Outlook Remains Challenging For UK-Listed Travel And Hospitality Companies Despite A 50% Fall In Profit Warnings

UK-listed travel, hospitality and leisure companies issued 90% fewer profit warnings during the first three months of 2021 than they did during the equivalent period in 2020, but they continue to face a challenging outlook, according to the latest EY-Parthenon analysis of profit warnings.

Between January 2021 and March 2021, FTSE Travel and Leisure companies, which includes restaurants and bars, recorded only five profit warnings, issued by 8% of the sector. This compares with the record 50 issued in the equivalent quarter in 2020, when the pandemic began. It is also a decrease on the 11 profit warnings issued in the previous quarter, between October 2020 and December 2020.

Christian Mole, EY UK & Ireland Head of Hospitality & Leisure, comments: “The hospitality sector has clearly been one of the most affected by restrictions on social contact, with almost four in five UK FTSE Travel and Leisure companies having issued a profit warning since the start of 2020. But restrictions are easing, and the economic outlook is improving. Consumers have responded to outdoor hospitality very positively, demonstrating that there is significant pent-up consumer demand. However, due to a lack of suitable outside space, only a relatively small proportion of sites have been able to open, and the full reopening of the sector on 17 May will likely prove a bigger test of the balance between supply and demand.”

“Hospitality operators need to recognise where there has been a permanent shift in consumer preferences and be ready to accommodate these changes. This may require action on staffing levels and on choosing which sites to preserve. A likely permanent shift towards increased working from home may lead to decreased footfall in some city centre locations, leaving some sites unviable in the long-term, even when they can fully reopen. The more businesses can adapt and innovate, the greater their likely resilience.”

Insolvency danger zone

Despite the decrease in warnings, FTSE Travel and Leisure is still the sector with the second highest number of profit warnings in Q1 2021, behind only FTSE Retailers which issued eight profit warnings. Most FTSE sectors saw significant decreases in profit warning numbers at the start of 2021 as the global vaccines roll out, and the lessons learnt in previous lockdowns, led to improved forecasts.

A total of nine companies, representing 14% of the FTSE Travel and Leisure sector, have issued at least their third profit warning in a 12-month period since the start of March 2020, and nearly all (eight) used the Government’s jobs furlough scheme in January. None of these companies have entered administration, in contrast to the 15-20% figure EY-Parthenon says it would normally expect to see doing so within a year of their third warning.

EY-Parthenon analysis demonstrates that government support, combined with a moratorium on winding-up petitions, has significantly reduced corporate insolvencies over the course of the pandemic: more than 6,000 extra companies would have entered an insolvency procedure by this point if insolvency levels had continued on the same trajectory as pre-March 2020.

Lisa Ashe, EY-Parthenon, Turnaround and Restructuring Strategy Partner, said: “A significant increase in insolvencies could have a wide-ranging impact on the wider business network. Stress is likely to spread up and down supply chains if businesses struggle to pay suppliers, or if vital parts of the chain stop working. Consequently, one business that introduces changes to become more resilient, has the potential to strengthen the wider business ecosystem.”

Government support ending

In the coming months, a variety of factors will affect financial planning for businesses. The furlough scheme is due to end in September 2021; deferred VAT and loan repayments have already begun; and, at the end of June, both the commercial rent moratorium and the suspension on creditors issuing winding-up petitions (where non-payment of debt is COVID-19-related) are set to expire.

Christian Mole added: “The hospitality sector faces tough choices as it emerges from lockdown. Social distancing requirements will continue to limit capacity until late June at least, with the Government still reviewing whether restrictions will need to remain beyond the summer. Businesses will also face potentially higher labour costs, given the additional need to check-in individual customers and to provide table, rather than at-the-bar service. The possible introduction of vaccine passports to obtain entry may accentuate these challenges, and the sector is hoping this will be acknowledged in the Government’s forthcoming consultation report on COVID-status certification.

“Companies also face the end of government support, with the end of the rent moratorium in June being the most significant challenge. Additionally, the end of furlough is likely to come ahead of a full recovery in demand. This is especially the case for hotels, where we do not expect revenues to recover to 2019 levels until 2024, and business travel is unlikely to fully return to pre-COVID levels.

“We’ve reached a crossroads in this pandemic. While there is still breathing space provided by government support, companies need to take the opportunity to understand where and how they need to reshape their operations in order to put their businesses on a firm financial footing.”