Life at the sharp end of the travel sector

Last week’s travel press was dominated by 2 huge stories.
On Wednesday morning, you’d have been hard pressed to find a more ecstatic bunch of business owners than the OTAs. After 5 years trading blows through the UK court system, the bed bank Medhotels claimed a decisive victory in the Supreme court against that perennial travel sector nemesis, HMRC. Here was the top court in the land, emphatically siding with travel agents over the question of agency status and the application of TOMS VAT on commission. With no further appeals possible, the inexorably tightening noose around the dynamic packaging business model seemed finally to have been loosened.
Then, late on Thursday night, On Holiday Group, a travel company operating the largest independent B2B bed bank in the UK, went into administration with the loss of 65 jobs and a string of unpaid hotel bills. It was a stark reminder that in travel, the next catastrophe is only ever round the corner. In a twist dripping with irony, OHG laid the blame for the failure squarely at the feet of HMRC for withholding £4.5m of VAT reclaims in the belief OHG should be paying over TOMS VAT on hotel commissions. OHG claimed that had the landmark Medhotels decision come earlier, it could have been enough to save them. In the days since the collapse, HMRC have been widely depicted as reckless, gun-jumping, zealots but its unlikely we’ll ever really know whether they alone were responsible for bringing OHG to its knees, or whether they are merely a convenient scapegoat.
Whilst news of OHG’s demise sent shock waves through the travel industry, there was a certain inevitability about the next big failure coming in the overcrowded bed bank space. In my view, bed banks have always seemed to be operating at the most brutal end of the commoditised travel sector. Its the end where only the leanest and pointy-elbowed survive; where “differentiation” is virtually impossible and where only the lowest cost producer survives. The cash flow cycle for bed banks is ridiculously tight, funds are usually received after check-in as OTAs look to push risks down the supply chain by holding onto cash longer and longer. Given the only way to survive is to shift large volumes, the biggest surprise to me was that no competitor wanted to take over the £16m of OHG pipeline bookings.
So what does it mean for those involved?
For OTA’s the shine has undoubtedly been taken off the Medhotels victory and the fall out from the failure will hit them in the pocket. The Flight Plus ATOL rules which came into force in 2012 mean an agent who has combined an OHG bed with a flight will be fully liable under their ATOL for replacing all accommodation, at no extra cost to their customers. Depending how early each agent paid customer monies over to OHG, re-booking at over-inflated prices could be a costly outlay with no guarantees of recompense from OHG’s administrators.
Most customers meanwhile, will remain blissfully unaware of either story. The majority are unlikely to even know their accommodation was sourced through OHG and whilst those currently in resort may be asked to pay again for hotel rooms, these amounts should be refunded in full by their travel agent. Customers yet to depart will be re-booked and will probably remain oblivious.
The CAA will be looking to claim a victory for consumer protection and will anxious to ensure agents take care of their customers under the Flight Plus rules. Given the size of the failure, and the likely costs to replace accommodation, there is also a significant risk of a ripple effect,  so they will be nervously monitoring their weaker ATOL holders for any early warning signs.
As for the remaining bed banks, they may take solace in what happened to the chartered flight sector between 2009 to 2011 when a series of failures (Goldtrail, Holidays4U, and Kiss flights) acted like the release of a pressure valve, removing excess capacity from the system and shoring up the profitability of the remaining providers. Add in the Medhotels victory, giving them certainty over their VAT position for the first time in years, and life right now is about as good as it gets for them.
This article first appeared in TTG March 2014