Consumer power

Travel volumes are once more on the rise, but with ever more demanding consumers and too much competition it is only getting tougher to translate volume into profits

Airlines may perhaps be cheered to know that they are not alone. Across the travel business, from hotels and rental cars to online agencies, executives are wringing their hands about the state of a market crowded with too many players competing with too much capacity, where yields and profits still go down even when volumes go up. Add in some further breast beating about the response to new online technologies and low-cost players and the concerns of the average travel industry executive start to sound painfully familiar.

Such was the message, or at least part of it, as Airline Business again hosted its Future of Air Travel conference at London's giant World Travel Market (WTM) show in early November, in partnership with Amadeus. The point was made well by Michael East, chief executive of Eastcastle Management Group, the UK's leading leisure business consultancy. "When the holiday business can grow 10% in Europe in the first eight months of the year but revenues fall 1% we have a problem," he says, with dark warnings about the extent of overcapacity across the sector.

It is a problem that he believes is threatening to get worse before it gets better: "Through-out Europe there are tour operators, hotel groups, car rental businesses and travel agents that make small profits from huge amounts of business. TUI is a good example." Not only are the barriers to market entry very low, encouraging new entrants, but the consolidation process has yet to begin in earnest. "We have an increasingly long tail of traditional businesses that make a smallish profit but with capacity that takes away the opportunity for others to make money," he says.

In large part, East argues that the traditional travel players have only themselves to blame, having often failed to adapt to the new realities that were dawning on the market. For years the leisure industry has continued to sell holiday packages for set periods of one or two weeks, says East, not because it suited consumers, who were in fact demanding greater flexibility, but because it suited the travel companies themselves.

With equal candour he points out that high-street travel agency chains were more intent on selling what made the most money rather than what the customer wanted and had little of the expert product knowledge that would keep the traveller interested. "As soon as the customer was offered access to what he might really want by low-cost/online then the package market went backwards," he says.

The extent of the change in consumer behaviour in the giant European holiday market, and indeed a more fundamental shift in how people think about their leisure time, is highlighted by a fascinating new study conducted not by a market research company but an anthropologist. Dr Simon Roberts, a people watcher with the London-based Ideas Bazaar research consultancy, helped to carry out a three-month study into travel among travellers, largely carried out with interviews in the UK, but linked in with other international studies.

One clear finding is that the concept of a standard set-piece holiday is almost obsolete. "The actual word holiday is going out of business," says Roberts, pointing out that the word, where it is used, is nearly always prefixed with a specific activity such as adventure, skiing or cycling. Equally consumers no longer think only in terms of week-long stays, with holidays now ranging from weekend city breaks to month-long tours.

The research highlighted that people spend a lot of time preparing for their breaks. "Planning is foreplay," says Roberts, arguing that people actually enjoy the preparation as much as the holiday itself. Surprisingly, perhaps that leads him to detect an "anti-last-minute movement" as consumers linger over their travel plans. However, with travellers becoming increasingly confident in their ability to plan more complex trips book-it-yourself is now a "huge phenomenon", he says.

At the same time, the research suggests that consumers are becoming more interested in the experiences that a destination has to offer, in particular the people that they meet there, and much less in the mechanics of the travel itself. "Destinations are about what we do in them, not the act of getting there or the going there," says Roberts.

East agrees that as the novelty of cheap online deals wears off, consumers will start to book because of the destination not simply because of the price. "The advent of low-cost airlines, internet booking, online packaging and online hotel reservations have created huge new business, new markets and new passengers," he says. "They have created chaos in the old world. They have to some extent become the product and the message. But, going forward, like package holidays, they will become the medium only for the real product, which is what does the customer want to buy and where - not where does he book and how does he get there."

He also points to the massive growth in European residential tourism over the past three years. Although it is a slowing trend, believes East, he notes that there are over 500,000 people in the UK that now own property in other countries. They have been a cornerstone of off-peak travel for the low-cost carriers.

Charter response

If the travel industry in general has struggled to come to terms with the new market dynamics, so too have Europe's traditional charter airlines, argues Tim Jeans. He spoke at the conference just days after taking up a new role as managing director of the growing scheduled business at UK leisure carrier Monarch. "Charter is by no means dead, but the model is coming under significant pressure," says Jeans. He has been at the cutting edge of that change in previous roles first as the commercial director of Ryanair and then in setting up MyTravel Lite, a low-cost operation for the now struggling UK travel giant.

MyTravel is not alone in eventually mounting a challenge to a low-cost sector that, as Jeans says, many travel groups initially tried to ignore. Hapag-Lloyd Express, ultimately part of TUI, is now growing fast, while independent charter carrier Air Berlin is fast adding new low-fares scheduled service.

However, along the way the traditional charter carriers have "ceded the short-haul markets of Spain, Portugal and Italy" to the low-cost operations and instead looked for growth in longer haul markets, says Jeans. So although he predicts that overall charter capacity in Europe will fall, there will be a growth in new long-haul destinations, helped by the emergence of new long-range mid-sized cruisers in the form of Boeing's 7E7 and the proposed Airbus A350.

Monarch's own response to the new market conditions has been to make scheduled operations the core of its short-haul business while growing higher margin longer-haul routes, says Jeans. Today, scheduled operations account for 40% of Monarch's capacity.

However, he concedes that the market is still heavily oversubscribed. "The outlook on profitability is frankly fairly bleak," he says, predicting that the future will bring "more new low-fare entrants, chronic overcapacity and falling fares leading to airline failures." He adds, though, that given the strong cashflows of the air travel business, "you have to be losing an extraordinary amount of money to go bust".

Wolfgang Kurth, chief executive of German low-cost carrier Hapag-Lloyd Express and president of the European Low Fares Airline Association, is also not optimistic about profits. This is despite parent TUI reporting that the carrier has just reported its first profits with earnings of €1 million ($1.3 million) in the September quarter when combined with UK sister airline Thomsonfly. This compares to a €10 million quarterly loss a year ago.

Although profits are under pressure, growth has been incredible, says Kurth. Europe's low-cost sector, which carried only 13 million passenger in 1999, is expected to handle 90 million this year based on latest estimates. The number of carriers during the same period has soared from two to 65, while routes have mushroomed from 19 to 909.

However, there will be failures. "Consolidation has started and we've had some fatalities," says Kurth, who expects more alliances and co-operation between low-cost carriers. "But I was not ready to believe that it would have happened after only two years. I get phone calls almost every day from airlines to talk about co-operation." Kurth believes the end-game will see at least 20 low-cost carrier survivors in Europe, most of them in niche markets, but with four or five players operating across the region.Others, however, have already begun to question how long the low-cost sector can sustain current growth rates. Bruno Matheu, executive vice-president marketing at Air France, believes that there are limits to the inroads that low-fares carriers can make into the complex world of network airlines. "Low-cost carriers have a specific product and there is no denying there is room for them, but they have no connections, internet exclusive booking and simple customer service," says Matheu. "Where are they going to find the routes to generate these traffic flows?" he asks of Ryanair and easyJet's aims to collectively grow from 20 million passengers carried today to 50 million by 2008.

Distribution shifts

Low-cost carriers are only half of the story in reshaping travel markets. The other half belongs to the revolution taking place in distribution. To date the airline industry has been a net winner from the leverage that new online sales channels have given in forcing down agency commissions and charges from the Global Distribution Systems (GDSs), says Richard Clark, vice-president at the MetaGroup IT consultancy. He points out that carriers have been able virtually to half their distribution costs, bringing them down to perhaps 10% of overall operating expenses.

However, Clark also warns of an emerging threat. That is from the rising market power of the big three online agency players - Expedia, Orbitz and Travelocity. They already hold 40% of the global online travel market, he says. This is forecast to grow to over 60% by 2008. Another challenge is that these powerful distributors are increasingly attacking the highest revenue segment: the managed travel market.

The GDSstoo have begun to react to the changing environment. A year ago at the WTM conference David Jones, executive vice-president commercial, outlined the Amadeus value pricing concept. Where the GDS adds most value to the airline, such as in an agency sale in a foreign market, then the fee is higher than for, say, a routine booking made in a home market. Jones describes this as a "modest first step" towards unpicking the old flat GDS fee.

"We need to improve our value for money where we are perceived not to be cost-effective," he says. However, Jones warns not to underestimate the value of the GDS channel. An Amadeus survey showed that while the GDS channel did not rate highly against direct booking methods in terms of cost-effectiveness, it did score well in geographic reach, yield and in complex sales. "Limiting your distribution has the consequence of reducing the demand for your product," he cautions.

Cheryl Hutchinson, chairman of the Association of Corporate Travel Executives, which represents 2,500 corporations worldwide, makes a plea for full access to transparent fare content. "Corporates will continue putting pressure on the industry to get its act together and offer cost-efficient and simple channels of distribution," she says. "Imagine if there were one website where you could find out all the flight information that you needed, with the best value fares listed for each option."

World travel boom

Despite the gloom about Europe's overcrowded market, there is nevertheless good news in the shape of a robust recovery in the world leisure market, albeit offset by slower growth from the business travel market. "Travel and tourism will enjoy a very healthy time in the years to come with international travel leading the charge," predicts Jean-Claude Baumgarten, president of the World Travel & Tourism Council (WTTC). Latest forecasts suggest a 5.9% growth in the tourism spend in 2004 after taking a hit last year because of the Iraq War and SARS.

According to the Global Travel Report, an annual forecast study commissioned for the WTM event, international tourist arrivals worldwide rose by 12% in the first eight months of this year to around 526 million. The year-end growth figure is predicted at 8%, with a 4-5% rise forecast for 2005.

As Baumgarten points out, growth will be driven by south Asia for the next 10 years. "The pendulum is moving from the traditionally important US and European markets gradually to Asia," he says. China, for instance, will move from eighth place in terms of spending on tourism globally today to third place behind the USA and Japan by 2014. An encouraging thought in a turbulent world.

WTTC tourism league tables
Personal travel & tourism spend ($ billion)
	2004		2014
Rank	Country	Spend	Country	Spend
1	USA	805	USA	1,513
2	Japan	279	Japan	356
3	Germany	182	China	282
4	UK	175	UK	230
5	France	143	Germany	202
6	Italy	117	France	185
7	Spain	87	Italy	156
8	China	80	Spain	122
9	Canada	66	Canada	104
10	Australia	42	Australia	67
Personal travel & tourism annual real growth
	2004		2005-2014
Rank	Country	Growth %	Country	Growth %
1	Venezuela	26.4	Libya	12.3
2	Singapore	18.2	Montenegro	10.7
3	Dominican Rep	15.7	China	10.1
4	Taiwan	15.3	Chad	9.5
5	Chad	14.9	Vietnam	9.2
6	Sudan	13.1	Angola	9.1
7	Soloman Islands	12.9	India	9.1
8	Angola	12.9	Taiwan	8.8
9	Malaysia	12.7	Cambodia	8.4
10	Tunisia	12.6	Botswana	8.2
Business travel spend ($ billion)
	2004		2014
Rank	Country	Spend	Country	Spend
1	USA	168	USA	283
2	Japan	65	Japan	82
3	Germany	50	Germany	56
4	UK	41	UK	52
5	France	39	Italy	50
6	Italy	38	France	48
7	Spain	15	China	24
7	Canada	14	Canada	24
9	Netherlands	11	Spain	20
10	Australia	10	Australia	16
Source: World Travel & Tourism Council

Source: Airline Business