The structure of UK tour operations market Essay Example

The structure of UK tour operations market Essay Example The structure of UK tour operations market Essay The structure of UK tour operations market Essay 1.0 Introduction 1.1 Terms of reference This report is the result of an investigation on the UK outbound tour operating market for Cole Venture Capital. The objective of this report is to give a clearer understanding of the structure of UK tour operations market and give recommendations on whether investment in such industry will be profitable for Cole Venture Capital. 2.0 Historical Review 2.1 Developments 1945-1960 Overseas travelling increased after World War Two. This was due to social, economical and technological improvements of their respective environment. The first air tour was credited to Vladmir Raitz whose Horizon Holidays bought surplus Douglas Dakota troop carrying aircraft from the army to carry 32 holiday makers on a trip to Corsica in 1950 (Yale 1995). The availability of cheap transport plus the lower accommodation and food costs in Spain and other Mediterranean countries made foreign holidays affordable to a generation emerging from war-time austerity and looking to enjoy the social equality and economic prosperity promised by governments of the era (Holloway 2002). 2.1.1 Development 1960s to 1980s The removal of visa requirements and the gradual easing of exchange controls encouraged further growth of foreign travel. The demand for travelling was largely met through inclusive tours rather than independent travel. This was because British people liked security of booking holidays from tour operators because the tour operators reduced the fear of the three Fs- flying, foreigners and foreign food (Yale 1995). Technological development continued to shape the tourism business. The introduction of Boeing 747 making it possible to travel in less time, made travelling more appealing (Yale 1995). Other factors, which influenced this growth, were the tour operators three main competitive advantages, which are low price due to bulk purchase of flights and hotels, quality assurance of well-known brand, and convenience booking through a local travel agent (Sharpley 2002). 2.1.2 Major developments 1980s to 2000 With the emergence of Thompson (Now TUI UK) as market leader, companies were adopting price led competitive strategies as consumers were expecting lower price. Thompson used its financial strength to pursue a strategy to gain market shares through cost leadership (Porter 1980 in Sharpley 2002). One of Thompsons major strength is that it is a vertically integrated company. Thompson owns the charter airline Britannia as well as retail chain Lunn Polly. Vertical integration has given Thompson more bargaining power with suppliers (Sharpley 2002). As a result of Thompsons tactics smaller operators were driven out of business and the sector became very much oligopolistic (Holloway 2002). One of the major developments during this period was the horizontal integration between Thompson and Horizon. The merger confirmed Thompson as the market leader, however the price wars have undermined the profitability of the whole sector (Yale 1995). The collapse of International Leisure Group (ILG) the second largest tour operator in 1991 signalled the full impact of the cutthroat nature of the industry (Yale 1995). By the mid 1990s a massive buying spree by Thompson and its rivals has changed the industry dramatically. The top four operators have spent millions buying other smaller tour operators and travel agents in the rush for dominance in the UK market. It all started with the Monopolies and Mergers Commission After several years of investigation, the UK Governments Monopolies and Mergers Commission announced at the start of 1998 that the foreign package holiday market was broadly competitive and served the interests of the customer well (Sharpley 2002). The report did impose three significant rulings on the sector: 2.1.3 Travel agents could no longer make discounts on the price of holidays conditional on the purchase of their preferred travel insurance scheme 2.1.4 Tour operators could no longer impose conditions on travel agents banning them from offering bigger discounts on other companies products 2.1.5 The big integrated companies now had to display their ownership links on the inside and outside of their agency shops and on brochures The MMC said the big operators had to make their ownership links more transparent. For example, Thomson Travel Group had to ensure that its travel agency chain Lunn Poly clearly stated its ownership links in its high street shops. The ruling of MMC meant the big companies were going ahead with more acquisitions (Holloway 2002: 227-231) 3.0Â  Structure of the travel and tourism industry 3.1 Structure The tour operating sector in the UK travel industry is dominated by the four big players- Airtours PLC, Thompson Travel Group, Thomas Cook and First Choice Holidays PLC. Between them they control 60% of the market (Sharpley 2002). To be a tour operator a licence (ATOL) is needed from the Civil Aviation Authority (CAA). An operator buys aircraft seats, hotel accommodation and other services or products required to make up a package holiday and sells them to the general public, traditionally through the travel agent but nowadays also directly to the public by various means including the internet. They make these purchases off principals in bulk, which generates economies of scale, thus making savings, which can be passed on, to the customer (Holloway 2002). The essential link in the process of selling holiday products is the brochure, which communicates the product to the customer, but as mentioned the Internet is becoming increasingly important. The barriers to entry are low, however it is very hard to compete with big tour operators. To survive it is essential to concentrate on a niche market or buy market share through integration (Sharpley 2002). The current structure of UK tour operating as mentioned by Sharpley (2002) is characterised by: 3.1.1 An elite group of about 10 vertically and horizontally integrated tour operators who collectively account 70 percent of the air holiday market. This group includes big players like Airtours and Thompson who are mass tourism operators. 3.1.2 A central group of established medium sized operators who have a strong niche market presence. They carry 100,000 to 300,000 passengers a year, however in recent years these companies have been taken over by big players for example Direct Holidays is now part of Airtours. 3.1.3 A very large number of small but specialised operators who carry less than 100,000 passengers a year. These operators focus on specific markets or destination. (Sharpley 2002:76). 3.2 Integration in tour operating In November 1996 Thomson and Airtours were referred to the Mergers and Monopolies Commission as part of an investigation covering the entire holiday industry. The investigation focused on vertical integration and whether travel agents sell their own holidays in preference to those of other operators or control their domination of the package holiday industry to control supply and fix prices. A further issue that was considered was brochure racking and switch selling, that is whether the larger travel agents such as Lunn Poly were giving preference to their own parent company when displaying brochures and selling holidays (Hudson et al 2001). Smaller tour operators were complaining that they were not getting a fair deal at the travel agents who were owned or linked to the larger operators. Integration both vertical and horizontal became more common with big tour operators after the Monopolies and Mergers Commission investigation into the travel industry. The outcome of the enquiry, which was announced in December 1997, effectively gave a green light to the big operators to go on their spending spree (Holloway 2002). 3.2.1 Cases of horizontal integration Horizontal integration is acquiring a company across the same level of chain distribution; the first focus of the major operators was on buying up other tour operators. Thomson bought smaller but profitable companies such as upmarket tour operator Simply Travel and Magic Travel Group. Airtours acquired companies such as Panorama Holidays while First Choice bought up medium-sized rival Unijet and long-haul specialist Hayes and Jarvis. Meanwhile, Thomas Cook bought Flying Colours Leisure Group, which operates Club 18-30 and Sunset Holidays and merged with Carlson Leisure Group (Sharpley 2002). After acquiring smaller tour operators the attention turned to securing distribution for the tour operators new, enlarged portfolio. Thomson acquired smaller, regional travel agent chains such as Scottish travel agency chain Sibbald Travel and South Wales chain The Travel House. Airtours bought up Travelworld and did a deal with an independent travel agency chain, Advantage Travel Centres, to sell its holidays through 350 of their branches. Thomas Cook literally doubled its travel agency chain overnight when it merged with Carlson Leisure Group and took over the Carlson Worldchoice (Holloway 2002). 3.2.2 Cases of Vertical integration Vertical integration is the common ownership of tour operator, airline and travel agent (or any two of these) it is a significant feature among the leading tour operators and travel agents and has increased in recent years. Prior to the late 1980s only Thompson among todays leading companies had been fully vertically integrated-with the purchase of its airline Britannia in 1965 and Lunn Poly in 1972 (Yale 1995:24-26). Among the leading organizations, the vertical integration picture is set out in appendix 1. 3.2.3 Impacts of horizontal and vertical integration on smaller independent operators In theory horizontal integration leads to economies of scale, this means that due to bulk purchases and shared marketing cost saving techniques are utilised. The cost savings enables tour operators to become more competitive, allowing it to develop better range of products at a cheaper rate (Yale 1995). Big tour operators have used integration as means of competitive strategy to gain greater immediate market shares as mentioned earlier in the report (See part 2.1.2 Thompson merger with Horizon). The vertically integrated groups now supply a large proportion of the tourism market. Vertically integrated operators have the market power to put competitors (especially smaller independent ones) at a disadvantage, for example in de racking or threatening to de rack their brochures in an attempt to negotiate larger commissions, by pressurising operators not to supply independent travel agents on better terms, or by pushing their own holidays through in house incentive schemes (Yale 1995). In many industries it is the role of small or medium size enterprises to develop new niche market segments, which if successful are taken over by larger organisations. This has certainly been the case in tour operating as the major groups have sought to diversify into higher yield specialist markets. In a report by Mintel (2001) the Association of Independent Tour Operators ruefully reflect that many of their former members are now part of larger vertically integrated groups. 3.2.4 Independent tour operator survival The keys to success are considered to be specialisation and exclusivity, with distinguishable niche products, and tailored personal service. These holidays are generally sold through direct sell advertising in newspapers and magazines, with high levels of repeat business and recommendation. However, AITO has also formed an alliance with independent retail agents under the banner of CARTA the Campaign for Real Travel Agents- who position themselves as genuine travel consultants as opposed to the holiday shops of the major groups. The big threat to the independents from the consolidation of tour operating is the fight for seat allocations. 4.0 Market Sizing Trends Despite the impact of the tragic events of 11th September 2001 on the outbound tourism market, expenditure overseas by UK residents (excluding fares), the number of UK residents visits overseas, and the number of nights spent overseas, all increased in 2001. The value of the outbound market including fares decreased in 2001, reflecting price pressure on fares as a result of increased competition (see appendix 2). This was accentuated by the development of low-cost airlines and the impact of 11th September. Prior to 11th September, the market was growing as it had since the Gulf War and the recession in 1991 (Keynote Travel Agents Overseas Tour Operators 2002). Keynote (2002) has stated that growth of outbound tourism from the UK has been greater than the world average during the 1990s. This is because Britons are getting better off. Many who could not previously afford overseas holiday can now do so. Also airfares are becoming less expensive, due mainly to competition and bigger airlines. There are also many other countries that are developing their tourist industry and the choice of where to go is getting bigger every year. Other trends included different channels of distribution such as the Internet and other forms of new media and digital technology.