For a long-term recovery strategy in the travel and leisure industry to have any chance of sustained success, the immediate and most pressing objective is survival. Future growth opportunities will remain just that without a stabilized financial position.

Companies in distress must double down on stopping the bleeding, prioritizing all measures that focus on cost consolidation to arrest or least minimize cash burn in underperforming business units. This could include putting underperforming core businesses into minimum viable operations, exiting or restructuring underperforming non-core businesses and optimizing cost structures and working capital. A strategy to attempt to “grow” out of a crisis as severe as this one, implementing just incremental changes along the way, could in fact make the situation only worse.

The need for cash—and how to capture it internally

Companies will need additional funds in the short to mid-term. In the fight to survive the current crisis, many will need to further adapt cost structures and business models which will require additional one-off payments and cash. Deferred payments such as leasing, rent and non-critical maintenance will also need to be balanced.

Traditionally lower travel activity during winter months, together with the continued market effects of COVID-19 has forced many travel companies to re-finance their operations in order to bridge these fallow months.

Equity financing in the shape of government injections may prove to be unsustainable and private investors’ appetite for risk in this space could be either a non-starter or unlikely to suffice to compensate public investments.

As a result, financing operations from within is likely to be the required approach, firstly to stabilize business operations and secondly to attract more private investors by building confidence in management’s ability to navigate the crisis.

Taking a portfolio perspective

In practice, an increased internal financing of operations means:

  • The reduction of cash burn in financially underperforming parts of the business to a minimum
  • Maximizing cash generation in the remaining financially performing business units
  • The use of additional generated cash flows to further build a company’s profitable core business and prepare it for the future

Reviewing internal re-financing options with a portfolio perspective quickly highlights how small adjustments to cost structures or working capital are not enough and that bold approaches for whole business segments are the required route to adequate internal financing

This viewpoint can be established by a company clustering business parts such as divisions, profit centres, product lines or operational parts alongside their strategic value to it and their operational cash flow.

alixpartners world in motion series portfolio review 2021

Assessing underperformance

Underperforming core business segments have been most significantly impacted by the pandemic and are associated with negative operational cash flows and a reduced likelihood or recovery within the timeframes of other business units. Examples might include long-haul flights from Frankfurt to New York or cruises in the Caribbean.

Moving these units into a mode of minimum viable operations will put all major operations on hold or reduce capacity to a bare minimum to meet current demand. Examples include grounding major parts of a fleet (e.g. aircraft, cruise ships) and reducing the service offering.

While this minimum viable operations model reduces variable costs significantly, additional measures must be taken to reduce the usually high fixed costs of travel companies. For example, renegotiating major contracts such as real estate and leasing, where a reduction in fixed expenses for the coming months could be exchanged for profit or revenue participation after the pandemic has subsided. In addition, major investments should be further postponed unless they become mission-critical for business continuity (e.g. health and safety).

Exit or restructure underperforming non-core business

Given the severe impact of COVID-19 on many travel companies, the need for bold and tough decision-making has been thrust upon management. This particularly applies to underperforming business segments that are not of high enough strategic relevance.

The objective in these cases is to stop the cash burn instead of merely reducing it and management essentially faces essentially two options:

  • Selling the business to stop the cash burn and potentially generate additional internal funds, or
  • Restructure the business to stop the cash burn but invest in restructuring costs

When evaluating both options, companies should review available divestment options and carefully balance expected purchase price discounts in times of crisis times against restructuring costs, prospects, and social implications associated with a restructuring.

Indeed, it may well be possible to, for example, re-deploy staff to other companies (especially blue-collar employees in, say, catering or ground handling) as a means to effectively manage cash burn for a particular business. We have seen other innovative and creative approaches in the market to reduce cost and prevent dismissals, including the transformation of travel agencies to vaccination centers, with call centers taking on the management of vaccination appointments. Companies have also seconded staff to companies with a COVID-driven capacity need such as online retailers.

For some, it might even make sense to review the options of optimizing business structures through self-administered insolvency processes. This can help to significantly accelerate restructuring timelines and reduce legacy cost structures. However, it should be carefully balanced against potential reputational challenges.

"While optimization of costs, organizational structures and working capital are also critical, a key focus should be put on marrying products and services to changes in demand."

Maximize cash from performing non-core business

To increase operational cash flow, management should focus on initiating tactical measures to maximize cash flow from performing non-core businesses. This could be used to cross-finance remaining cash burn of other businesses and even to push growth investments in strategic business segments as a next step.

Possible levers to maximize operational cash flow include optimization of product offerings, such as a re-focus on high-margin products, renegotiation of purchase prices at suppliers and selection of less costly inventory alternatives. In addition, prices should be carefully reviewed and adjusted upwards where feasible to maximize profits. Spend committees should be implemented to closely monitor and sign off spend to ensure that expenditure is minimized where feasible. In addition, required overhead such as workforce, real estate footprint and others should be reduced to a workable minimum.

Grow and maximize value of performing core business

The performing core business comprises strategic business activities that contribute positive operating cash flow. They form the foundation of business activities that travel and leisure companies should pursue and the basis of the companies’ value. Examples might include in-country tourism and profitable business short-haul flights between major hubs.

While optimization of costs, organizational structures, and working capital are also critical, a key focus should be put on marrying products and services to changes in demand. We have seen accelerated trends in online booking and communication as well as a consumer re-focus on in-country tourism offers.

In addition, go-to-market approaches should be optimized to expand reach and win new customers to set the basis for generating additional revenue. As the world takes its time to rediscover its freedom of movement, companies should also be analyzing and preparing potential growth investments to further build the strategic business.

alixpartners world in motion survive stabilize maximize 2021