Shares in online holiday retailer On The Beach (OTB) soared over 25% to 251p as it explained to the market why it’s in a better place than airlines and tour operators, such as TUI (TUI) and Jet2 owner Dart (DTG:AIM).
It comes as the company scrapped its interim dividend and reduced its marketing spend to almost nil as it adapts to the coronavirus crisis.
Monthly cash costs were now less than £2m, the company said, while suspending its financial guidance for the year to 30 September 2020.It added that its chief executive Simon Cooper was forgoing his salary and its board had taken a 20% pay cut.
The company had recently reached agreement with its bank to extend the term of a £50m credit facility to December 2023. Covenant tests were reset for all periods up to and including June 2021.
‘ONE TWENTIETH THE COSTS OF RIVALS’
In a statement, On The Beach detailed how it has no fixed commitment to pay for hotel rooms or airplane seats, unlike tour operators.
Providing context, it explained how a tour operator or airline will generally have an ‘almost immovable committed inventory cost’ comprising aircraft and/or hotels, and infrastructure cost of 60-70% of its aspirational total sales with or without any demand.
However an online travel agent like On The Beach, which doesn’t have any inventory commitment, only incurs inventory costs on each sale made.
Under normal conditions it will have an underlying operating cost of approximately 8% of sales of which almost 70% is flexible marketing spend.
If, like in the current scenario, demand falls away completely the company said its fixed cost base will drop to around 3% of aspirational sales, or one twentieth of the costs of a similar sized asset heavy operator.
READ MORE ABOUT ON THE BEACH HERE
Perhaps more importantly in the current scenario, the company continued, it is also the only listed UK travel business that operates a fully ringfenced customer trust account in which customer funds are held until the point of travel.
That means unlike the majority of online travel agents, tour operators and airlines, it doesn’t rely on cash received for forward bookings to trade.
It added that money received for holidays cancelled by a closure of airspace can be repaid to customers in cash, with ‘limited impact’ on its working capital.
‘INDUSTRY NEEDS TO WITHSTAND FUTURE SHOCKS’
Cooper said the travel industry is ‘prone to shocks’, whether that’s global recessions, terrorist attacks, natural disasters or major airline failures for example.
Against the backdrop of ‘impossible market conditions’, he added that the resilience of an asset-light business model becomes clear.
Cooper said, ‘The benefits of using a trust account structure (as opposed to the use of customer funds for working capital), become obvious, for consumer protection, for the financial stability of the business, and ultimately for the protection of the taxpayer.
‘It would appear obvious that, as an industry, we need to reflect on financial protection and on how we can make our industry robust enough to withstand future shocks.’
