Despite the number of dynamic packaging options now open to travel consumers, tour operators are seeing the traditional package holiday, complete with its fixed prices, starting to make a comeback. Martin Cowen finds out if there’s space, and demand, for both to co-exist
Dad, what’s an LP? Dad, what’s a fax machine? Dad, what’s a tour operator?
It was only a few years ago that the theory and practice of ‘tour operating’ seemed destined for the great recycling bin of outdated business models, despite the fact that the number of Britons taking a traditional tour operator holiday was holding steady at around 19 million.
The growth and profits would come from helping customers to create their own holidays online, vested interests claimed.
Who’d want to own a fleet of aircraft that you had to fly where you said it was going to fly even if it was only half full? And how much is a barrel of oil this week?
Or how about booking up hundreds of hotel rooms years in advance in a currency that could move either way?
But over the past two years there has been a shift, and with the TUI/First Choice and MyTravel/Thomas Cook mergers, it seems that traditional tour operating, with all its fixed costs, is making a comeback.
Despite the increasing number of ways in which web-savvy travellers can get exactly what they want, some of us still want to fly and flop when and where we are told.
Thomas Cook Holidays executive director Ian Derbyshire says, following the merger with MyTravel, it now takes between 4.5 million and five million Britons on a traditional tour operator package every year, including its specialist businesses, which operate in the charter environment.
“Continuing to maintain and maximise strength in mainstream travel” is one of Thomas Cook Group’s four pillars, alongside independent travel, financial services and emerging markets. So, a traditional tour operating business is not mutually exclusive from a strong play for the independent/component-based/dynamic packaging sector.
“Mainstream tour operating is at the core of what we do,” says Derbyshire, “because when you get it right, it’s the most profitable part of the business.”
The vertically integrated model has its critics, but Derbyshire is a big fan of “being able to keep all the revenue within the organisation”.
Derbyshire says that tour operator profitability requires the balancing of four variables – “Manage the margin, manage the loads, manage the revenues, and manage your guaranteed recovery position,” he says. The latter being the extent to which a business can give back, or shift in other ways, rooms it has committed to for its tour operations.
Directly opposed to this model is virtual tour operating. Steve Endacott founded the On Holiday Group, having spent a number of years in the traditional sector. Endacott says that by bundling scheduled seats with contracted and bed bank accommodation, he can beat the traditional tour operators on choice and price.
Every morning he wakes up with a potential 100 million combinations of package holidays to shift. Any that aren’t shifted that day are cleared from the cache. Next morning, it starts again.
Its pricing advantage works at both ends of the booking window, Endacott claims. “Low-cost carriers are cheaper the earlier you book, while in the lates market we can pick up distressed seats from charter operators.” He pointed out that a big boost in the number of charter flights from the UK to Egypt was driving On Holiday’s own business in the region.
Sat between the two models lies Europe’s biggest travel business, TUI Travel. Its new media director, for the next month or so at least, is Graham Donoghue, and he admits the pricing issues surrounding tour operating and virtual tour operating are “ridiculously complicated”.
While TUI Travel continues to shift “significant volumes” of traditional tour operator packages, Donoghue says that the overall model was a hybrid and made a clear distinction between traditional and dynamic packages. “About 40% of our product is differentiated,” he says. Accommodation brands such as Holiday Village and Sensatori, along with its revamped fleet give it an impressive array of exclusive offers. Having got the product, Donoghue says that the focus now is on “efficiency optimisation”.
One key plank of TUI Travel’s efficiency optimisation must be to stem the losses from Thomsonfly, TUI UK’s seat-only brand from its pre-merger incarnation. In the year to end to September 2007, Thomsonfly racked up losses of £27 million. Route rationalisation is under way. Analysts were told last month that some routes were getting enough scheduled business to warrant operating as a charter.
The hybrid nature of its model reflects the hybrid nature of the customers who, Donoghue says, are in control. “Everything we do is customer-driven,” he states. “We’re obsessive about our customer-driven key performance indicators.”
Customers, eh? Do they even care whether it’s a traditional or virtual tour they have booked?
Donoghue seems to think not: “What I do know is that I’ve never heard a customer say that they had a great dynamic package. All they want is a holiday.”
Derbyshire disagrees. “Customers are aware of the difference between a traditional package and a component-based product,” he says. Branding of the aircraft, reps and transfer coach all reinforce its position as a tour operator.
Virgin is one of the strongest brands around, so it’s little surprise that Virgin Holidays sees its positioning as an advantage. E-commerce manager Chris Roe says: “There’s a trust and confidence in the Virgin brand and that helps differentiate us as a tour operator.”
Virgin Holidays is also differentiating by offering its Gatwick passengers the first and only tour operator lounge in the business. The V Room opens this month. Roe also talked up Virgin Holidays’ concierge service, which calls a customer a few days before departure to see if there’s anything it can do to help.
Its product is based on Virgin Atlantic’s schedule. Virgin Holidays, which is part of Virgin Atlantic Ltd, gets an allocation of seats from its sister airline. But it also has deals with other airlines so that it can offer holidays to destinations not currently on the Virgin Atlantic map.
Virgin Atlantic isn’t the only major airline to offer a tour operating product, but this trend is set to continue. EasyJetholidays – bundling easyJet seats with Hotelopia beds, protected by a Travel Trust Association bond – has been around for a year or so.
Endacott has his eye on this sector too. On Holiday Group powers Jet2Holidays.com by connecting the Leeds Bradford-based airline’s reservation system with its packaging database. Endacott argues that this arrangement doesn’t affect the airline’s yield management for seat-only. “In time, most low-cost carriers will operate a tour operating arm,” he says confidently.
One constant between the virtual and traditional model is their exposure to fuel costs increases. Derbyshire is philosophical about the fuel price hikes of late. “It’s a challenge for the whole industry,” he says, “and it doesn’t predicate against charters, scheduled or low-cost airlines.”
And package pricing will reflect the increase in costs of the flight element. Hedging can offer some level of protection. Derbyshire is confidence that the strength of Thomas Cook’s tour operations means that they are priced on their own merits rather than in relation to the virtual rivals.
“We know the fixed costs, the operating costs and the margin we want from each customer,” he says. “Our traditional product is competitively priced, and while there might be cheaper product out there, it might not offer the same value. It’s the difference between being on the beachfront or at the back of town.”
Traditional tour operating is here to stay, but that’s not to say that there isn’t a place for the virtual tour operators.
As Donoghue says, customers are in control and if they want component-based product, there are enough businesses out there to provide it.
Unravelling the regulations
There are probably as many travel lawyers who could retire on how much they make trying to make sense of the tour operator laws, as there were techies who retired on the back of Y2K.
Federation of tour operators director-general Andy Cooper gives the standard explanation: under the Package Travel Regulations, any business that organises a package holiday is a tour operator and therefore obliged to provide a level of consumer protection. The problem, as ever, is what is a package holiday?
Guidance issued by the Department for Business, Enterprise and Regulatory Reform this January was eagerly awaited by the industry, but fell short of providing a cast iron definition.
Cooper’s quotation in the official press release acknowledges BERR’s “attempt to provide clarity” rather than a clarification. He tells Travolution: “The reality is that there are so many travel products and providers that there are still grey areas, and there are still some not willing to play by the rules.”
When asked whether the FTO could do some consumer-facing PR to help the public understand, Cooper says that this did not fall under its remit.
The FTO recently “merged with ABTA”, although it will retain some level of autonomy. It will continue to represent tour operators’ common objectives. These include crisis management, health and safety, and the environment.
Case study: The quiet one – XL
XL Leisure Group is the UK’s third-largest tour operator, behind TUI Travel and Thomas Cook. It was sold by its Icelandic owners in October 2006 to an management buyout valuing the business at £237 million.
It owns a fleet of 25 aircraft, including the UK’s first B737-900s. It has a multi-brand portfolio and like the other ‘traditional tour operators’ it is adopting a hybrid approach.
XL.com is positioned as an online travel agent shifting in-house and third-party products, while Greek specialist Kosmar and Florida specialist Travel City Direct are standalone businesses within the group
Interestingly, the business uses two different booking engines – Anite provides the packaging technology to bundle XL Airways flights with its own ground product, while London/Sri Lankan-based Codegen powers the dynamic packaging content.
Martin Lock, managing director for XL.com, is also trying to factor in customers’ preferences. He referred to some Google research that shows people visit more than 20 sites from the start of their research to when they actually book.
“The whole industry is so transparent these days. We have found that customers do know that if they book a package holiday they get the rep and the transfers. But they know that flight+ hotel is exactly that.
“What we have to do is be able to offer them what they want. If a customer wants a dynamic package, we have to be able to provide one, even if it’s comparable with our own product.”