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Travel: How can finance chiefs justify it?


In the final in the series: a look at the need to adapt to survive

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As in most recessions discretionary spend is the first to go. Travel usually falls under that category and with today's telecommunications advances like Skype it's getting harder and harder to justify travel.

Travel spend, particularly business travel budgets have been slashed and slashed again as the UK entered its second recession in less than three years.

Like consumers, businesses see travel to all but the most crucial appointments as one of the first targets when belts must be tightened – a reality that makes the travel and tourism industry a challenging place to be in times of economic uncertainty.

And while we are certainly living through times of economic uncertainty, other shifts, such as consumer buying behaviour and advancements in technology and communication, are having just as big an impact on the sector.

Take FTSE-250 travel company Thomas Cook. A year ago, its share price was hovering around the 150 pence mark. Today, its shares trade for just 18 pence; a performance that has claimed some major scalps. CFO Paul Hollingworth resigned after he had finalised a debt refinancing deal in early May, while CEO Manny Fontenla-Novoa stood aside last August, following a series of profit warnings and the initial share price collapse.

So, what went wrong for a business that’s been around for more than 170 years?

A particularly troublesome trading period, which saw the impact of the eruption of Icelandic volcano Eyjafjallajökull combine with a worsening economy, certainly hit where it hurts. But this is only part of the story. The travel and tourism industry in general has been through a fundamental shift, driven by changing customer behaviour and the rising power of the internet. In essence, Thomas Cook had an enormously difficult time adapting to this new environment, and, as a result, investors voted with their feet.

But Thomas Cook is only one side of the story. Elsewhere in the sector, better stories are to be heard – such as the world’s largest hotel company by number of rooms, Intercontinental Hotels Group (IHG). Instinctively, one would think that the hospitality sector would be in considerable trouble given the economic environment – but this isn’t the case, and some companies continue to prosper.

“Despite the challenging economic backdrop, I’m optimistic about the outlook for 2012,” says IHG chief financial officer Tom Singer. “I’m confident that our... resilient business model will continue to deliver increased market share and high-quality growth.”

Moving with the times

Singer was speaking following the company’s first quarter trading update in early May, and was bullish about future growth opportunities. The interesting point is, however, that Singer was talking about new markets, new concepts and new products as a way to position the business for a changing world.

“Greater China continued to be our strongest market, where revenue per available room was up 11.9 percent,” IHG’s Singer explains. “IHG launched two hotel brands which represent a first for the industry.

In February, IHG launched EVEN Hotels as the “first mainstream hotel in the US focused on wellness”. A month later the group launched Hualuxe Hotels and Resorts – “the first upscale, international hotel brand designed for Chinese consumers”.

Both are bold moves – the group has committed to investing up to $150 million over the next three years to help establish the EVEN brand in key US cities while Hualuxe is also a multi-million pound investment. But, crucially, they are also clear and determined efforts to take advantage of growing industry trends and markets. Indeed, over the next three years, IHG expects an extra 52,000 rooms to open in China, representing 30 percent of its global pipeline.

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Travel: How can finance chiefs justify it?
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