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Flight to quality: dealmaking in the travel industry

Author: Nicholas Neveling

Published: 06 Dec 2023

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The travel industry has rallied strongly after COVID-19 lockdowns and, despite concerns over cost-of-living pressures, the sector is firmly on the private equity deal radar, as Nicholas Neveling reports.

Pandemic lockdowns took a toll on companies across the board, with the travel sector affected more than most, but as international borders reopened, the industry rebounded probably beyond expectations.

According to the International Air Transport Association (IATA), global air traffic climbed 26.2% year-on-year in July 2023, lifting traffic to 95.6% of pre-pandemic levels. Holiday companies have seen bookings soar to levels close to those enjoyed before the world had heard of COVID-19, and industry bellwethers such as TUI reported robust year-on-year growth in summer holiday sales in 2023.

As the industry has recovered, private equity and strategic M&A dealmakers have returned to the sector with more confidence, DC Advisory reporting that UK deal volumes in the travel space for H1 2023 exceeded pre-pandemic transaction volumes from the first half of 2019.

“Travel company performance has rallied remarkably well after the various lockdowns,” says David Wilson, a partner at Panoramic Growth Equity, which has recently invested in the high-end tour operator The Artisan Travel Company. “There has been a huge release of pent-up demand following COVID-19. People have been desperate to get out and to do and see things again.”

landscape mountains snow pine trees lake blue water
Pent-up demand after COVID-19 has seen people seeking adventures in unique travel destinations

Justin Maltz, a partner at Mobeus, which has backed specialist adventure-focused tour operator Active Travel Group for the past five years, adds: “The travel sector does have a track record of bouncing back from disruption. Before the pandemic, there were events such as SARS, 9/11 and the Icelandic ash cloud. The industry has rallied every time.”

But although private equity firms are confident about the travel sector’s post-pandemic prospects, investors are now taking a highly selective approach when it comes to assessing potential target companies.

Handcrafted holidays

Founded in 2002, The Artisan Travel Company operates a portfolio of travel brands that provide specialist destination expertise and tailor-made itineraries. The award-winning company has various niche brands, including The Aurora Zone, the UK’s first holiday brand dedicated exclusively to Northern Lights sightseeing trips. Another of its brands, Activities Abroad, creates ‘bucket list’ holidays for families.

In September 2023, Panoramic Growth Equity backed a management buy-out of the company, which is headquartered in Newcastle-upon-Tyne. “Customers are looking for more than just holidays; they are looking for experiences. That is where The Artisan Travel Company is so strong and it is what attracted us to the company,” says David Wilson, a partner at Panoramic Growth Equity, who joined the Artisan board following the MBO. “The company is geared up to craft a unique personal experience for each customer.”

Special agents?

“The travel sector is an attractive investment proposition, with secular consumer trends driving strong growth post-COVID-19, but it’s important to look at the rally in detail and understand whether the boost in 2022 earnings is a one-off, post-lockdown event, or can be sustained for the longer term,” says David Stephens, a partner and private equity co-head at 3i, whose portfolio includes high-end, bespoke tour operator Audley Travel and VakantieDiscounter, an Amsterdam-based online travel agency focused on affordable holidays. “The impact of interest rates and inflation on the end consumer must also be factored into growth projections.”

Firms are proceeding with deals in specific areas of the market, Stephens says: “The travel sector has tracked a trend we have observed across the wider consumer sector, where spending remains strong at either the luxury end of the spectrum or at the discount end, with the middle squeezed.” 

Maltz says Active Travel Group’s positioning as a higher-end quality operator was central to the Mobeus investment case. “Premium travel operators are better positioned to protect margin where they are providing bespoke holidays that involve high levels of customer added value and interaction.”

Similar drivers are what attracted Panoramic to The Artisan Travel Company. Wilson says: “Customers are looking for more than a ‘fly-and-flop’ holiday, where you book a vanilla flight-and-hotel package online and sit at the pool for a week. There is strong demand for unique destinations and activities, which have higher margins.”

The COVID-19 experience has also supported the consumer pivot towards the higher-quality operators with established track records and reputations. “The value of booking through a credible tour operator, rather than the DIY approach of booking the different parts of a holiday yourself, really shone through during the pandemic,” 3i’s Stephens says. “Customers appreciated being able to pick up the phone and speak to an experienced consultant who could provide support when holidays had to be postponed or cancelled, driving a shift in client behaviour to focus on the top-performing brands.”

Maltz concurs with this observation: “There has been an undoubted return towards trusted tour operator brands that provide customers with support and protection. Travellers who built their holiday packages independently were not always treated very well through lockdown periods by airlines or accommodation suppliers when refunds had to be processed or travel plans rebooked.”

Knees up not feet up

In the autumn of 2018, Mobeus brought together winter sports operator Ski Solutions and walking, cycling and kayaking tour specialist Wilderness Scotland, creating Active Travel Group (ATG), a tailor-made adventure holiday platform. Ski Solutions was a £6m secondary buy-out, Wilderness Scotland a £3m management buy-out. The business survived the travel restrictions brought about by the COVID-19 pandemic and, over the five years of Mobeus backing, has developed into a balanced, year-round activities-focused tour operator. It has expanded its offerings in Europe and North America, and the group continues to seek
bolt-on opportunities.

“Bespoke itineraries, offering not just accommodation and transport but activities and experiences too, plus high levels of direct customer interaction sit at the heart of the company’s proposition and growth,” says Mobeus partner Justin Maltz. “Active Travel Group’s offer is distinct. It is curating experiences that simply can’t be patched together using a search engine, enabling it to earn strong margins.”

landscape Tokyo Japan city buildings skyscrapers mount Fuji
Customers are seeking more than a ‘fly-and-flop’ holiday, travelling to destinations such as Tokyo

Cultural shift

Looking ahead to the next 12 to 18 months, the travel industry recovery is expected to support steady flows of deal activity. Managers have factored in the possibility that earnings may cool now the ‘revenge travel’ theme that boosted bookings immediately after the pandemic has died down. There is recognition that rising interest rates will also play a part in consumer booking decisions, but the long-term growth drivers supporting the industry make it an attractive option for buy-out dealmakers.

“One of the most interesting trends in consumer behaviour is how travel has shifted from being a discretionary item to almost non-discretionary. There have been numerous consumer surveys and studies illustrating this structural shift. A holiday is now one of the first things that households budget for,” Maltz says.

Active Travel Group landscape snow mountains ski skiing northern lights
Providing carefully curated experiences, premium travel operators are in demand

Private equity firms have been looking to build their exposure to the travel space as a result of this shift. Recent investments include Primary Capital backing Diversity Travel, an international travel management company servicing the humanitarian, academic and not-for-profit communities, and ICG backing the secondary buy-out of Direct Ferries, the ferry tickets aggregator, from Livingbridge.

Trade buyers are also back in the market in numbers, turning to M&A both to expand geographical footprints and to increase their luxury and bespoke holiday offerings. Recent examples include Hyatt Hotels acquiring boutique and luxury holiday property platform Mr & Mrs Smith, and Flight Centre buying luxury travel operator Scott Dunn from Inflexion Private Equity.

“Deal activity is likely to increase significantly, with several holiday companies going into sales processes,” Maltz says. “There was a large amount of private equity investment in the five years before COVID-19, and it was obviously difficult to exit during lockdowns. The sector has rallied and assets are coming to market in numbers. Trade buyers are also firmly back. The hope is that we will see more strong returns as companies are sold and the exit backlog clears, as well as some exciting investment opportunities on the buy side.”

Knowledge is power

When customers call 3i portfolio company Audley Travel, they don’t speak to a consultant reading about a venue from a brochure, but someone who has actually visited the locations customers want to book.

This investment in high-value, expert advice sits at the heart of the company’s proposition. “The expertise Audley offers is unrivalled,” 3i partner David Stephens says. “Consultants have often lived and worked in the countries they are booking trips for, and regularly visit the hotels and experiences. Their recommendations and itineraries simply can’t be matched.” As a multi-destination operator focused on delivering premium travel experiences, this investment in consultants has positioned the business strongly at the high end of the market.

Customers regularly turn to the company to lay out plans for holidays to fulfil lifelong travel ambitions, booking multiple trips over a number of years.

“The quality of the Audley service offering means that between 50% and 60% of bookings every year come from repeat customers. The company also has outstanding Trustpilot scores and recommendations are a big driver of bookings. This is hugely positive when it comes to marketing and customer acquisition costs,” Stephens says.

The company’s global destination footprint has been another key feature of its success. “Through the lockdown period some countries opened up earlier than others and that really emphasised the importance of having a global destination offering for tour operators,” he adds.

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