Travel is considered a ‘high-risk’ industry. However, this isn’t just the view of insurers but also travel business owners themselves. They are aware of the risks associated with selling travel and will do what they can to protect their businesses and their customers. 

The concept of risk in travel was thrust into the spotlight during the COVID-19 pandemic when thousands of travel companies worldwide went bust. However, even before the pandemic, travel providers were faced with managing the myriad of risks impacting their businesses.  

In this blog series, we explore how travel providers can safeguard their businesses against various types of risk. In our first instalment, we introduce the different types of risks that travel providers regularly face. 

Insolvencies 

One of the most significant risks in the travel value chain is supplier insolvencies. When a supplier goes bust, businesses along the chain feel the impact. You incur financial losses from pre-paid bookings, which now must be refunded, or, where possible, replaced. 

But the cost of supplier insolvency isn’t only financial—it also comes with a reputational cost through damaged relationships with let-down customers. Even if you, the travel provider, didn’t see the insolvency coming, the customer may even go as far as thinking you didn’t do sufficient due diligence into your suppliers. 

Despite the economic pressures impacting many industries, travel and tourism businesses appear to be less affected by the risk of insolvency compared to other sectors. Between 2022 and 2023, travel companies deemed to be in a critical financial situation had decreased by almost 30%.  

Despite this, travel providers must stay vigilant to protect themselves and their customers from insolvency. Proactive measures, including responsible financial management, careful supplier due diligence and a diverse supplier network, are vital for mitigating the risk of potential insolvencies. 

Disruptions

Disruptions, whether major economic shocks, health crises, political unrest or natural disasters, are significant risks for travel providers. Unfortunately, their unpredictability means they’re difficult to prepare for adequately. These events can lead to a slew of negative consequences, including mass cancellations, reduced bookings and, in some cases, longer-term shifts in travel patterns and preferences. 

Beyond revenue loss, disruptions put significant strain on travel providers. Managing refunds, finding alternative arrangements (if possible) and communicating with stressed customers is overwhelming for travel businesses, and the handling of these situations impacts their reputation with customers and suppliers. 

Chargebacks

Chargebacks present a frustrating risk for travel providers. The average chargeback rate for the travel industry is 0.89%, which is significantly higher than many other industries. A chargeback rate close to 1% is deemed high risk. Not only are chargebacks direct financial losses, but they may also lead to increased transaction processing fees and, if the chargeback rate gets high enough, blacklisting by banks and processors. 

While a 0% chargeback rate isn’t possible, there are steps travel providers can take to reduce it. Dealing with chargebacks is time and resource-intensive, but it’s essential to dispute illegitimate chargebacks. If the chargeback isn’t disputed within the time period specified by your payment provider, the customer’s chargeback will be upheld. The good news is that you can reduce your chargeback rate by boosting payment security, keeping in contact with customers, clearly communicating cancellation and refund policies and monitoring and analysing chargebacks when they occur. 

Reputational Damage

Reputational is fragile—it takes years to build and can be shattered in an instant. This is certainly the case in the travel industry, where word-of-mouth recommendations, positive online reviews and trust are essential for attracting and retaining customers. 

News of negative incidents, such as mishandled disruptions, substandard customer service and security breaches, have the potential to spread like wildfire and present a very real risk to your business. This reputational damage can lead to cancellations and fewer bookings overall, significantly reducing the business’s financial health. 

High Insurance Premiums 

Insurance is a lifeline for travel businesses, providing protection against a wide variety of risks. When disruption occurs, the travel industry is usually one of the first industries to feel the impact. For example, when the pandemic hit in 2020, many insurers pulled their support for the travel industry entirely. It was simply seen as too risky at a time when countries closed their borders and businesses were closed for an indefinite period. 

 In such an exposed industry, insurance premiums can be a real barrier to profitability. Travel companies with a history of incidents, customer complaints, chargebacks or operations in areas deemed particularly volatile may pay higher insurance premiums. In extreme cases, they may lose access to insurance altogether. 

The Case for Proactive Risk Management

As a travel business owner, you contend with the risks outlined above regularly. They demand careful attention and proactive management, otherwise they may spiral into financial and reputational headaches. 

Our Navigating Risk blog series dives deeper into the risks associated with running a travel business, including managing risks with data and protecting your business with financial protection and payment solutions. We’ll also explore what the future holds for travel industry risk, touching on technology disruption, changing traveller expectations and potential regulatory changes. Make sure to follow along!