Guide company altering itineraries due to worldwide virus outbreak - The FTI bankruptcy does not spell doom for the travel industry.
In the span leading up to its insolvency, the travel agency FTI showcased its sales: a whopping 4.1 billion euros, claims the company, in the 2022/2023 fiscal year. This figure is impressive, but it's not all it seems. A large turnover shouldn't mean much in the travel industry due to the frequent disappearance or nonexistence of profit.
The last financial statement available for FTI from the 2021/22 fiscal year had a turnover of 3.7 billion euros, but there was a loss exceeding 90 million euros. This is partly due to the company's heavy debt, but even healthy companies make it clear that there's a major difference between turnover and income. Couple this with the fact that the largest German travel agency, TUI, had a 20.7 billion euro income in 2022/23, resulting in just over 1 billion euros in profit.
Can a business model with such low margins survive in the long run, or has FTI's bankruptcy highlighted a fundamental problem in the industry?
"FTI is an anomaly" says Torsten Kirstges, tourism economics professor at Wilhelmshaven's Jade University, in a Capital interview. "Pauschalreisen, travel agencies, and organizers have been declared defunct many times, but nothing significant has resulted. The industry has weathered several crises, and so will there be no more bankruptcies due to this event." Travel demand has skyrocketed after the pandemic, with other organizers breaking records, namely in revenue.
At the end of the day, all that's left for them is the fee for the travel trip. Travel agencies typically buy contingents from service providers such as hotels, airlines, and bus companies which they can use until a certain point beforehand. They then construct a cohesive trip from these components and sell their bundle to the end customer.
"Travel agencies' margins typically fall between 25 and 30% of the trip's price, provided that the package trip is well calculated and the organizer occupies a decent market position," explains Kirstges. The travel agency's commission is then subtracted, leaving a net profit of around 10 percent. FTI's margin was probably even lower. "FTI was more cost-aggressive than others and this aggressive strategy is now catching up with them." They were only able to execute this strategy while acquiring enough volume, which FTI couldn't in the recent years.
FTI could not reclaim its lost trust with customers and partners
Contrary to their competition, FTI could not capitalize fully on the renewed travel frenzy. The business's reputation took a hit from a data scandal where booking numbers and competitor data were disclosed. There were numerous headlines critical of the agency, which also highlighted their financial instability and the pre-trial detainment of former managing director Ralf Schiller that surfaced at the beginning of 2023. Marija Linnhoff from the Association of Independent Travel Agents, VUSR, recounted in February, "My colleagues at travel agencies no longer sell FTI products unless a customer expressly requests it." By year's end, there was news that hoteliers in target locations had received up to 200 million euros through intermediaries which may hint at FTI's unreliable status.
Missteps and the coronavirus pandemic are believed to have been instrumental in FTI's failure, according to Kirstges. Nonetheless, this insolvency doesn't indicate the failure of travel organizers or possibly the tourism industry entirely. Instead, the market is expected to consolidate, as other organizers fill the void FTI left behind. This trend has already become plain.
"It's not necessarily more costly to book through a travel organizer than to do everything yourself," Kirstges continues, "as the organizer also benefits from buying in bulk to secure better deals than a private individual." Additionally, travelers have a safeguard through the German Travel Security Fund DRSF which kicks in when a travel organizer goes belly-up, as is currently the case with FTI.
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Despite FTI Tourism's bankruptcy, a tour operator known for its high turnover but questionable profit margins, the travel industry remains unscathed. In fact, other tour operators have flourished post-pandemic, breaking revenue records in the tourism sector.
The insolvency of FTI Tourism might prompt consolidation in the industry, as other tour operators fill the void left behind, benefiting from bulk purchasing and offerings such as the German Travel Security Fund DRSF, providing a safeguard for travelers.
