Max Kingsley-Jones/LONDON Andrew Doyle/MUNICH
Between May and September every year, millions of people all across Europe jet off for their two weeks in the sunshine on package deals that usually include hotels, food, transfers and, most importantly, flights.
After ebbing and flowing since its invention in the 1960s, this business has boomed for the past four or five years in Europe, which has the two largest charter markets in the world: the UK and Germany.
As holidaymakers strive to travel further afield to more remote or exotic locations, the job of flying them there - and bringing them back - is arguably the most important element of the "package".
This expanding market, combined with increased competition, has forced the holiday companies to rethink their strategy. It is now essential for every tour operator to be vertically integrated with a charter airline. Similarly, any large charter carrier that does not have direct links with a tour company has found itself on very dangerous ground.
By the end of the 1990s, the drive to vertically integrate, paralleled by stepped-up competition between the leading tour companies, saw the European holiday industry gravitating around a handful of giants - Airtours and Thomson Travel Group (TTG) of the UK, C&N Touristik and Preussag of Germany, and Switzerland's Kuoni.
"The tour operator is the driver behind the charter airline's passengers," says Airtours aviation chairman Mike Lee, "so they dictate our fleet and network strategy and any mergers or consolidation by the airlines is driven 'from above' by them."
The tour operator mergers that created the giants have reshaped Europe's airline landscape, with carriers such as Leisure International Airways, Caledonian Airways, Blue Scandinavia and Airworld disappearing. These and other airlines have been absorbed to create airline groupings as powerful as their tour operator parents.
The large tour groups have spread their wings across Europe, covering the important western and northern markets with tour operators and airline arms. They had already begun to study and implement ways of increasing fleet synergies.
Thomas Cook's JMC Airlines, for example, which is linked to Germany's Hapag-Lloyd through the latter's parent Preussag, had begun a detailed joint fleet planning exercise with its counterpart. But these plans have been turned on their head after the events of the past six months, which have led to Thomas Cook and its airline being dropped by Preussag in favour of TTG/Britannia.
TTG, which earlier this year declined an offer from the Lufthansa/Karstadt Quelle-owned group C&N of 140p (ó210) a share, has since had an offer of 180p a share from Preussag. To ensure that the purchase clears the monopoly watchdogs, Preussag has pledged to sell its Thomas Cook arm, severing the JMC/Hapag link. The European Union cleared the merger on 26 July on condition that Preussag divests itself of Thomas Cook as it has agreed to do.
US firm Carlson Companies, which holds a 22% stake in Thomas Cook, is in talks with potential partners about acquiring the remaining shares from fellow stakeholders Preussag and Westdeutsche Landesbank. Any deal is likely to align JMC with a new continental European partner airline.
Stung by its high-profile loss of TTG to rival Preussag, German group C&N is on the hunt for acquisitions, and is understood to be discussing a merger with UK tour group Airtours. "We would like to expand in the British market," says C&N. Such deals could lead to a tie-up between Condor and the Airtours airlines. First Choice and Thomas Cook had been rumoured to be in the German group's sights, but industry sources say C&N sees a tie-up with Manchester, UK-based Airtours as its most attractive option.
Meanwhile, SAirGroup's family of charter carriers includes Swissair subsidiary Balair/CTA, Sabena's Sobelair, Air Europe and Volare Airlines of Italy (which are merging), and Germany's LTU. The airline group may be big in fleet terms, but it lacks the clout of a major tour operator behind it - something SAir is working to rectify.
So, as the dust begins to settle after the latest round of mergers and acquisitions, Preussag's airline group - which includes Hapag-Lloyd and Britannia but now lacks JMC - boasts the largest fleet (77 aircraft) and seat count (17,900). SAir is a close second. If third- and fourth-placed Airtours and C&N confirm their tie-up, however, they will steal the lead by a considerable margin - 19 aircraft and 4,500 seats.
Airtours has been driving the trend for pan-European expansion in recent years and the tour operator's 10-year-old UK airline now has arms in Germany, Scandinavia, Belgium and Germany. This growth came through acquisition of tour operators and merger with, or creation of, local airlines.
Last year, Airtours tried to grab secondary UK tour operator First Choice/Air 2000, but the move was blocked by Brussels. First Choice management had already agreed a merger with Swiss giant Kuoni (parent of Edelweiss Air), but shareholders saw things differently and held out for the more lucrative Airtours bid, which ultimately proved unsuccessful.
The creation of pan-European charter airline families by tour operator groups such as Airtours has enabled operators to streamline their fleets and operations. Airtours created its Aviation division, headed by Lee, in 1998, and he oversees an operation that includes about 50 aircraft, and will average more than 90% in passenger load factors this year.
As well as the UK carrier Airtours International, the group includes Germany's Fly FTi, Scandinavia's Premiair, and Air Belgium.
Airtours has increased its stake in Germany's loss-making tour operator Frosch Touristik (parent of Fly FTi) from 29%to a full 100% "to manage the business during this period of significant structural change", says Airtours. Following the parallel decision to close Air Belgium in November, the carrier's management wants to stage a buy-out ahead of a planned shut-down on 1 November. Airline partners are being sought, with Sabena a possible recruit.
Although each Airtours sister airlines has its own air operator's certificate to meet licensing requirements to operate long-haul, twin-engined flights, there is much integration elsewhere.
"There are three key areas where we gain economies by centralised acquisition," says Lee. These include:
• aircraft;
• fuel/insurance;
• maintenance/engineering and other services.
"The Airtours philosophy is to build our fleet size around our low season needs," says Lee, because this avoids the headache of having to lease aircraft out during the winter. The UK arm carries about 90% of the tour operator's passengers during the winter season, compared with 65-70% in the summer when extra capacity is leased or bought from other operators.
The Airtours group airlines can make effective use of their fleets "as we pass aircraft between each other as local markets fluctuate", says Lee.
A good example of this is the transfer of an Airbus A330-200 from the UK at the end of the summer season to Scandinavia (Premiair), where the local market has a requirement for additional long-haul capacity during the winter. In some cases, the aircraft take their own crews with them.
German arm Fly FTi operates its Airbus A320 fleet on short-haul charter routes for tour operator FTi, but relies on wet-leased Britannia Airways Germany 767-300ERs for its long-haul capacity. A possible consequence of rival Preussag's acquisition of Britannia parent TTG could be the premature termination of this arrangement. Fly FTi has long-term plans to acquire a fleet of A330-200s - a type already operated by its UKsister airline Airtours International.
Meanwhile, the current priority for the Swiss group SAir is to reverse the flagging fortunes of LTU, which is suffering badly from over-capacity within its aircraft fleet and a much higher than average cost base. SAir is trying to secure a tie-up with a major European tour operator to drum up more business for its 49.9%-owned German charter subsidiary. Media reports identify Rewe-Touristik - a venture between German tour operator ITSand travel agent DER - as a likely investor.
LTU's tour operator affiliate LTU Touristic is "not providing enough" business for the airline, says SAirGroup. "We think we need another partner as well. Everything is very fluid at the moment and we are talking to several different parties."
SAir says it is looking to forge a partnership rather than acquire a tour operator. "We would prefer to have a co-operation," it says. The parent has taken the radical step of deciding to replace LTU's entire fleet of Boeing 757s, 767s and A330-300s with smaller A320-family and A330-200 aircraft in an effort to reduce costs and restore profitability.
Meanwhile, SAirGroup's previous concept of a "European leisure group" focusing on the 757/767 families for charter operations has been dropped in favour of developing a closer relationship with the Qualiflyer Group of scheduled carriers.
SAirGroup believes that overlap between demand for economy-class scheduled travel and seat-only charter deals will increase in the coming years - a belief that it demonstrated recently by deciding to allow Balair/CTA passengers to collect Qualiflyer Group frequent-flyer miles.
On the fleet side, the SAirGroup charter affiliates are increasingly standardising on Airbus types, except for Balair, which is acquiring two new 757-200s and two 767-300ERs. Following LTU, the Volare Group will also operate an all-Airbus fleet and is planning to replace Air Europe's four 767s and two 777s with a similar number of A330-200s.
Source: Flight International
