A number of UK travel companies and tour operators will struggle to survive in 2012 unless they radically change their business models and adapt to a fundamentally new market environment, a report from KPMG warns.

The phenomenal rise of low cost carriers, online travel booking and the challenging economic backdrop, combined with fuel and Air Passenger Duty increases could make 2012 one of the most challenging years yet.

Since the beginning of this year 24 ATOL registered tour operators have gone into administration.

The number of tour operator businesses facing ‘critical distress’ is estimated to have risen by 49 per cent in the past year.

Given that the economic cycle in the industry typically leads to cash reserves being at their lowest between November and January, operators find themselves now in the most risky part of the year.

Richard Hathaway, KPMG’s head of travel, leisure and tourism commented: “The traditional high-volume tour operating model based on customers pre-booking flights and accommodation packages well in advance is in long term decline as more and more travellers opt for self-packaging online and niche solutions.

“To survive, operators must ensure that they are flexible and in a position of financial strength.

“Operators who do not adapt their business model to meet the demands of today’s holidaymakers will face increased risks in the next year, including takeover or business failure.”

“There will be increased restructuring as operators adjust their balance sheets to strengthen their position in the face of longer term structural changes in the market and shorter term economic pressures.

“While some traditional tour operators have introduced change and flexibility, or are in the process of doing so, others will face financial discomfort and those with weak balance sheets and poor forward sales will be hit hardest.”

The UK tour operator market, especially for overseas travel, is shrinking, argues KPMG.

After a long period of year on year increases, the total number of overseas holidays taken by UK travellers has seen a 20 per cent decline between 2008 and 2010, and now stands at about 36 million per annum, a level last seen in 1999.

In the same period, the number of package trips, which by contrast had hardly increased over the previous ten years, declined to 14.1 million – comparable levels last seen in the mid-1990s.

At the same time UK travellers are among the most active when it comes to online booking.

A recent global KPMG report revealed that 74 per cent per cent of consumers in the UK are now more likely to buy flights and vacations online, compared to 61 per cent in the rest of Europe.

KPMG advises operators to ensure that they are looking closely at the underlying economic cycle, changing customer demographics, current business plans and seasonality of cash flow to make sure they have the full picture of risk in their business.

In order to cope with these risks, tour operators should consider doing the following:

• Ensuring a spread of strong brands in high margin spaces, whether niche or otherwise.
• Invest in a strong online and mobile channel, exploiting the latest technology.
• Offer products which are dynamic and adaptable to ever changing customer preferences.
• Put a significant focus on cost reduction and cash management.
• Take steps to ensure a healthy and lowly geared balance sheet.

Hathaway added: “Businesses who fail to take appropriate action are likely to have problems in the short to medium term.

“Operators with significant costs tied up in high street retail operations or those focused exclusively in the commoditised end of the market will be more exposed than others to the economic and market uncertainty of the coming years.

“Businesses that still have significant reliance on committing to capacity the year before the sale season will be less able to adapt to unexpected changes in demand, and thus reach breaching covenants or entering financial distress,” he concluded.