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Bankruptcy of the Russian travel agency brings industry crisis into limelight

February 01, 2012, 18:05 UTC+3 Alexandrova Lyudmila

The bankruptcy of Russia’s tour operator Lanta Tour Voyage has not only harmed thousands of holiday-makers from Russia in various countries, but brought into the limelight the question of whether the national travel industry is in crisis, and if yes, how deep the crisis is. The management of the bankrupt company is faced with a criminal case on fraud charges, although tourist business representatives tend to present this as ‘ineffectiveness’ and blame the affair on dumping policies on the tourist market. In the meantime, economists see at least as doubtful the suspicion unfair competition alone is to blame for the company’s crash. Experts see the root causes of the tourist business crisis in the general economic instability, overcharged air fares and businessmen’s carelessness.
In the meantime, Prime Minister Vladimir Putin has ordered one of the state banks to pay the tourist firm’s debts to counter-agents.
The Investigation Committee on Tuesday announced it had launched criminal proceedings against the management of Lanta Tour Voyage. The investigators suspect the company’s chiefs of gross fraud.  According to the Investigation Committee’s findings, the company from the end of 2011 to January 28, 2012 concluded many tourist service contracts on instructions from the top management headquartered in Moscow. The company collected the would-be travelers’ money in full. However, the management deliberately defaulted on the liabilities to the clients to have declared forthcoming bankruptcy on January 27 and embezzled the customers’ cash. As a result, heavy material damage was caused to more than 3,500 people.
After Lanta Tour Voyage said it was broke, many Russians abroad encountered major problems. For instance, hotels would not let the tourists check out before paying the bills first. Some holiday-makers were literally taken hostage and managed to escape with serious risk to their property and health. In the meantime, the Lanta Tour Voyage affair is going from bad to worse. On Tuesday, the Moscow office of the tour operator was reportedly raided and looted. The Moscow police force has acknowledged there was only minor damage to the front door.
The criminal case by no means guarantees those responsible will be brought to justice, the affected clients will have their money back, or the market will be restored to normal in the future, says the head of the legal commission of the Russian Tourist Industry Union, Georgy Mokhov, who is quoted by the RBC daily. Any outcome of the criminal case would by no means influence the insurance company’s payments to the affected tourists. “The law on the basic principles of the tourist business has a special clause saying that even premeditated action by the tour operator does not relieve the insurance company of the duty to compensate for the damage suffered by the clients,” Mokhov explained.
Experts at the Russian Tourist Industry Union blame the crash of Lanta Tour Voyage on dumping policies on the tourist market. Companies dare resort to such measures in a bid to oust competitors from the market. “In the tourist business tough price wars are being fought, because for most Russians the decisive factor in choosing this or that tour is price,” the executive director of the Association of Tour Operators of Russia, Maya Lomidze told the daily Novyie Izvestia.
The Russian Tourist Industry Union believes that a number of players have inflated ambitions and tend to ruin the market in general, while the other travel agents have to operate at a loss. According to their estimates, about 40-45 percent of tours in Russia are sold at prices below the cost. No more than 15 percent of the vouchers are profit-making. RTIU press-secretary Irina Tyurina says the owners of the bankrupt tour operator were not responsible for dumping practices, but they were forced to follow the market trends and to lower the prices so as to retain clients.
Nezavisimaya Gazeta argues that tour industry representatives’ speculations about dumping practices are not convincing enough. It has compared the prices of typical offers from Russian firms and their counterparts operating in Ukraine, Poland and Germany. The analysis has shown that in reality Ukrainians and Germans pay for the very same tour approximately the same price, but far less than Russians.
Economists also very much doubt the suspicion competition was responsible for the company’s bankruptcy. “If dumping practices were the real cause of the crash, the company would have complied with all of its outstanding liabilities to the clients first and gone out of business only afterwards,” the daily Novyie Izvestia quotes the chief of the risk management and insurance department at the Higher School of Economics, Sergei Smirnov, as saying. “In this particular case we have seen a firm go bankrupt in the process of providing services. They lacked turnover capital. This makes one suspect the cause of the bankruptcy is elsewhere. Possibly, the company’s management did something wrong.”
As Solid company analyst Elena Yushkova has explained to Nezavisimaya Gazeta, competition on the market is high and firms often blow their spending on advertising out of proportion. Costs outweigh incomes. Then firms go to banks to take huge loans – hoping for future demand. But they are unable to repay the loans. Clients in the context of an unstable economic situation are unprepared for exaggerated and groundless spending, they look for balanced price-quality offers. Hence the problems of the companies that have been careless.
An expert at Audit – Business Consulting/Morison International, Irina Vorobyova adds: “The price of tours largely depends on air fares. The cost of flight may be as high as 70 percent of the tour’s overall price. In Russia, air tickets are very expensive, because competition in the passenger traffic segment is very low. High air fares make tours from Russia more expensive than those from the CIS or the European countries. The loss-making condition of the Russian tourist industry is largely a result of the monopolists’ overcharged flight prices.
Experts believe that the bankruptcy of Lanta Tour Voyage is far from the last one. “In the six months to come more bankruptcies of tour companies are possible, in the first place, due to high-risk policies by their managers. Most vulnerable to risks are small firms that went in business several years ago,” Yushkova said. If bankruptcies hit several large tour operators – and this is not ruled out – then Russians should brace for a major rise in voucher prices.
In the meantime, Prime Minister Vladimir Putin has intervened in the Lanta Tour Voyage affair. At a meeting with the minister of sports, tourism and youth policies, Vitaly Mutko, the prime minster said one of the state banks was prepared to pay the tourist firm’s counter-agents. According to the daily Izvestia, the VTB bank agreed to provide a financial safety net. This will let those Russians who are already on holiday to enjoy themselves without paying for hotel accommodation and the flight back home a second time. However, after the situation has been resolved, Lanta Tour Voyage will have to fully compensate for the government’s costs.
Putin voiced the certainty that at this point he saw no signs of fraud in Lanta Tour Voyage operations, but at the same time he added that the firm should be audited thoroughly. In order to prevent such situations in the future the prime minister suggested creating a self-governing organization in the tourist industry, capable of promptly addressing such problems.

MOSCOW, February 1.