Comment: Atol-bonded holiday volumes will pass 40m mark very soon

Until Loveholidays and On the Beach reached deals to secure free access to Ryanair flights, the value of their businesses was heavily discounted as investors worried about access to the flight seats that fuel their dynamic packaging holiday machines. 

 

The resurgence in their value can be seen from the 88.7% year-on-year increase in On the Beach’s publicly quoted share price. Loveholidays, which is privately owned by venture capital firms and therefore does not have a public-facing value, has seen its worth increase even faster – its passenger volumes have grown by 92% from 2.6m to 5m over the last three years, compared with a moderate 11% growth for On the Beach to a much smaller 2m passengers.

 

However, Loveholidays’ growth rate since the Ryanair deal is the most striking aspect, with a 25% rise in passenger numbers – equating to 1 million passengers – in the year leading to March 2025, bringing the total number of bonded holidays to a record high of 34.2 million.

 

An obvious question is: When does supply exceed the demand for holidays and require heavy discounting, eroding profits as it always did in the age of the vertically integrated tour operator?

 

I believe the answer is ‘never’, as the entire package holiday model has been reinvented.

 

The vertically integrated tour operators had internal airlines that primarily carried their passengers and only sold ‘seat only’ to dump 10%-15% of unwanted flight seats to customers who owned timeshares or wanted to visit friends and family. They also guaranteed, on average, 65% of their hotel stock, meaning empty seats often created a double jeopardy of empty hotel beds.

 

Their yield model was also suboptimal, with packages being discounted aggressively at the last minute in a much less controlled manner than today’s low-cost airlines which offer the cheapest seats first and increase prices closer to departure.

 

The net result was that 35% of holidays were always sold within the holiday season, often at heavily discounted prices, meaning that an excess of supply really hurt prices and tour operators’ profits.

 

However, easyJet holidays uses less than 5% of its parent airline’s seats, with the remaining 95% occupied by flight-only passengers. Of course, an excess of flight seats over demand leads to lower yields per seat and more empty seats, but it has zero impact on the holiday division as it can just take whatever capacity it can sell. Hence it never has to sell holidays at a loss, making easyJet holidays far more profitable than a traditional tour operator.

 

This profit is further boosted because 80%-plus of its traffic is ‘free’ cross-referral traffic from its much larger airline brand and website, so the rapid expansion of the holiday division is inevitable as it offers a much higher profit per seat than just selling flight-only to customers.

 

Interestingly, this ‘risk-free’ tour operating model also applies to Loveholidays. The only difference is that it is growing rapidly on the back of Ryanair’s massive route range and seat capacity. Its just-in-time dynamic packaging model means it only buys seats at the exact moment a customer buys one of its holidays, again meaning it never sells holidays at a loss.

 

The only expansion restriction Loveholidays faces is how cost-effectively it can attract customers, but as long as these costs remain below or equal to its profit per booking, it will also continue to expand rapidly.

 

A potential threat Loveholidays faces is not being price-competitive with the rapidly expanding easyJet holidays, because its parent airline charges it a massive £12 per passenger per flight API fee to book easyJet flights. 

 

On the Beach has introduced a ‘Book and Save’ scheme to avoid these fees, whereby it offers the customer a discount equal to the fee if they agree to receive an On the Beach virtual credit card and make the flight booking themselves via a deep link to the easyJet site. This makes easyJet-based holidays on the On the Beach site price-competitive, but it is a relatively clunky experience for the customer.

 

Loveholidays has maintained simplicity by only quoting package prices and allowing natural competition between Ryanair, which has no API fees, and easyJet, whose higher flight costs include API fees, to determine their relative airline volumes.

 

There are no publicly quoted stats about Loveholidays’ mix of airlines, but insiders have told me that Ryanair’s share is double that of easyJet, which it primarily uses when mixing carriers as this means only one £12 API fee comes into play.

 

Although easyJet may be losing capacity by charging API fees, the benefit of substantially higher yield per seat due to these fees outweighs this. With a rapidly expanding holiday division of its own, we are unlikely to see a change in strategy unless the much-threatened legal action by On the Beach against it for ‘abuse of a dominant position’ is taken seriously by the Monopolies and Merger Commission.

 

The one thing that is clear, however, is that the volume of Atol-bonded holidays is set to reach 40 million passengers and beyond in the next five years, with easyJet holidays likely to surpass Loveholidays in the race to become the UK’s largest tour operator simply because of its significantly lower advertising costs.

 

I have not forgotten Tui and Jet2holidays, by the way. It’s just that, as explained in other blogs, their capacity growth appears to have already hit its peak.

 

So, here’s to a continued expansion of an industry I love.