Oil prices were on an upward trend even before the turmoil in the Middle East and North Africa spooked the commodity markets. The occasional pullback aside, the troubles in Libya have kept them at levels not seen in over two and a half years.
All this bodes ill for fuel costs. Petrol prices are rising, and threaten to weigh on consumer sentiment as commuters face up to higher costs at the pump. More money on petrol means less to spend elsewhere – on holidays, for example. This is negative for tour operators, who already have to contend with sluggish economic growth and the prospect of lower bookings for the Middle East.
The first signs of trouble were evident in last week's update from Travelzest, the UK and North American holiday retailer. Reporting on trading to coincide with its annual general meeting, the group said that while its North American arm was doing fine, the UK business continued to "experience difficult markets due to the economic climate in this region, the recent troubles in the Middle East and concerns about high fuel costs, which conspire to slow demand".
The result is that Travelzest's bookings for the summer, which "substantially relate to our UK business," are currently down 18 per cent. That, the company said, was "behind the board's previous expectations".
And yet Travelzest's shares have been on an almost uninterrupted upward march since the beginning of this month. After declining sharply during the latter half of February, they are up around 20 per cent since the beginning of the month.
Why? The key thing to bear in mind is that Travelzest is a thinly traded and not very widely held stock. This, as chief financial officer Jack Frazer points out, means that a few big trades can have a disproportionate impact on the price.
That said, we suspect that part of the uptick is down to bargain hunting, as Travelzest boasts an undemanding valuation. The gains are also likely to have been spurred on by the positive news on the North American arm, particularly Canada.
A recent circular from Merchant Securities suggested that the market may be underestimating the value of the Canadian agency operations by as much as 50 per cent. "The market conditions in Canada are positive. The agency operation is going from strength to strength," they said, arguing that Canada should more than offset the weakness on this side of the Atlantic, which, in any case, is a much smaller driver of the company's profits.
Mr Frazer is also confident that Canada will continue to support the business, pointing to the strong recovery in that economy. This is not to say that the Middle East and European environment is not relevant; Mr Frazer says a fair bit of North American business flows this way. But it is not as material to the operation. In any case, he is hopeful that the UK business will pick up in coming months.
When looking at Travelzest, it also worth taking note of the recent restructuring moves that have made the company leaner before the Middle East flared up. And for fans of takeovers, the stock boasts the tantalising prospect of deal activity.
Merchant Securities says that private equity is "showing [a] considerable amount of interest in online travel agencies at the moment". "Opodo has recently been sold to Permira and Axa Private Equity for €450m," it said, adding that while deal discussions between Travelzest and a leading UK tour operator came to nothing as the markets turned negative in 2008, the current low valuation "could reignite talks again".
"We view the business as a credible mergers and acquisition candidate as it has substantial branding power in North America, strong distribution and operating systems, and a low valuation." This is clearly one to watch.
City pushes charter to boost local suppliers
Besides hitting travellers, higher oil prices also push up the cost for businesses that source their goods from afar. Against this backdrop, the City of London Corporation will this morning launch a local procurement charter calling on developers in the capital's Square Mile to source 10 per cent of their goods and services from the local region. The push by the Corporation's Economic Development Office is designed to boost small businesses in the City and surrounding boroughs, and is timely not just owing to rising oil prices, but also because of the recovery in the commercial property market, with an estimated half a million square metres of extra office space due to be built in the City over the next 10 years.
"Small businesses are not the only beneficiaries of a commitment to local procurement. These policies often bring cost savings, especially when looking at the transportation and whole life cost of a product or service," the chairman of the Corporation's policy and resources committee, Stuart Fraser, said.
"Furthermore, when local small and medium-sized enterprises secure new contracts, they are able to upgrade production and invest in expansion and job creation, increasing their capacity to support global trade within our financial centre."
The Corporation itself sources 24 per cent of its good and services from the City and neighbouring areas, he added. Currently, some 4 to 5 per cent of City procurement by value is done in the local area, according to figures for the Corporation, which says that up to 13 per cent could be sourced locally.Reuse content