Travel industry risk management is the process of identifying, measuring and reducing the financial exposures a travel business carries between taking a customer's money and delivering the service. For most UK travel businesses, one of the largest of those exposures sit with the providers they rely on to deliver trips.
In this two-part series, we explore supplier and counterparty risk, including exposures created by the businesses you work with, and market and external risk, including economic downturns, geopolitical disruption and currency exposure.
Counterparty risk is the risk that someone you have a financial arrangement with fails to meet their obligations. In the context of the travel sector, this might be a supplier that goes insolvent before they deliver the services they are contractually obligated to fulfil.
Almost every business operating today carries some level of counterparty risk. However, travel businesses carry more because of the way the sector works:
Customer funds are held for weeks or months before trips take place, making it the travel organiser's liability if something goes wrong between payment and delivery.
Customer payments move through agents and booking platforms before reaching the organiser. Each handover is a point where funds can be delayed or lost due to insolvency.
A package might combine flights, accommodation, transfers and excursions from several different travel companies. According to the Package Travel Regulations (PTRs), the organiser is legally responsible for delivering all of them, but has no say in how those companies manage their finances.
If you are the travel organiser, when a trip can't go ahead due to supplier failure, customers who paid by card may choose to reclaim their money from their card issuer. That turns a supplier's failure into a claim against your merchant account.
Supplier failure happens when a business you've contracted to deliver a component of a trip, such as a hotel, becomes insolvent. For a travel organiser, it is often the single biggest counterparty exposure, because suppliers are usually paid in advance.
A single supplier failure can put immense strain on a travel organiser. Under the PTRs, the responsibility to fulfil the booking is with the business that sold it, whatever caused the failure.
The organiser has to deliver the trip with a different supplier or refund the customer, and sourcing alternatives at short notice usually comes at a hefty premium. If the customer is already abroad and the trip can't continue, the travel organiser has to manage the immediate and unexpected costs of getting travellers home.
This is all happening while the money already paid to the failed supplier is almost certainly gone. In an insolvency situation, deposits are unsecured debts and recovering the funds is unlikely.
The more your business relies on one supplier, the more damage its failure can do. Maintaining several supplier relationships limits the damage and gives you alternatives you can call on in the event of a supplier failure.
Before you sign a contract with a new supplier, assess their financial stability using filed accounts, credit ratings and litigation history, and keep monitoring their financial standing throughout your partnership.
To protect your business from the financial troubles of suppliers, negotiate shorter renewal cycles and include a requirement that the supplier regularly makes financial disclosures, allowing you to monitor their ongoing stability.
Even with a diverse supplier base and strong contracts, suppliers can still fail without much warning. Supplier Failure Insurance (SFI) protects you when a contracted supplier becomes insolvent, covering the costs you're now liable for, including:
Find out more: What is supplier failure insurance and how does it work?
Airlines are some of the most fragile partners in the travel supply chain. They are capital-intensive, run on thin margins and are highly sensitive to fuel prices, currency movements and geopolitical events. When an airline fails, it usually happens with little warning and leads to major disruption in the travel supply chain.
When a scheduled airline failure occurs, the travel organiser has to buy replacement seats at short notice and at much higher fares. If there’s no suitable alternative, customers must be refunded, while the money you paid to the airline is lost. For an operator with a large number of customers booked on one carrier, the difference between the original fares alone can run into many thousands of pounds.
Relying on a single carrier means one failure can impact hundreds or thousands of trips. Spreading your seat purchases across several carriers on your main routes limits how many customers a failure can affect. It also means you have working relationships with alternative airlines, meaning you may be able to rebook travellers onto new flights quickly.
Scheduled Airline Failure Insurance (SAFI) covers the financial losses that follow an airline’s insolvency, including:
Find out more: What is scheduled airline failure insurance (SAFI) and how does it work?
When an intermediary fails, you lose customer payments because the failure occurred before the intermediary transferred the funds to you. Travel agents and booking platforms collect customer payments before passing them onto you, and that money is exposed for as long as it remains with them.
If an intermediary collects customer money and then ceases trading before passing it on, you're left in a difficult position. The customer has paid and expects their trip to go ahead, and you're legally obligated to deliver it under the PTRs. However, the money to fund that trip is now trapped inside an insolvent company, and it's unlikely to be recovered for some time, if at all.
Before selling through an intermediary, conduct due diligence to ensure the company has the financial strength to safeguard your funds. Review its filed accounts, verify company registration and check its litigation history. It's also good practice to review these details regularly to confirm the company is still able to fulfil its financial obligations.
Many agents pass on customer payments on a monthly basis. Asking for weekly or twice-monthly remittance means you lose less money should they cease trading. Shorter remittance cycles also make financial problems easier to spot. For example, when an agent that normally pays on time starts paying late, in part or starts asking for longer terms, it can be a sign they're in financial trouble.
Pipeline funds insurance protects the revenue you're owed when an intermediary in your payment chain fails. If an intermediary collects customer money and ceases trading before passing it on, the cover protects inbound funds that would otherwise be trapped in an insolvent company, while you're still legally required to deliver the trips customers paid for.
Find out more: What is pipeline funds insurance and why do you need it?
When a supplier, scheduled airline or intermediary fails, the cost lands on the travel organiser. That's why one insurance policy rarely protects a travel business properly. Instead, cover has to be layered at each point of exposure, and it must align with how your business actually operates.
TMU Management does just this. Instead of off-the-shelf cover, we map your exposure across your entire supply and payment chain, then build robust protection around it. Our approach is driven by years of expertise and insight, and we work closely with you to design cover that meets your regulatory obligations, your operating model and your commercial priorities.
However, the partners you work with aren't the only source of risk. In part two of our travel industry risk management series, we explore how external risks, such as economic downturns, geopolitical uncertainty and currency exposure, impact your travel business.
You can't remove all counterparty risk from the travel sector, but you can reduce the impact it has on your business. Contact the TMU Management team to integrate layered insurance that protects your business from counterparty failure.
If you need insurance that reflects how your business really works, TMU Management is here to help. Our team will assess your challenges, understand your exposures and design a bespoke solution that fits your strategy.
Contact usThank you for your interest in TMU Management. If you have any questions about our company or our services, please feel free to reach out via our contact form, or using the contact details below. We look forward to connecting with you soon!
