As suppliers across the industry are rewriting their terms and conditions and issuing new rate contracts for 2021, the matter of deposits and cancellation policies remains a contentious issue. Tour operators and DMCs are also revising their policies, and there is a fine balance between protecting our financial interests and remaining flexible so we don’t chase tourists away with harsh terms and conditions.
In recent weeks I’ve seen a number of revised rates contracts that were even more strict than before COVID-19. Non-refundable deposits. Full payment 60 days before travel. Cancellation policies that do not offer flexibility with regard to COVID cancellations or which define COVID cancellations too narrowly. These clauses will chase away what little business we can secure during this uncertain time.
To unpack this delicate balance, let me highlight the perspectives of some of the different players in the chain.
The customer faces very uncertain times. It’s impossible to purchase travel insurance that includes COVID cancellation cover. Travel advisories remain in place, with no indication of when they will be lifted.
Lockdowns may be reintroduced at any time if we see another wave of infections – both in the source market or the destination country. A number of travel companies have already been liquidated, and they worry that the lodge or tour operator may no longer be around by the time they want to travel. This is a legitimate risk and concern.
Customers are therefore very hesitant to part with their money and have an aversion to a large deposit or commitment fee, particularly if that fee is non-refundable. They are likely to book at short notice rather than far in advance, and are not comfortable paying in full 60 days before travel. They also want to know that their payment is financially protected, and that they will get their money back if they are forced to cancel due to COVID, or if the agent or operator goes bust.
The overseas agent or operator
The overseas agent or operator needs to address the customer’s concerns in order to get the business. So they want to offer flexibility and reassurance to the customer, but are constrained by the terms imposed by the DMC or suppliers.
The biggest risk faced by the overseas agent or operator (particularly in the EU and UK) is that the package travel directives force the agent to provide a full refund to the customer if they are prevented from travelling due to COVID.
This becomes problematic if the suppliers insist on a non-refundable deposit or refuse to refund advance payments. Many agents have had to pay full refunds to customers during COVID while facing 100% cancellation fees from suppliers. This has caused a number of bankruptcies already.
The local DMC or inbound operator
The local DMC or inbound operator is not subject to the package travel regulations, but their customer (the overseas agent) is. So they get pressure from their overseas agents to ensure cancellation policies are flexible and that they will get all their money back in case of an unavoidable COVID cancellation.
In addition, they also face the risk of supplier failures. A number of suppliers have already been liquidated, and went under with advance payments. Who will be responsible for that loss if supplier failure insurance doesn’t cover it? The risk of supplier failure is a very real ongoing concern throughout the value chain, and remains a growing risk the longer borders remain closed and travel advisories remain in place.
Apart from money paid to suppliers, the DMC or operator also faces their own upfront costs. Most of the work is done in advance, salaries have to be paid, credit card merchant fees, rent and other overhead costs are incurred regardless of whether the customer travels or not. (This is true for the overseas agents or operators as well.)
The product owner or accommodation provider
Product owners need a deposit or commitment fee to avoid no-shows. Inventory is limited and rooms cannot be held provisionally for longer than necessary while turning other guests away. Many expenses are incurred in advance of travel, regardless of whether the customer travels or not.
Stock must be purchased, lease fees, community fees and traversing fees must be paid, staff commitments are made. Balance payment or full payment at 30 days prior is therefore not unreasonable.
Their cancellation policy outlines the time frame in which the booking can be cancelled without penalty (or with minimum penalty), right up to the 100% cancellation penalty window (typically 7-30 days before travel, depending on the supplier).
How do we balance all of the above interests?
The first and most obvious way forward is to have a flexible COVID cancellation policy in place. We need to ensure that the customer’s key concerns are addressed and that everyone can get their money back in case of a COVID cancellation.
Of course, everyone in the supply chain faces certain unavoidable, upfront expenditures. Salaries have to be paid. Work has already been done. But this does not justify a 100% cancellation fee. In case of a COVID cancellation, it does not even justify a 20% non-refundable commitment fee, because someone else will have to absorb that loss. At best, a 10% non-refundable fee can maybe be justified. That’s better than losing 20% or 50% or 100%.
In speaking to other operators and agents, I pick up that most would like to see the following in their STO contracts with suppliers:
- A reasonable deposit or commitment fee (10-20%) to confirm a booking, of which not more than 10% is non-refundable. A 20% non-refundable deposit is too much; it will chase customers away.
- Balance payment or full payment not more than 30 days before travel date. Nobody wants to pay in full 60 days before travel in the current uncertain climate.
- Flexible COVID cancellation policy that offers a full refund if COVID prevents the guest from travelling (excluding personal choice or disinclination to travel).
- Reassurance that advance payments will be held in trust or escrow, so they cannot be used to pay operational expenses or salaries before the travel date, and will not be disbursed to priority creditors like banks or SARS (South African Revenue Service) in the event of liquidation.
If we can get these basics right, we have a better chance at recovery. If we don’t get this right, we’ll be chasing tourists away with our revised terms and conditions.