UK travel sector’s summer boom hopes dimmed by strikes, infections and labour shortages

The UK’s much-anticipated summer travel revival risks descending into chaos as unions target airline strikes to coincide with school holidays while surging inflation and the cost-of-living crisis curb nascent demand recovery. In Europe, new Covid-19 infection outbreaks have also prompted flight cancellations, further weakening the inter-related sector. 

Aviation sector headwinds risk stiffing the performance of the broader travel sector, leaving hotels, leisure destinations and tourism-related industries to adapt business models and pivot to domestic tourism. 

Aviation: faltering recovery 

In the first five months of the year, 20.1 million passengers travelled through Heathrow airport, the UK’s largest airport, compared to 2.9 million passengers during the same period last year. Heathrow reopened Terminal 4 to rebuild post-pandemic passenger capacity and align supply with anticipated near-term demand. Heathrow revised annual passenger forecast up to 54.4 million in 2022, representing two-thirds (67%) of 2019 levels. “Demand continues to be driven by outbound leisure at weekends, school holidays and bank holidays, as people take advantage of the removal of restrictions and utilise travel vouchers from cancelled trips over the past two years,” Heathrow airport reported in an investor report dated 23 June.

In the broader travel sector, TUI Group, the world’s largest tourism company, said summer holiday demand is expected to reach 85% of 2019 level, as eased Omicron-related travel restrictions increased pent-up demand for beach holidays, excursions, activities and tours. However, in recent weeks, staff shortages have failed to keep pace with resurgent demand causing hundreds of flights across the UK to be cancelled, notably during the Queen’s Platinum Jubilee week and half-term school holidays. Staff shortages led to familiar airport disruption for travellers, sapping the recovery momentum. 

Gatwick, the UK’s second-largest airport, warned companies based at Gatwick are operating “with a severe lack of staff resources over the summer holiday period,” which, if not addressed, will lead to “poor standard of service, including more queues, delays and last-minute cancellations”. TUI, the Anglo-German holiday company, said it planned to cancel six flights a day from Manchester until the end of June, due to acute staffing shortages, according to a Financial Times report. It is a reminder of how fragile the recovery remains. TUI’s CEO, Fritz Joussen, resigned last week, claiming the travel company has successfully “overcome the existential crisis” it faced.

Union strikes threaten recovery further

Labour problems have been compounded by union strikes over pay at airlines across the UK and mainland Europe, as spiralling inflation and the rising cost of living have inflamed employer-employee tensions over pay cuts. Last week, around 700 British Airways (BA) check-in crew at London’s Heathrow airport agreed to strike in a dispute over pay, with unions promising “severe disruption” timed to coincide with summer school holidays. 

Trade union Unite is demanding equitable treatment for BA workers. The union claims while wages were cut by 10% for all BA staff during Covid-19 travel restrictions, management pay has since been restored to pre-pandemic levels, while workers’ pay has not. The claim is emblematic of deeper tensions. Since the onset of the pandemic, some workers across the aviation and travel sector lost their jobs or were forced to accept lower wages; now, demand is returning, and the cost of living has spiralled, real wages are not keeping pace. A similar dispute at Ryanair prompted cabin crew to begin a three-day strike in Belgium, Spain and Portugal last week (24 June) over pay and working conditions, according to Reuters. 

In Europe, staff shortages are also a major problem in the aviation sector, not due to workers’ pay demands but a new wave of coronavirus infections. Deutsche Lufthansa recently cancelled 2,200 flights after recent infections worsened staffing shortages, according to Bloomberg. The German airline has scrapped domestic and European routes for July and August, which followed 900 recent flight cancellations. Rehiring airport security personnel is also slowed by government requirements for security clearances, adding to airport disruptions and prompting airlines to warn passengers to expect delays, potentially dampening enthusiasm for travel. Recruitment challenges for travel businesses have worsened due to an absence of sector-specific government support and the withdrawal of furlough support ahead of the lifting of travel restrictions, according to ABTA, the travel agent and tour operator trade association, in a submission to a Business, Energy and Industrial Strategy (BEIS) Select Committee.

For airlines, labour costs must be weighed alongside competing cost pressures. It is a lengthening list, including fuel and food prices, supply chain disruptions, high fixed infrastructure and operational costs, ESG compliance costs, rising debt service costs due to higher balance sheet leverage and interest rate hikes. There is a balance in passing on these costs to consumers to sustain margins without destroying demand, which hinges on the evolution of Russia’s war in Ukraine, potential new Covid-19 outbreaks, and China’s pandemic policy response.

In the hotel sector, domestic and short-haul tourism is recovering, while long-haul business travel – the most lucrative segment – remains weak. Accor’s CEO, Sébastien Bazin, told delegates at the Qatar Economic Forum that 25% of international cross-continent business travel “is lost forever”. He argued that the efficacy of conference meeting software tools, such as Zoom and Teams, had proved so effective that corporate approval for long-haul business travel was dimmed in the context of spiralling inflationary pressures. Hotel operators are repositioning business models. Hotels that survive will be those which develop a hospitality ecosystem with high-value services and experiences for local communities.

The financial trade-offs for businesses across the travel sector are difficult to balance. Ultimately, operating costs are rising faster than improving revenues and, in many cases, cannot be absorbed. The longer-term consequences include a more protracted pivot to domestic travel demand with the potential for further sector distress and insolvencies, particularly as government support schemes have now unwound. Infrastructure-intensive businesses with unavoidable high-fixed costs, an unreliable improvement in the outlook for demand, and unionised workforces remain most vulnerable. 

If your company is affected by these issues and would like to discuss financing options available to your business – from refinancing to new (equity or debt) capital injections, to solvent sales and advice on how to adapt business models, but not hesitate to get in touch with a member of the specialist BTG Advisory team today.