Profit warnings issued by FTSE Travel and Leisure companies more than doubled in the first three quarters of 2022 compared to the same period last year, according to EY-Parthenon’s latest Profit Warnings report.
In total, 22 profit warnings were issued by FTSE Travel and Leisure companies in the first three quarters of 2022 compared to nine in the same period of 2021 and 11 in the whole of 2021. The sector issued nine warnings in Q3 2022 alone, the highest quarterly total since Q2 2020, with rising costs featuring in six of the sector’s warnings.
Meg Wilson, Turnaround and Restructuring Partner at EY-Parthenon said:
“The travel and leisure sector had been the beneficiary of pent-up consumer spending post-pandemic. However, the disruption at UK airports over the summer dampened the recovery for many travel operators, while rising costs, pressure on disposable incomes and falling consumer confidence look set to intensify the sector’s challenges as it approaches a vital sales period.
“Post-Christmas is traditionally when tour operators start to see deposits for summer travel coming in, however, consumers have been increasingly taking a wait and see approach, so only time will tell how bookings will land over the next quarter or so. With developments in ATOL regulation expected to be outlined in the coming months as well, there is an interesting period ahead.”
Challenging winter for hospitality sector
Despite a post-pandemic bounce in demand, the hospitality industry has been facing significant challenges, even before the cost-of-living crisis. Many businesses have struggled to recruit and retain staff to meet demand, while high inflation has required businesses to make difficult decisions about whether to pass these on price rises to customers.
Christian Mole, EY UK & Ireland Head of Hospitality & Leisure, said:
“Many hospitality businesses will be facing a make-or-break Christmas and whilst pubs have historically been counter-recessionary and protected from economic downturns, rising energy, food and labour costs have all had significant effects on profitability.
“The 2022 World Cup and festive gatherings are likely offer some respite before a potentially difficult January and February. Hospitality businesses need to use the festive period of high demand to build operational and financial resilience to face more challenging times ahead.
“This may include measures such as simplifying food menus, reducing off-peak opening hours and flexible labour scheduling. However, the reality is that many businesses have already been doing this since and there is very little fat left to trim. Finally, and perhaps most intangibly, businesses need a reason to exist, whether that’s strong customer loyalty, a unique location or food offering such that, even if consumer budgets are tight, people will still want to dine or drink with you.”
Consumer-facing sectors most affected
Across all FTSE sectors, 86 profit warnings were issued between July and September 2022, compared to 51 in the same period of 2021, an increase of 69% and a 34% increase from Q2 2022 when 64 warnings were issued. The report reveals that 57% of warnings during Q3 cited rising costs, while 23% were prompted by labour market issues.
Consumer-facing companies issued 44 warnings in total – the highest quarterly total since the start of the COVID-19 pandemic. Cost issues featured in 70% of all consumer-facing sector warnings with many companies saying that they are struggling to pass on price increases to customers, while falling consumer confidence and changing buying behaviour featured in 50% of warnings.
The three warning ‘danger zone’ now contains 28 listed companies who have issued their third consecutive profit warning in the last year, compared to 18 at the end of Q2 2022. On average, one-in-five companies delist within a year of their third warning, most due to insolvency.