Who wins and loses when there are too many flights?

I have been in the holiday business for 37 years, and I have never seen peak-season flight prices trashed in the way they have been this year to popular beach destinations like Majorca.

 

As usual, Ryanair leads the way with a £19 fare from Manchester to Majorca, but one glance at Skyscanner shows that return flights for under £100 can be secured for most supposed peak dates in August.

 

This highlights the genuine weakness of the low-cost yield systems that “price low” early and subsequently raise prices in response to demand. There must be demand!

 

The UK’s warm early summer weather has fostered a “let’s wait and see” consumer attitude, as many holidaymakers are content to stay in the UK if the weather is pleasant enough for the children to play in the garden and for the BBQ to be fired up.

 

I have always believed that foreign beach holiday markets compete far more with “staycations” than with expensive UK breaks.

 

With the advent of the internet, on-demand TV, social media, and gaming, the urgent need for parents to take the family on holiday to alleviate school holiday boredom has diminished, allowing for late decisions to be made.

 

We must therefore consider whether we have reached a capacity tipping point, as low-cost carriers are compelled to reduce capacity to improve yields as their relentless UK expansion approaches its limits.

 

This is a relatively trivial rebalancing for Ryanair and easyJet, who will shift capacity to other source markets. Still, it may highlight a weakness in Jet2’s exclusive supply to the UK travel sector.

 

As mentioned in previous blogs, easyJet holidays is the perfect “opaque” dumping ground for heavily discounted excess seats, so watch out for some amazing orange deals.

 

However, it’s companies like On the Beach and loveholidays that are leading the way with £402 for seven-night self-catering holidays based on their new favourite ultra-low-cost carrier, Ryanair.

 

Loveholidays is a private company still seeking an IPO to enhance its share liquidity and access cash for expansion; therefore, it is difficult to determine how much the owners value the new deal with Ryanair and the access to low-cost seats it provides them.

 

However, given that On the Beach’s share price has doubled since last August to a closing price of 207p yesterday, it’s clear the financial markets have finally got the message. 

 

OTB operates as an “asset-light” travel business that feeds off the misery of  low-cost carriers, providing the optimal position when capacity exceeds demand.

 

The key profit driver for OTAs is not the selling price of their holidays, but the conversion of leads into bookings they achieve from their advertising sources. Low prices significantly boost conversion rates and, therefore, profitability, so watch out for some excellent results from Love and OTB this year.

 

However, it is the reaction of Majorca’s leading hotel chains to this new “glut” of excess seats that I find most interesting.

 

After many years of needing to operate at nearly 100% capacity to turn a profit, the sector has learnt that it is a better strategy to maintain high prices, which enable it to generate a profit at 80% capacity.

 

This allows them to relax and simply fill the extra rooms if airlines significantly discount their prices, creating an influx of late demand. 

 

Therefore, while it’s easy to find ultra-cheap flights to Majorca and other Mediterranean destinations, holiday prices are not falling because it’s difficult to locate any inexpensive accommodation.

 

So, although UK holidaymakers are benefiting from lower holiday costs, it’s not quite the “golden age of discounted holidays” just yet.

 

However, I know a few hoteliers well, so it’s time for me to stop writing and book another holiday!