Much has changed in the last five weeks or so, not least, that I have learnt how to work remotely from home, but also that the original soundtrack of ‘We are in this together’ is increasingly becoming a narrative of ‘I have to look after my own business’.
It is that very change that I predicted at the beginning of March, when COVID-19 started to destroy the very fibre of our tourism industry globally. One cannot deny the logic, because charity starts at home and commercial/financial survival and sustainability supersede anything else that can possibly be important.
However, I fear there are many unintentional consequences that might be overlooked and I decided to write another essay for your reading ‘pleasure’. As always, I would love to hear opinions, contrarian arguments and, of course, constructive criticism.
Cancellation fees and business ethics
The first topic that raised its head was cancellation fees charged by suppliers as COVID-19 heated up, countries closed borders, airlines stopped flying, travellers were limited to their own homes or fell ill – culminating in our own country closing its borders and ultimately enforcing a lockdown.
What is important to understand is that some DMCs act as principal and some DMCs as an agent, both for the supplier and/or the overseas distributor, normally a wholesaler. In both cases there are very different legal arguments over the enforceability of such fees, the whole force majeure disaster zone, commercial and common law in multiple jurisdictions, and no, I won’t venture on to the thin ice of giving my opinions to these items here. I will leave this to the courts of law over the next few years.
I will, however, venture into the area of business ethics. How can it be right to charge for something that the consumer has been prohibited from consuming as a result of being locked in his country of origin, disconnected through airline capacity reduction or locked out of the destination he or she wanted to travel to?
How would terms and conditions that were never designed for the current dramatic circumstance even remotely be consulted for what the financial outcome of a transaction or rather the change thereof should be? Common sense must prevail, anybody looking at their contracts at the moment surely is losing the moral and ethical high ground forever.
The second topic that occupies the minds of DMCs – I will leave it to OTAs and OTOs to comment on their own facts. Distributing product through a traditional wholesale/retail channel are the changed trading terms of some suppliers mainly in the luxury game lodge segment focused around prepayment structures with or without an escrow process.
It is important to understand margin ability and cash flow implications as a result of these changes. DMCs in the value chain have by far the lowest margin opportunity, as a minimum of 25% of the (mostly too low already commissions) are passed on to the overseas distribution mechanism in order to create a rate equilibrium when it comes to the consumers’ choice.
Cash, as a result of internationally accepted requirements and sometimes consumer protection laws, generally can only flow 30 days after the guest has travelled. The question that has to be asked is, how can the one link in the chain that has the lowest margins rightfully be expected to carry the negative cash flow at high working capital gearing costs?
Of course I understand why this is being implemented now, but the unintentional consequence that must be highlighted is that entities changing their terms and conditions might lose the majority of the potential bookings generated in the traditional channel – and maybe it is worthwhile to consider that, as a result of COVID-19, we will see a material level of reintermediation, which makes us ‘dinosaurs’ more relevant for the future climb-out phase.
To rate freeze or not to rate freeze?
A question that is asked frequently in conjunction with our request to consider a rate freeze is the impact of the substantially devalued rand. Unfortunately for a period of at least 12-18 months, there is no benefit to the overseas wholesalers.
The reason is not glaringly obvious. It is a function of wholesalers being forced to take forward foreign exchange cover in order to be able to guarantee selling prices in their home currency. As a result of the volumes having evaporated to zero, these forward contracts have not been used up and now create substantial overhangs that will take that amount of time to be used up, especially at the currently expected forward volumes.
Lastly, why would we currently recommend a rate freeze when so many properties and transport suppliers have to endure an extraordinary amount of distress. Remember, DMCs are a margin business. The more we pay for something the more we earn, so our guidance is costing us money too.
There are a number of reasons:
- Most clients retain their current unused sales collateral and, since they are tied into their forex contracts, need the same land cost to keep the same home currency cost.
- We expect a material increase of the air component of a package costs, which land components will have to make up.
- Dynamic rates will trade materially down as a result of prolonged low occupancies continuously undercutting static rates and an increase will simply make the continuous re-negotiations unworkable.
- And, most importantly, many competitor destinations all over the world are waiting in the wings to literally have our breakfast once there is some level of international travel coming back.