In association with Travelport
Growth – that’s not a word that’s been bandied about much in the last few years to describe the UK listed travel sector.
For many years the emphasis has seemingly been on contraction of capacity and cutting down the size of the debt mountain – the share price of Tui and Thomas Cook certainly also hasn’t seen much evidence of growth or at least not until 2010.
But looking at the recent numbers from both Tui and Thomas Cook for May, one can’t help but feel that that word growth is firmly back on the agenda.
Over at Tui Travel for instance UK bookings grew by 7% ahead of a 3% increase in capacity and average selling prices up 5%.
That fed through into a much improved bottom line with many City analysts lapping up the free cashflow improvement of £233 million and increased dividend.
There was also good news, though a little less euphoric, at Thomas Cook where Harriet Green, the new chief executive seems to be winning the battle against cynical, and until now at least disgruntled shareholders – with a fair wind she should have raised her £425 million in extra funding via a rights issue by June 19.
The debt mountain is falling (from a very big starting point) and the bottom line doesn’t look quite so horrid – here in the UK the EBIT margin was up 5%. There’s an even ambitious new earnings growth target – for a compound annual growth rate (CAGR) from 2013 to 2015 of 3.5% per annum
But there is I think a much bigger story lurking behind these positive numbers – we can begin to see a fairly convincing narrative for growth for the listed travel giants.
I’m sure there’ll be the odd judicious cutback in capacity here and there (and continued closure of stores) but we can now begin to understand how the two travel giants will actually grow their bottom line – and their businesses – through to the end of the decade.
The first big shift is in air fleet capacity, with more and more inefficient older aircraft retired (reducing overall capacity) in favour of larger, much more efficient newer planes.
Over at Tui, for instance, the big change will come in financial year 2014 when 23 aircraft leases will expire replaced by just 9 newer, leaner, bigger planes.
This is a big, seismic shift and echoes what outfits like Norwegian Air have been up to over the last few years – use new planes to kick in a substantial margin improvement through lower fuel costs and more capacity per aircraft.
The next big shift is to use operator controlled hotels as the back bone for a reinvention of the product inventory – Thomson and Tui generally has long shown that own label hotels with a theme or luxury bias/concept are a big hit with customers, especially if you can throw in some form of all inclusive package.
Thomas Cook is now aggressively playing catch up, expanding its already substantial roster of concept hotels.
The Sentido range of hotels will be expanded, with 44 hotels for singles, couples and small families made available for the summer 2014 season. Cook is also pushing ahead with plans to expand its German focused Smartline chain of hotels and introduce Sunprime into the UK.
According to Thomas Cook Smartline features 22 budget hotels for families while Sunprime is largely focused on upmarket, adult only hotels.
The key idea here though is that the big travel companies can control all the key parts of their ecosystem – taking the bookings via shop or online, then use their more efficient air fleet, and finally deliver the happy punters to their own concept hotels.
This model copies the success of the big cruise giants, keeping virtually all the supply chain in-house and allowing the operator to carefully manage the cost profile.
My guess is that City analysts will lap up this higher margin business model and put pressure on the big travel operators to move to an almost completely internalised model akin to the cruise giants.
This will mean abandoning ‘commodified’, multi-supplier capacity (which will be bad news for big Med hotel chains), focusing on a smaller core of own label products, and shifting all other business onto wholesale digital platforms where Cooks and Tui simply aggregate the customers and take a bite out of the revenues – which to this cynical observer suggests that the big Med hotel chains are in deep trouble moving forward.
Which brings us nicely to the biggest bit of future growth – online.
Looking through Thomas Cook’s numbers I was quite astounded to see just how aggressively the travel giant is pinning its future on the web. It has now set a target that says that web penetration will be 50% by 2015 (it’s currently 35%).
And here’s Thomas Cook on its digital targets, with my own emphasis on the boldness of the strategy:
“A key priority of the Group is to become the leading online tour operator with a digital platform that will host a full portfolio of digital products and services.
“The Group will reduce its online brands and websites to just three customer facing options in the UK and one in Germany; implement functionality enhancements and extend its product offering; increase investment in offline advertising and search optimisation; and, invest in customer engagement tools. The aspiration is for the highest share of bookings online of a major tour operator. “
This is bold stuff indeed and to be fair to Thomas Cook it was accompanied by the appointment of experienced web entrepreneur John Straw as global head of web and Tomasz Smaczny as Chief Technology Officer.
There’s also a new digital advisory board and talk of a linking up with next generation travel platform Triporati to provide customers with “personalised recommendations for their holiday destinations”.
Over at Tui that digital ambition is now less enthusiastic, with the group still putting its faith in the “Research Online Purchase Offline” trend – online is clearly also the growth channel.
That means yet more emphasis on products like the MyThomson App and a greater business focus on online accommodation, where Tui is powering ahead with its wholesale platform targeting European and Asian growth CAGR of 8% to 10% per annum.
Tui’s continuing growth in its wholesale hotel bookings operation shows that this emphasis on online is spot on. Thomas Cook and Tui should also be helped by some key shifts coming out of the US market – according to a very recent PhocusWright report, airline websites are now outselling US online travel agencies.
The report suggested 36% of travellers said they used an airline website to book travel vs 33% via online travel agency – this is part of a big counter attack by the suppliers of travel product, to grab back their revenues lines from intermediary operators.
Tui’s emphasis on Research Online Purchase Offline is also exactly the right trend for the more traditional part of the market whereas Thomas Cook’s move to hook up with the likes of Triporati is also indicative of its new digital savviness – outfits like this web site are at the cutting edge of a move to personalise travel data, with data mining the next big frontier.
Add in a real focus on social media – Thomson for instance has built a large dedicated social media capability – and then add in more media rich content, mix up with wholesale hotel booking platforms, and hey presto one can begin to see how Thomas Cook and Tui could become mainly online businesses by the end of the decade.
My big worry with this digital ambition is whether the likes of Tui and Thomas Cook have the organisational depth to actually manage this transition.
Yet again the high street banking sector is a sensible parallel to the high street travel sector.
Banking has now effectively been transformed into a new business model, where modern institutions are effectively data driven, information technology rich machines, with a top layer of regulated activity and customer service.
Outfits like HSBC are huge IT companies that happen also to be a bank. The bad news is that it’s taken the banks almost a decade to make the shift and along the way there have been plenty of disasters that have cost the banks very dearly.
Are the big travel groups really ready to make that change to being IT driven organisations with a top layer of customer support ?
Talking of potentially successful online business models, it’s worth finishing by looking at the success of Airbnb.
If like me you thought that this online platform for letting out a spare room was a small play, focused on digital hipsters looking for a ‘real’ alternative….think again.
Recent controversies focused on letting out apartments in New York obscures the fact that this network is generating billions in revenues from its 10 million apparently happy customers – with more and more business travellers using its platform to find spare rooms in locations boasting expensive hotels or simply no hotel capacity at all because there’s a big convention in town.
That remarkable growth has inevitably led to a counter attack by the conventional hotel industry – and local governments.
Earlier this year, for instance, officials in New York City dragged one apartment owner (a certain Nigel Warren) into court for violating local rules that stop unlicensed room lettings.
Airbnb sent in its own lawyers to defend the luckless client but city officials still slapped a big $2,400 fine on the owner. But hidden beneath the NYC controversy – Montreal and Amsterdam have also tried to slap down AirBnB-style services – are some remarkable numbers.
According to one report Airbnb took 300,000 bookings in NYC last year and the company is apparently on track to do $1 billion in bookings in the city in 2013. That’s $1 billion in one US city in one year.
And Airbnb is just one small part of a ‘sharing’ revolution that is sweeping through the US, featuring car sharing outfits like Uber.
I can’t imagine this share economy having much impact on the traditional travel trade business for the time being, but my money would be on some form of “travel share” product making its way into online travel platforms by the end of the decade at latest.