|
|
|
You are here: Home > Educators > BTEC Travel and Tourism > Tour operations - Activity |
|
|
Tour Operators: Take-Off or Grounded?In early autumn 2008, fears are growing that the UK economy and those of many developed countries are teetering on the edge of recession. Fallout from the turmoil that has gripped the financial markets suggests that the expected downturn could be quite severe.
In this travel and tourism resource, we look into the major tour operators, analyse the impact of XL's failure and ask if there is any room for new entrants in the travel industry. The big twoTUI/First Choice
TUI's headquarters are in Hanover, Germany. In August 2008, TUI Travel reported a rise in its third-quarter profits to more than £65 million. The firm is Europe's biggest travel company, following its merger with First Choice in 2007. TUI said that consumer demand for package holidays is still strong despite the economic gloom. TUI is confident in its projections for growth in 2008 and 2009. The average forecasts for TUI Travel's 2008 and 2009 full-year pre-tax profit are £317 million and £403 million respectively, according to Reuters. TUI embarked on a cost-cutting programme following their merger with First Choice, shutting more than 100 travel agency outlets. Thomas Cook/My TravelThe first year of merged operations at Thomas Cook/My Travel saw an increase in profits. Costs were cut as the company shut around 144 travel agencies, leaving just over 800 Thomas Cook-branded shops in the UK. 
A Thomas Cook poster advertisement from the 1950s. My Travel had found it hard to generate sufficient profits to ensure its survival as an independent tour operator. Between 2002 and 2006, the firm made pre- and post-tax losses in the first four of these five years. These losses ate into the company's reserves and resulted in dividends only being paid to shareholders in 2002. Both merged tour operators have been cutting capacity, leaving them with fewer holidays to sell and enabling them to avoid deep discounting on late bookings. Fewer discounts mean higher margins on the prices they charge for their products. This generates higher profits for the tour operators. XL ExpiresThe plight of the UK's third largest tour operator, XL Group, unable to meet its costs due to a lack of cash, high borrowings and low profit margins, was a company collapse waiting to happen. XL's demise provided a large quantity of data about travel and tourism products, prices, the people working in the industry, as well as its customers. It also offers a window on how travel and tourism firms promote their activities and allows us to analyse the role of 'place' in the industry. In short, XL's collapse is a great case study of the industry's marketing mix. Product:XL's failure offers us a chance to analyse the popularity of different travel products and brands. It also illustrates the changing nature of trends in consumer demand. Mintel research, commissioned by TUI Travel, indicates the continued popularity of package holidays, even though a greater proportion of tourists go on independently organised breaks. The research suggested that:
Tour operators would be inclined to add the 11% to the 42% to achieve a total of more than 50% of holidaymakers buying packages. What happens to the travel and tourism market in an economic downturn, is open to speculation. Some sectors of the market are believed to be more recession-proof than others. Cruise industry experts, for instance, believe that if the travel trade continues to cut capacity, (reducing the number of holidays on offer), then more consumers will choose to go on cruise holidays. 
The cruise industry: recession-proof? The cruise sector is thought to be recession-proof because of the demographics of its market. The core market for cruises centres on mature people, sometimes wealthy retirees, often with grown-up families and little or no mortgage commitments. These groups of consumers are less affected by an economic slowdown, so their demand for holiday products is likely to withstand a recession. While there are many examples of travel firms 'going to the wall', industry observers believe that the strategies followed by the big two tour operators will virtually guarantee that their businesses remain healthy. As many developed economies went through a sustained boom period, entrepreneurs started up many new travel businesses, including new airlines, set up online using plane-leasing companies. The major tour operators, though, were looking at consolidation. By merging with one another, they could cut costs, trim away heavily discounted, unprofitable products and activities and achieve more buying power as larger operators. By adopting this strategy, TUI/First Choice and Thomas Cook/My Travel have reinvented themselves as highly profitable businesses just as economic pressures have intensified. More diversified, bigger scale operators can spread costs across their businesses in ways that smaller firms cannot. In the end it was this commercial reality that led to the collapse of XL Group. Many analysts felt that although XL was known as the UK's third largest tour operator, in reality it was really just a big charter airline. XL's business model left it exposed to the severe rise in fuel prices that affected many airlines. Experts estimate that while fuel costs account for around 10% of the cost base of the big two operators, in XL's case it was closer to 40%. Price:Price is a key component of the marketing mix: get your products' prices wrong and you'll soon run into trouble. Too high and you'll put customers off, ending up with unsold inventory on your hands; too low and, while you may sell out, your revenue is likely to be less than your costs. In this latter case, that's a recipe for loss-making and, at worst, going out of business. 
Charging low prices? Can you handle the demand? XL Group's products had notoriously narrow margins. That means that what the firm made in revenue from selling travel packages or airline seats only just exceeded what it cost them to run the operation. In the aftermath of XL's collapse, travel agents re-booking customers who had booked with XL companies, struggled to find deals priced anywhere near what the customers had paid originally. Customers seeking low prices and value for money, increasingly search online, perhaps making independent bookings to piece together their own travel plans. This presents challenges for travel agents as they have to justify the additional cost of using their services. For more on this issue in the travel and tourism industry, why not have a look at this recent Biz/ed resource? There is uncertainty over what will happen to the prices of travel products in the wake of XL's demise. This collapse is expected to cut capacity in the UK travel market by between 7% and 10%. Typically, when a shortage occurs in any market, prices rise. Whether or not this will happen depends on what the tour operators do to capacity: increase it to offer more packages and other products, or sit tight and capitalise on higher prices? 
Prices: grounded or lift-off? Place:In relation to the travel and tourism industry, place can be looked at from a number of different perspectives:
'Place' could mean this or this In the case of the demise of the XL Group, one of the most significant aspects of 'place' was the choice of channel used by the firm's customers. XL's customers might have booked their travel plans using different channels:
In the event of something going wrong on their holidays, the protection offered to consumers depends to some extent on the channel used to book their trip. It can also be affected by the method of payment the customer uses. For example, credit card bookings are protected by the Consumer Credit Act (1974). If problems occur, such as the travel supplier going bust, or if disputes arise between the customer and the supplier, the Consumer Credit Act allows consumers to get a refund from the card company. The failure of the XL Group and the subsequent rescue of tens of thousands of customers may also threaten the rise of dynamic packaging. This is where travel agents and other firms put together accommodation and travel packages at last-minute prices. The problem with this practice is that no one, not even travel industry experts, the law courts and the authorities, seems to know what level of protection these dynamic packages really offer. If they qualify as package holidays, then dynamic packages should be covered under the Air Travel Organisers' Licensing (ATOL) scheme. If not, then what happens if the supplier or operator goes to the wall, as in the case of XL? More on this aspect of dynamic packaging can be found here. Providing an ATOL bond is a cost to travel agents. Some agents have seen a chance to undercut the prices charged by bonded providers. Industry representatives such as ABTA, have supported this, saying that dynamic packaging needs no ATOL protection. The Civil Aviation Authority (CAA) disagrees and believes that any collection of flight plus accommodation, or flight plus car hire, should carry an ATOL bond. In the event of the continued failure of the industry and law courts to agree one way or another, consumers may have to wait for the European Union (EU) to decide in its Package Holidays Directive, which is due in 2011. In the meantime, customers booking their holidays directly with suppliers would be well advised to use a credit card to do so. Promotion:When XL Group collapsed, it sparked a wave of promotional activity in the retail travel sector. Firms sought to inform consumers through advertising and provide reassurance to customers waiting to go on holiday. Some travel agents saw an opportunity to persuade holidaymakers to use their services, rather than booking independently. And industry experts emerged to advise the industry on responding to the news. Overall, this was an excellent chance to see how promotion is used in the travel and tourism industry. As soon as news broke of XL's demise, travel companies such as Cooperative Travel and First Choice took action by immediately ordering advertising and point-of-sale campaigns to reassure their customers. The message was that customers would not be prevented from going on holiday following the collapse of XL. If they had booked through an agent then their holiday plans were still intact. Much of the marketing communication since XL's failure has concentrated on the difference between booking a traditional package holiday (protected by an ATOL bond) and DIY packages (often carrying no ATOL protection). Travel providers' marketing campaigns have included tactics such as targeting users carrying out Internet searches. Some firms have bought advertising space on Google, triggered when users search under terms such as 'XL bankrupt' or 'XL collapse'. 
Promotion is much more than just making a noise! Industry insiders have also been busy advising travel agents on how best to market themselves following XL's failure. Their advice has focused on agencies who have helped customers let down by XL's closure and firms worried about the impact of the news on potential customers. Among the hints offered are the following:
Many of the largest travel agencies have been busy in the mainstream and specialist media, issuing warnings to holidaymakers thinking of booking online. The commercial director of Advantage Travel was one of these voices gaining coverage aimed at boosting the appeal of the traditional method of booking holidays. Up to the time of its collapse, the XL Group was shirt sponsor of West Ham United Football Club. Brand owners pay millions of pounds to have their brand names visible to television viewers around the globe. XL's three-year shirt sponsorship deal cost them £2.5 million each year. But as the deal was only in its first year, the football club had only received the first payment, leaving them £5 million out of pocket and without a shirt sponsor. This is not the first time that a football shirt sponsorship deal has gone wrong. In 2002, First Advice, part of personal injury claims firm, The Accident Group, went bust, leaving Manchester City sponsor-less. MG Rover's association with Aston Villa FC ended in 2004 when the carmaker folded. Charlton Athletic FC have lost their shirt sponsors twice: in 2005, when retailer Allsports was taken over and in 2007 with the collapse of the Spanish property developer, Llanera. People:In the tourism industry the 'people' element of the marketing mix is extremely important. The sector is, after all, about delivering service to people. And while customers are central to the success of any business, the people who deliver service, known as staff, are vital. Customer care, friendliness and good appearance are key attributes for working in the travel and tourism industry. XL Group flew more than two million passengers in 2007 and the company's failure left 85,000 stranded:
This meant that 10,000 people were stranded abroad with no ATOL protection to bring them home. Some customers who had paid with credit cards were entitled to refunds under consumer credit law (see above). This would have been a challenging time to work at any of the airports, or for any of the travel companies involved. Staff would have had to remain calm and reassure customers that they would be returned home safely and quickly, whether or not they were financially protected. As a result of their efforts and the work done behind the scenes by the CAA and a number of airlines and travel companies, two-thirds of the 85,000 stranded customers were returned to the UK by the end of the week following XL's collapse. The CAA itself dealt with 200,000 telephone calls on the day after the firm closed (September 12th 2008). There is a conventional wisdom that when a firm goes bust, it is usually good news for those that remain in business. While this is not always the case, it is interesting to note that on the day that XL Group folded, travel market analysis reported an increase of 86% in sales of package holidays, flights and accommodation. There could be several reasons for this 'spike' in demand:
Whatever the true reason, it is undeniable that countless numbers of people felt the impact of the demise of the XL Group. And what's left, after the biggest collapse in the UK tourism since the failure of the International Leisure Group in the early 1990s? The administrator, Kroll, is left to raise money by selling off the parts of XL that have value, to repay the firm's debts of £143 million. Its main assets are thought to be the group's tour operator brands, some buildings on which XL owned the freehold and its intellectual property. XL owned none of the aircraft it operated. These have been returned to the leasing companies. Some of XL Group's brands may be saleable. These include Kosmar, the Greece and Turkey specialist, and Travel City Direct, which operated in Florida. These operations might be hard to sell, however, both because of a lack of buyers and the fact that they went bust owing money to suppliers such as hotels. Any buyer would have to deal with opposition from its suppliers in the future and this could make the deal unattractive. 
A typical Greek sidestreet scene. But would Kosmar be welcome there again?' The XL brand lives on in the form of XL Airways, Germany and France. These firms were taken over by Icelandic investment bank, Straumur, when XL's UK business collapsed. These businesses are believed to be profitable, which provides some comfort for Straumur. The bank was XL's main investor and has been financially hit by the firm's demise. Unfortunately, for XL's staff and customers without financial protection, there is likely to be little in the way of comfort.
TasksThe following article from The Guardian is about an airline business start-up which is going ahead despite the economic downturn and the demise of XL. www.guardian.co.uk/business/2008/sep/24/theairlineindustry
|
