One size doesn’t fit all – 6 ways to recognise revenue in the travel industry, and 3 things to consider when assessing your options

Henry Ford once famously said of the Model T ford you can have any colour you want, so long as it is black. He didn’t believe in variety and his products came to epitomise the production line approach to producing one-size-fits-all consumer goods.

The modern UK travel sector is pretty much the opposite of one-size-fits-all. Holidays come in all shapes and sizes and so do the travel firms that sell them.

Take agent vs principal for example. Once upon a time, life was more straightforward. The principal was the tour operator who owned the aeroplane and the hotel. Meanwhile the travel agent was the one in the high street shop surrounded by brochures.

These days, things are a little more complex: There are specialist tour operators and commodity travel agents; luxury differentiators and mass market bucket shops.

It can be very difficult to work out who is who in the transaction, and with sometimes more than a year between a customer booking a holiday and returning home, there are many potential trigger points in the sales cycle when revenue could be classed as “earned”.

Hardly a surprise then, that recognising revenue is such a hot topic in the travel sector.

Taking a different road

In practice, we see our clients use many different recognition policies. The range is almost as wide as the variety of holidays they sell. Here are the 6 most common, in chronological order:

  1. Booking date – the most common among agency related revenue but certainly the more aggressive recognition policy as a principal. To mitigate the risk of cancellation as a principal you would expect there to be a cancellation provision in place.
  2. Deposit / final balance split – the customer deposit is recognised at date of booking and the remainder on departure. Difficult to administer and dependent on terms and conditions.
  3. Non-cancelable / refundable –  a common trigger for recognition is the point at which the holiday becomes 100% non-refundable to the consumer. Arguably a point at which the right to consideration passes, though recent court cases challenging excessive non-refundable deposits may call this into question..
  4. Supplier / customer final payment – revenue is recognised at either the point at which the customer pays the final balance, or when suppliers’ have been paid in full. The timing of each can vary and the right to consideration is not as clear as when non-refundable.
  5. Departure date – considered to be the industry standard when acting as a principal.
  6. Return date – certainly the most prudent basis, but not a popular one for obvious reasons.

The road map to recognition 

Financial Reporting Standard 5 (FRS 5), Application Note G gave some guidance on when to recognise revenue but it could also be interpreted in many different ways. The recent introduction of FRS 102 doesn’t exactly narrow down the options.

The fact is, there is no straight forward answer to the correct policy but here are 3 key points that could help you determine the most appropriate measure:

  1. Whose booking terms and conditions are in use? –  does the company act under the terms of an agency agreement, or are sales covered by their own terms and conditions?
  2. Which regulations apply? – The Package Travel Regulations and/ or ATOL Regulations may give the company additional responsibilities and potential liabilities. If so, maybe recognising revenue close to departure is more suitable.
  3. What are the cancellation terms? – If recognising revenue in advance of departure, is there a sensible cancellation provision? What level of non-refundable deposit is collected, would it protect the gross margin?

Ford’s production line approach certainly yielded a consistent output, and though its unlikely we’ll ever see consistency in the accounts of the travel industry, its certainly worth a look to make sure your policy is on the right road.


Staying afloat in times of uncertainty

Warren Buffet once said that when the tide goes out, you can see who’s been swimming naked.

It was a typically wry observation from the Sage of Omaha. It reminds us that companies are at the mercy of events outside their control, and that the true strength of a firm is only apparent during adverse conditions. 

Right now, the tide feels pretty far out for the travel sector. November was another low point in a difficult year as once again, some of tourism’s most popular destinations went into lockdown. The atrocities in Paris felt a bit too close to home, terror and confusion closed down Sharm El Sheikh, foiled attacks in Tunisia have all but wiped out demand in North Africa, even sleepy old Brussels became a battle-ground. The British holidaymaker’s already fragile confidence took a battering, and bookings were reported to have fallen by as much as 25% in the last weeks of the month. 

The big question is, can our travel firms cope? Traditionally the sector has been thinly capitalised. As a consequence, it has been able to survive short, sharp, shocks but may well be unprepared for a prolonged downturn. Many still live off their customer’s money, relying on tomorrow’s deposits to pay today’s bills. Some are still too highly geared, with big financial commitments to cover.  If they’re not quite swimming naked, certainly some are looking pretty vulnerable in their budgie smugglers. 

As we enter December, all eyes will inevitably turn towards the 2016 peak booking period. Habits have changed over the years, and thankfully January isn’t the make or break month it once was but the statistics still consistently show its importance. Some holiday firms may hope to secure more than 20% of their annual customers in that single month, and to collect a fair chunk of cash too. In times of uncertainty, the natural customer response is to delay making a decision.  Lets hope things improve before we reach that point. 

Except, hope isn’t really much of a strategy is it? 

Unfortunately, detailed scenario planning isn’t something I see too regularly outside the largest travel firms. All too often, budgeting amounts to little more than adding a bit onto last year and crossing fingers. Tracking performance starts and ends with comparing against prior year. 


Theres no doubt we’re heading into further uncertainty in 2016. We should all hope for the best but plan for the worst. The act of detailed financial planning is absolutely vital to understanding the key drivers of performance. Knowing which costs can be cut and which levers can be pulled if cashflow tightens.
Whether swimming in your wetsuit or naked as the day you were born, if you dont know your break-even points and your red lines, how do you know if you’re floating on the surface, or already under the waves?  

This article first appeared in TTG on 3 December 2015