Is the industry out of control?

Is the industry out of control?

Is the industry out of control?

Industry analyst Michael East examines the current state of the market and asks if the trade is losing its business acumen

Consider the following two statements: “The mass package-holiday market has had a turbulent year and next year looks no better” and “the key issues are, once again, discounting, early brochure launches and the march of the multiples”.

I wrote those paragraphs in Travel Weekly 10 years ago.

They are still broadly true this year. However the industry itself is strategically very different, and we now have High Prices, High Discounts, or HPD as it is now known – the industry’s own version of mad cow disease.

How is current trading?

This summer has been difficult for a number of reasons.

The no-deposit blitz before Christmas didn’t add significantly to the booking numbers.

But when the post-New Year discounting came in, there were huge cancellations as people jumped ship for cheaper offers plastered over agents’ windows.

The huge discounting at high-street level was caused by Airtours and First Choice deliberately offering high brochure prices in order to be able to tempt customers into shops with massive 30% discounts.

HPD changed the booking profile.

Operators who priced brochures low to attract bookers, were lost in the high-street rush, as Thomson Holidays managing director Shaun Powell admits.

“We went in low on prices andwe got slaughtered,”he said. “The message was, if you don’t play this discounting game, you get hurt.”

The outcome was a confused public, who sat back and waited for prices to get lower and lower.

As Harry Weeks Travel managing director Grahame Weeks said, “I’m confused on pricing and if I’m confused after 36 years in the business, then the public must be confused.”

This summer might be a couple of percentage points up, but that’s because the last six weeks have been strong, as the public could wait no longer.

How are the individual companies doing?

Most operators and agents think Airtours has done best – up by 10%-12%.

Travelcare group general manager Yvonne Rankin said:”Its product pricing was good and despite all the management changes, Going Places did the business for them”.

Former Airtours man Peter Shanks, who is now First Choice distribution managing director agrees.

“Airtours is extremely competent in yield management. It increased volumes and managed the pricing well.”

Airtours calculated Thomson would need to retrench under the much more conservative management style of Charles Gurassa, which is indeed what happened.

Airtours Holidays managing director Richard Carrick said: “We did not have a share objective but we thought we could sell more holidays at the expense of others.”

After the high-profile problems of last year, Thomson cut its capacity by about 7% and JMC cut back by nearly as much. First Choice, who invented HPD a couple of seasons ago, is about level year on year, helped by the emergence of Travel Choice.

And although relatively small, Cosmos, under new chief executive Nigel Wright, has performed really well, a quarter or more up year on year.

Next summer is no better, in fact it’s currently worse, down 15% or so. Everybody has jumped on the HPD bandwagon. The shops are already festooned with discounts. Deposits are back and this may account for the current sales downturn but post-Christmas cancellations should disappear. Nobody believes the market is going to increase much in the next few years.

To quote one of those I interviewed, “we are matured out”.

As for this winter, it is best summed up by Rankin: “Winter comes out in November when no-one cares and it really doesn’t happen anymore.”

Except perhaps long haul, and that is Kuoni land.

But in all of this one thing is clear – more and more tour operator product is going through in-house agencies. Thomas Cook chief operating officer UK and IrelandSimon Vincent admitted: “It is increasingly difficult to protect third-party outlets.”

Shanks added: “High-street distribution policy is a mutual group issue and it’s not just on First Choice products. We have Thomson as our second operator and we work with them on high-street policy.”

Nearly 50% of Travel Choice sales are in-house product, and industry estimates suggest a further 20% for the Thomson group. The same pattern is true at Thomas Cook, Lunn Poly and at Going Places where about 70% of sales are Airtours products.

Good independents still deliver

Travelcare is about 6% ahead, despite not pushing discounts.

Rankin explains: “Travelcare hasn’t had a discount on its windows all year – they are a complete waste of time.”

Harry Weeks is very much a specialist independent, working largely with close-user groups such as NHS employees or the Royal Mail.

Weeks said: “We have seen a fall in the number of heads over the past few years, but turnover is still rising. Being an Advantage member helps.”

So what’s new?

Well, what is new, or at least what is increasingly clear from another poorly operated season, is that in the first year of the new century, the industry is close to losing control of its business.

There are short-term excuses, notably the significant changes in ownership and management, and next year will be no better on this front either.

Thomson will be under pressure to bring in profits to justify Preussag’s high price. Whoever gets Thomas Cook will certainly want more out of that business. And Airtours UK is the group’s only real profit earner to support overseas losses.

The core issue is that there are simply too many big tour operators, as they all recognise.

Vincent is sure:”Four major players is simply not a stable recipe for the market.”

Powell adds: “This is the only market I’ve ever worked in with four big companies – it is causing extreme difficulty.”

The retailers I spoke to also agree – four biggies, plus of course Cosmos, may bring choice, but that choice is what is wrecking the ability to run a proper business. As quickly as one company gets a competitive advantage, all the others pile in.

What one operator loses in volume or margin this year, they will want back next.

Powell again: “Thomson and Lunn Poly must improve profit performance over the next few years – and we can.”

But if they can, then it will be at the expense of somebody else and will be a short-lived game.

The great saviour for many is to attack costs

Synergies, especially in the new pan-European groups, might cut fuel or bed costs, but even if it works, and there is great debate about its real impact, it will be a long slow process.

Distribution costs will fall if direct sales and e-commerce take off, but again most industry leaders see that a long way in the future. Fewer outlets, in the vertical chains and among independents, is certain.

But it won’t change the real problem. Too much product from too many companies with very short-term horizons. And with the manufacturers, ie operators, acting like retailers it means the business seems out of the industry’s real control.

The European Union won’t let them merge and new owners will make them compete more. And, they can’t get together and fix things – it’s illegal.

Vertical integration is perhaps the root of the problem.

The product should have a totally independent retail sector, like all other consumer goods to bring market sense and real control. Most operators agree. But it’s too late. What do you think? Write and let us know.

Richard Carrick, managing director, Airtours Holidays

Shaun Powell, managing director, Thomson Holidays

Peter Shanks, distribution managing director, First Choice

What they said….

“The industry is losing control of the business.”

Michael East, industry analyst

“Travelcare hasn’t had a discount in the window all year – they are a complete waste of time.

“Winter comes out in November when no-one cares and itsimply never really happens anymore.”

Yvonne Rankin, group general manager, Travelcare

“Thomson and Lunn Poly will need to improve profitperformance over the next few years.

“This winter we went in low on brochure prices and we got slaughtered.”

Shaun Powell, managing director, Thomson Holidays

“A key issue will be Thomson’s performance needs which have to justify the very high price the Germans paid.

“It is too early for alarm bells, but we have a tough year ahead.”

Peter Shanks, distribution managing director, First Choice

“I’m confused on pricing and if I am confused after 36 years in the business, then the public must be really confused.

“Some big operators don’t talk to us enough – so no talk, no business.”

Grahame Weeks, managing director, Harry Weeks Travel

“The policy of high price, high discounts will go on.

“If the numbers are stripped down, the traditional all-inclusive product is probably reducing, while seat-only are up.”

Richard Carrick, managing director, Airtours Holidays