Should Travel Companies Merge Amid the Impact of Covid-19?
Sadly, the travel industry has been the most impacted industry in the Covid-19 pandemic. This has led to several companies filing for bankruptcy, requesting government support or taking on new debt and investments which were not necessary only a few months prior. This situation has definitely been tough on the industry and the plans for the future are imprecise. But do travel companies have a better alternative? Should travel companies consider a merger in order to reach solvency and, why not, join forces with other companies in order to form a stronger entity?
The new normality
Merging during an economic crisis is not new. This has helped different industries to continue serving their markets and resurface at the culmination of the crisis. However, the way these merge processes were conducted before, changes completely when the concept of the “new normality” appears.
Social distancing will delay the process of negotiation as we used to know it: both companies’ teams negotiating on a big round table. But it has also shown us the real scope we can reach as companies by using technology and different tools for putting a team to work across the globe.
What options do travel companies have?
Travel companies based in countries like Germany, who´s economic response to Covid-19 has raised the standard as to what is expected from governments after years of paying taxes, can probably weather out the storm. Other companies may be fresh off a new round of funding, while other companies hopefully saved funds for a “rainy day” and are surviving off reserves. But what about all the rest?
While acquisitions are an option, a travel company´s valuation might be tremendously affected, since the value of an asset is based on past returns, IP, stock, and future projections. However, valuing future revenue projections for travel companies is pre-mature at the moment. So for the seller, they might only get a fraction of the dollar if they try to sell now.
Should travel companies merge when the future is uncertain?
Merging two companies into one may help smaller companies gain current stability along with increase future market share, or at least the potential to operate more efficiently. If you operate in a niche travel market with limited competition, a merger could allow the unified entity to grow with less obstacles, due to the disappearance of a competitor.
Another benefit of a merger is what´s known as “economies of scale”. This occurs when a larger firm with increased sales can reduce average costs. Lower average costs enable lower prices for consumers. Or in other words, your customer acquisition cost will decrease, which will allow you to gain more profitability and/or reduce the price of your product/service. This can be manifested in lowering average fixed costs due to increase of volume, purchasing at bulk and obtaining better rates and better loan rates due to larger size of the new unified entity.
Regardless of which specific sector you are in within the travel industry, each sector is dominated by multinational conglomerates, whether it be Hotelbeds and Webbeds in the bed-bank sector or Booking and Expedia in the OTA sector. Joining forces as a unified front will allow you to better compete with industry leaders, especially if the merger also combines additional revenue streams, business models, new technologies and global presence in new markets.
If a merger is not an option for you, think about alliances and ecosystem partners to increase resilience. For example, alliances in the airline industry have been essential to establishing global networks. Coming out of the crisis, the roles of such networks will evolve to solve weaknesses exposed by the pandemic.
Cons of a merger
While there are certain potential negative sides to a merger, such as higher prices for customers, potential loss of jobs, lack of choices for customers and more, during these unprecedented times, a merger might be one of the few options remaining for a travel company looking to survive and position itself to thrive post Covid-19.
Entering a merger should always be done from a position of strength. During the current climate of the travel industry, those capable of doing so from that position are blessed, while others unfortunately might need to address a merger as one of the few opportunities left to survive the pandemic´s impact.