Reduction in capacity is good for margins and the environment, says Sunvil chairman Noel Josephides
The Thomas Cook collapse has created turmoil in the travel industry. I don’t think regulators truly understood what the repercussions would be, and we are still at the beginning of the adjustment process. Far more will be revealed over the next six months.
How much of the capacity will be replaced? We have already heard about Tui’s two million extra seats and Jet2’s increase in capacity. From Gatwick we await to hear which airline will win the bidding war and exactly what the slots will be used for. For Tui, it seems that a good proportion of the increase will be on long-haul routes.
Personally, I hope the message will sink in at last that there was just too much capacity out there and that to replace all the Thomas Cook capacity would not only be crazy but also environmentally damaging. The necessary reduction in capacity would also lead to a much-needed increase in margins for both airlines and tour operators.
Higher airfares
The public has had it too good for too long and has to understand that peppercorn seat rates must become a phenomenon of the past – well, with the exception of Ryanair, which stubbornly seems to love selling seats at ridiculous, below-cost prices.
The interesting result of the Thomas Cook collapse will be what happens to the OTAs that have grown on the back of freely available excess capacity at unrealistically low rates. I believe that, in the short to medium term, they will have to adjust to slower growth and, more importantly, they will have to adopt a far riskier business model which, as a result of gross overcapacity, they have until now avoided.
We will shortly be able to distinguish the men from the boys because the only way of maintaining growth is to commit to capacity, something the OTAs have never previously had to do.
Transition phase
Where will this capacity come from? We are told that aircraft availability is tight and that the likes of Tui, Jet2 and easyJet Holidays will need existing capacity for their own expansion plans. They will not make it easy for OTAs, which have been allowed to grow at their expense.
There is only one UK independent charter airline left offering inclusive tours capacity and that is Titan Airways. It seems capacity there is limited too, as Titan’s aircraft have long been chartered by the big players. Over the past 10 years, charter airlines in the UK have been wiped out by the low-cost carriers, although there are still one or two players based in Europe.
Those OTAs able to find charter capacity will find the seat rates they will have to pay on a commitment basis are far higher than the distressed rates they were able to access from the likes of Thomas Cook, which was struggling to fill its capacity.
I believe we are about to enter a short-to-medium-term transition phase where capacity will be restricted and prices will rise. That would be good for the environment, good for margins and bad for the travelling public looking to self-package (on an unprotected basis) with the likes of Airbnb.