do not want means of avoidance . . . We like anti-avoidance measures - strong and effective measures." So the big two want enforcement and, in Air Travel Trust fund terms, they pay the piper. This must make for interesting Abta board meetings, with Cooper and Travel Republic's Kane Pirie in attendance.

Addressing the seminar the following day, lawyer Peter Stewart of Field Fisher Waterhouse, raised an argument that was initially a surprise. "You would think the sole reason for these regulations was to deal with people acting as agents for the consumer," he said, and went on to demolish any legal basis for a challenge to such a way of doing business.

The proposals do not appear set up to do this at all and, if they were, would almost certainly fail for the reasons Stewart outlined. Rather, it appears the DfT has simply acknowledged the fact that retailers can and do work in this way, that more may do so as a result of the changes and that these must comply with existing consumer protection laws.

However, as a rehearsal of a future argument before a judge, Stewart's presentation was masterful. It also included the kernel of an argument that might repeat the hours of fun we have had with "what constitutes a package" - with Stewart suggesting at one point: "[Travel] web companies are not really travel companies at all, they are like search engines."

Ah, what constitutes a travel company? What possibilities that holds - would it matter how the firm described itself? Would a court lean to the customer's view regardless? What if a firm were an Abta member but only an affiliate marketer of travel? The lawyers have seen the future, and it's contentious.