Why the end of March is going to be a critical moment for tour operators

In just over a week the Civil Aviation Authority will be renewing licences for tour operators in the UK - a process which takes place at the end of March and September ever year.

Ignoring the TravelRepublic situation for a moment, this scheme impacts on almost all tour operators and those dynamically packaging holidays simply because the ATOL Protection Contribution (APC) and the regular ATOL bonds are seen as the best way to protect customers if a travel firm goes into administration.

In other words: thanks to ATOL, passengers will be brought home, sometimes refunded their money, etc, in the event of a business going under - something which occurs from time to time, but is certainly a bigger threat during an economic downturn.

Now the huge irony here is that due to the financial state of the economy many travel firms are actually under huge pressure to find the money to renew their ATOL licences in the first place - and therefore will not feel comfortable trading if they do not get their accreditation.

It's what Steve Manwaring, a director at 'restructuring and recovery specialist' MCR, called a "ticking time bomb" for the industry in an email this week.

In addition, "the CAA, by doing its best not to over expose the risk to the fund, is holding back licence renewals from many in the industry right now as it assesses the risks associated with those companies," Manwaring says.

This may not make comfortable reading, but some people believe that the system actually exposes the fundamentally perilous way in which travel companies operate.

First of all the collapse of credit markets has meant that companies do not have the same access to investment capital. They can't grow, so therefore they can't attract any more investment. A vicious circle...

Now this is the same as other industries, of course, but where some travel companies fall down is in their practice of operating on low levels of cash flow.

Many operators take a late payment from customers and then pay their creditors quickly (hotels, airlines, car hire, etc), meaning there is often very little in the coffers.

This has worked for eons, but is quite a precarious way to run a business.

And now add the credit crisis.

This is making the problem especially acute as there are fewer bookings, some suppliers are demanding earlier payment, and banks are simply dishing out less money.

It may appear wonderful on the surface that average prices are higher - but supplier costs are also higher.

In the meantime there are less personal loans to directors being handed out, often using property as collateral, which traditionally would have given man y businesses access to funds and, most importantly, cash.

The consequence of this rather frightening cycle is that, if you listen to some close to the issue and analysts such as Manwaring, there are a number of small to medium sized operators in the market who will struggle to renew their ATOLs by the end of this month.

And that - for an industry only now discovering how terrifying the economic downturn is going to be - is actually rather a scary thought.