The Internet has changed the role of traditional travel companies to the extent that former business partners are now competing in the same market. Linda Fox investigates
Thomson added fuel to an already raging fire last month when it presented its vision of the future. The operator plans to have its entire bed and seat stock available to be dynamically packaged on the Internet by Christmas.
Not much of a gift to its shops, which five years down the line, will act as advice centres and offer reassurance to guide people through the Internet process.
The operator believes the unbundling of its product will enable it to raise the ceiling on the four million holidays it sells annually.
Former sales and marketing director Miles Morgan says dynamic packaging is an enormous area of growth for Thomson and the market in general. “It is what the customer wants.”
Thomson is gambling on the success of the web and dynamic packaging as it looks to appeal to a wider audience.
The move is not unique to Thomson. It is merely the next step in a strategy of trying to increase margins and drive down costs, and it applies to most of the industry.
The market is becoming more focused on providing consumers with an individual package of holiday components, value for money and service, and less about herding people from one point to another.
Agents are responding accordingly, seeking new avenues of business, and the Internet enables all parties to get involved. The web has acted as a catalyst for an already changing sector rather than being the sole trigger.
The battle lines between operators and agents were drawn long before most of the traditional travel market had grasped the power of the Internet – let alone harnessed it. Tour operators have always sought to push sales through their own channels and the Internet is just another channel.
The turn of the century saw the UK’s top four operators beefing up their high-street presence through acquisitions and new openings and establishing call centres so they could drive the majority of sales in-house.
The new millennium also saw operators, such as Thomson with its Just brand, beginning to break down and simplify packages by making in-flight meals and transfers an optional extra.
The natural reaction of the agency community, up in arms at being undercut by in-house sales channels, was to turn its back on the vertically integrated operators, de-rack them and seek new revenue sources.
The final nail came late last year when operators reduced commission to agents who were already selling away from them because of earlier attempts at direct selling.
First Choice managing director of distribution John Wimbleton says: “Not much has changed. We get lots of rhetoric from people who have never been supportive of First Choice.
“We are carrying on with the agents we have always had good relationships with but we have cut the commission of those who have never been good supporters.”
Barry Moxley, managing director of Beaconsfield-based Traveltime, agrees: “The big guys can decide what they do but independent operators are more dependent on independent agents. I respect Thomson but it has become so efficient that it has put its high-street agencies out of business.”
Moxley gained column a few inches last year when he said he couldn’t see what a website would add to his business. This is what he says now.
“We are looking at getting one. The point I was trying to make is that if you are a one-off agency selling to a local client base and want to move business forward you need new clients. There are a lot of tools in the armoury and a website is one, but you need to evaluate the costs and benefits compared to other ways of generating new business.”
Ultimately, the high-street chains of the big four will be slimmed down, although First Choice claims it will have more shops by the end of the year.
Wimbleton says: “We’re different because our hypermarkets and Asda sites are where the customer wants to shop. If you think everybody is going to book online you’re mistaken.”
Given his audience, Advantage managing director John McEwan has to agree and says industry figures prove that the majority of travel is still booked over the telephone or face-to-face.
“Think about the development of the Internet in the past 10 years and then go to the high street. It’s still heaving.”
The balance sheet of the top four operators has not been the only driver of change and neither has the Internet boom. McEwan says: “It’s not all down to the Internet, the trade is simply responding to its development. It’s to do with evolving lifestyles. People are living longer, are fitter and travel more extensively.”
He claims the average number of leisure trips people take over a two-year period is about five.
“Ten years ago it was one main holiday. The traditional package market has fuelled the evolution of travel. Increasing affluence and more holiday time means that most have experienced overseas travel and want more.”
This appetite for travel made room for low-cost airlines, which have increased the size of the market and changed the way people book travel.
McEwan says: “Low-cost airlines have driven the growth in independent travel and introduced a lot of people to overseas travel for the first time, and then they may go on and take a package holiday.”
Wimbleton agrees: “The Internet has been a huge catalyst. The impact of the web we see now was a gift from the low-cost carriers because millions of people were used to booking travel online before we even came up with our websites.”
Moxley, who is also AITO Specialist Agents’ chairman, adds that people have outgrown traditional package holidays.
“Packages were great when they started but then they became too simple and agents were acting like a computer search engine and it’s natural that [it] goes online. People are becoming more independent because they can. They don’t want seven-night holidays and that is in favour of those who can customise and personalise the holiday experience.”
Super-consortium Triton, consisting of Advantage, Worldchoice and Global, thinks it can take a slice of the dynamic packaging market with its talk of buying in bedstock and setting up a tour operation.
McEwan says: “Increasingly today you will either get people seeking to specialise or, if they are competing in the bigger market with vertically integrated companies or online players, they have to provide like-minded service and product. To do that they will continue to sell other people’s product and have the capability to put together their own product dynamically.”
Many established independent agents have been doing that on a small scale for years.
Edwin Doran, managing director of Twickenham-based Edwin Doran’s World of Travel, started tailor-making 20 years ago because he felt he had a responsibility to find a holiday for his customers at the right price.
“We’re not a commission earner. We are in business. The thing about tailor-making is that you control the product and the client sees how hard you are working for your money.”
Doran says this side of the business is increasing and he is seeing a backlash to the Internet. He says: “It is not as good as people thought. If they wanted to buy on price they could, but in terms of the overall quality it is better to buy from an agent or tour operator. Our figures this year show that.”
Moxley has had similar experiences and believes the dynamic packaging trend is playing into the hands of independent agents. “There are people who do not have the time or inclination to package holidays for themselves on the web,” he says.
“We’re getting people back who have found the Internet is not all it’s cracked up to be. They have had a bad experience or made a mistake. Personal advice can be invaluable particularly if you are spending a lot of money.”
Moxley thinks agents should stick to what they know and is concerned by the idea of everybody selling everything on a large scale.
“There could be some horror stories. If you are a travel agent you need to stick to to it. Tour operating requires a different set of skills and it frightens me when people say they are going to dynamically package because they don’t know the hotels or have reps in resorts. People have done it for years in small volumes but if you start to ramp it up without controlling quality there will be problems.”
Wimbleton agrees: “As an agent you are opening yourself up to a huge area of liability and agents don’t have the infrastructure to deal with that.”
With so many players looking to sell travel and the industry in such a state of flux it is not clear who or what will emerge as the dominant travel provider.
Most believe there is room for everybody and findings of market research company Tripvision back that up. Managing director David Jones says: “Some 50% of people have not taken a trip away from home in the past 12 months. They could be brought into the market. We need to make it easy for people to take a holiday.”
Each link in the chain – tour operator, agent, online agent and supplier – will have to improve the customer experience by taking advantage of the opportunity the Internet presents backed up by personal service.
Operators believe they are in a strong position because of their brand strength and because they own the product.
Thomson research shows that 64% of consumers think the hotel is the most important element of a holiday, and the operator owns half its stock.
That puts pressure on the online intermediaries who could find it difficult to get hold of product to sell.
TUI UK head of new media Graham Donoghue says: “Intermediaries are going to have to take more risk and take commitment. They will have to become a virtual manufacturer. We’re all going to cross over but that is a completely different ballgame for them. I would rather be in our position.”
And the fate of the independent high-street retailer rests in its own hands.
Tripvision’s Jones says: “The high-street has to reinvent itself but there is a place for it because an agent can be good at reading a client – and you can’t complain to an Internet site.”
He also sees potential for agents with a new breed of package holidays to destinations such as China where people will need advice and reassurance to book.
Does bonding hold the key?
The ATOL bonding situation is in limbo, but its eventual conclusion could pave the way for further confusion. ABTA won a judicial review of the Package Travel Regulations in January when the Civil Aviation Authority wanted every agent who sold a flight and then accommodation to have an ATOL.
“As long as you make it clear you are acting as an agent and acting on behalf of two companies you don’t need an ATOL,” says ABTA.
The CAA has appealed and is seeking further clarity. The appeal will be heard on June 26 with a decision expected late July. Neither ABTA, nor the CAA can give guidance to agents on how to proceed.
The CAA has also just finished an industry consultation on changing from bonding to a levy-based scheme. It says: “There may be cost savings for companies if we move to a levy-based scheme but it would only apply to ATOL holders. We don’t have a mandate to look at industry-wide protection.”
In May, Thomas Cook said it would change the way it sold holidays to avoid bonding regulations. The operator spends £8 million annually on its ATOL and has said it will not tolerate the unlevel playing field any longer.
Agents v operators: who will win the battle for online sales? Steve Endacott, chief executive, On Holiday Group
The Internet will spell the end for high-street travel agents. Five years ago the Internet was bad news for agents, with inefficiencies making it a prime candidate for extinction.
Traditionally agents acted as brochure warehouses for the mass-market tour operators and, arguably, added little value except personal advice.
This provided operators with a cost saving to target, since the average shop delivers only 1.5 bookings a day and makes virtually no profit. Given an average distribution cost of 13% commission (£150 per booking) and brochure costs of £50 per booking, the total cost of distribution via shops reaches a massive £200 per sale.
Given that an operator’s average gross margin is only £30 per booking, it’s not surprising they are attacking distribution costs.
This desire has been present for many years – however, it’s only been with the advent of the Internet and, more importantly, broadband, that operators have had an alternative to high-street distribution. Online bookings have increased from 7% in 2002 to 35% so far in 2006.
The integrated groups now have enough distribution in-house – shops, call centres and websites – to sell 85%-plus of their stock. This shifts the balance of power away from third-party retailers and is why operators such as Thomson have been so bullish with commission cuts.
So surely high-street agents must be dead and buried? Interestingly enough, the answer is probably not, since the latest ruling on ATOL licences has removed a barrier to entry and has allowed agents, via the web, to become operators and attack the structural inefficiencies of operators.
The problem with dynamic packaging is that if retailers are not careful they become ‘half pregnant’. They start believing they are operators, but miss the key point. The holiday is about the experience in-resort not the platform used to book it. In the Internet world, brand and trust are crucial elements when persuading customers to part with £2,000 in exchange for an intangible product, delivered months in the future.
Customers naturally want to transact with the providers of the product, putting retailers at a disadvantage.
The likely winners in the beach sector are not the Internet brands of Expedia and Lastminute.com, but the traditional operators who move their brands online.
The dark horses will be the VVI’s (Virtually Vertically Integrated). These will be formed by alliances between independent airlines – such as the low-cost carriers – and bed brokers who have access to, but crucially do not own, high-street locations and call centres to support their websites.
In October 2004, faced with a stagnating retail business selling family short-haul holidays in Birmingham and a fledgling but successful online business, Richard Dixon, director of long-haul specialist Holidaysplease.com, closed his shop and turned it into a sales centre for the website.
The Internet and low-cost carriers, combined with customers tired of being told how to holiday, helped to make the decision.
“The trigger was the figures. Our retail business was finding it harder to maintain booking levels. People were sick of the formula of the package holiday,” he says.
Dixon partnered with online specialist Please Online to make the smooth transition from bricks to clicks. “I had people who were experts at building and designing websites and knowing how to market them.”
Now Dixon is packaging up holidays on a small scale, when it’s right for the customer. Although his ATOL requirements are covered by membership of the Hays Independence Group, he is under no illusion about the amount of responsibilities operators take on for customers such as insurance and VAT.
“I would not dismiss becoming an operator but it is easy to say and a lot harder to do. Fundamentally, we are travel agents not travel providers but I do have a small deal with some hotels so I can’t say we’re not going along those lines. A lot of retailers think they can set up their own product and 12 months down the line discover everything that goes with it.”