Travel companies face billions in refund payouts
On The Beach chief says operators must reconsider using customer deposits to fund operations
Travel companies must radically rethink their business models after the coronavirus crisis as they face paying out billions in refunds to customers due to the near total shutdown in global travel, the chief executive of On The Beach has said.
Simon Cooper, head of the online travel agent, warned that tour operators and airlines would have to stop using cash deposits for future bookings to support their current operations after the pandemic prompted mass refund claims.
“It’s painful enough being in an environment of zero revenue without being in an environment of zero revenue and having to pay money out,” he told the FT.
Instead he said that customer money should be put in a ringfenced account that would not be used to meet day-to-day running costs. On The Beach does not pre-book inventory such as hotels and keeps customer money in a trust account until they travel, so does not face the same challenge.
Most airlines and tour operators, including cruise companies, have been refunding customers for cancelled holidays using vouchers and credit notes in order to preserve cash — something that is not strictly permitted under EU law, which says that if a service cannot be provided a cash refund should be given within seven days. The US government has also ruled that carriers must fully refund tickets to passengers.
Iata, the global trade body for airlines, said this week that allowing them to issue vouchers is a matter of “survival” for the industry. It warned that carriers have about $35bn of ticket refunds that are due in the second quarter alone because of cancelled flights. The UK travel trade body ABTA estimates that travel companies owe £4.5bn in refunds.
Last week Germany’s governing coalition sent a letter to the European Commission formally requesting a “short-term, practical voucher solution” and calling for a temporary suspension of rules requiring cash reimbursements.
Other countries, such as Brazil, Canada, Columbia and the Netherlands have also agreed to relax refund rules which airlines have called a “vital time buffer” to help the sector deal with its cash problems.
Tui, the world’s largest tour operator had €2.9bn of customer deposits on its balance sheet at the end of September according to its annual report, but said the majority of that had already been paid out to hoteliers and other suppliers as prepayments.
Like most travel companies and airlines it has been forced to halt virtually all operations as airspace and international borders have shut.
Tui has secured a €1.8bn bridging loan with German state bank KfW but one industry executive warned that given the potential scale of refund payouts, this would only provide a starting point to support the company through the crisis.
“That loan gets German business through next three months,” they said. “This is not a bailout, this is a first instalment.”
Tui said that it supported the proposal of a voucher scheme but said that discussions were “ongoing”.
German carrier Lufthansa, which is in talks with the government about its rapidly diminishing liquidity after grounding almost all of its planes, has called for a voucher system to be approved.
Mr Cooper added that the result of giving customers credit notes was that the companies were being bailed out “at the expense of the consumer” and that regulators were “sitting on their hands”.