The theme of the annual general meeting of the charter airline industry body the International Air Carrier Association (IACA) was a familiar one - how to respond to the rise of low-cost operators.
The title of the conference was the single provocative question: "Is the package industry dead?" The answer from IACA carriers was a defiant no, despite the obvious success of the low-cost model as it encroaches onto the European leisure market traditionally dominated by the all-inclusive tour. But alongside that message came a series of warnings over the need for the package-holiday industry to adapt to the changing market conditions.
Some 90 million Europeans took a package holiday of four nights or more last year. However, this is 10% down from the 100 million who did so in 2000. The low-cost carrier sector was then in its infancy beyond the UK and Ireland. Low-cost carriers have now eaten into the charter industry market share, wiping it out from some routes within Europe such as London-Nice.
Even so, the charter industry believes it is up to the challenge posed by the likes of Ryanair and easyJet. "90 million people can't all be wrong," says Charles Gurassa, former aviation director of the TUI travel giant. "Nothing prolongs life more than predictions of imminent death," adds consultant Ralf Corsten, who, like Gurassa, used to sit on the board at TUI. Corsten notes that the question of the death of the package tour industry has returned "time and time again" but always when the market is "stagnant or in decline". He believes that there could even be a renaissance as innovations such as internet tour operators emerge. He also notes that domestic package holidays - those within the same country - are actually growing.
However, not all are quite so bullish. Peter Faross, head of economic regulation at the European Commission's transport directorate, questions whether the industry is being too optimistic. He notes that dynamic packaging, whereby consumers build their own holiday by purchasing air travel, accommodation and ground transport individually, is becoming subject to full transparency through the internet. He questions whether the simpler product offering of low-cost carriers may not prove more popular with consumers. He also asks whether intense competition may lead to yield erosion despite projections of future growth in tourism.
Even so, European tour operators are confident that the package holiday is here to stay. "There are certain people who want to be safe and sure about cost. They will always be there," says Simon Buck, who heads industry affairs at UK travel group First Choice. Gurassa notes that as time becomes an increasingly precious commodity, some will want to pay for the convenience of "having it all done for them".
Charter carriers still have some protection from the low-cost challenge on sectors of more than two to three hours, as it becomes impossible to achieve the benchmark of three daily rotations. EasyJet's four-hour service from London to Athens is a notable exception. For further flung destinations, such as Turkey, the tour operators can leverage their buying power to offer accommodation, food and drink for as little as €100 ($120) a day.
There is little protection on more accessible markets, such as the UK-Spain routes and most short-haul leisure destinations out of Germany. "They are in the middle of everything," says Alexander Kaiser of Germany's Cell-Consulting. Even peripheral areas of Europe such as Greece and Scotland are only a couple of hours flying time away.
Air Berlin has been among the most innovative, establishing a Spanish hub at Palma Majorca, which is served by up to 200 flights a week from German regional airports. The carrier now flies the majority of its passengers on a seat-only basis and half connect at Majorca to destinations on mainland Spain.
Few question that survival for charter operators will depend on how successfully they too innovate to meet changing market conditions. "Pricing is now much more transparent," says Gurassa, adding that the price advantage enjoyed by the charter sector against scheduled carriers has been eroded. "Their bigger aircraft, higher utilisation and load factors have been offset by higher distribution costs and higher complexity," he says, noting that on a seat cost basis aircraft costs between charter and low-cost carriers "look similar". If that is indeed the case, then the advantage of the package holiday operator now depends on the scale reduction achieved through block buying hotel rooms and operating large-scale transfers, he argues. "This has to be offset against the costs of packaging, brochuring and paying the traditional distribution chain," he warns. "It's far from obvious that overall package holiday companies have much edge here, particularly at a time when they're downscaling their long-term hotel commitments."
Tommaso Zanzotto, chairman of Online Travel Corporation, a UK online travel retailer, points out that consumers are more knowledgeable now thanks largely to the internet. "The package holiday is not dead, but it's going to be packaged differently. The consumer will be in charge," he says
Speaking at another recent conference, David Downie, aviation director of UK low-cost start-up Thomsonfly.com, a subsidiary of TUI, predicts that in five years the distinction between charter and low-cost offerings "will be much more grey".
COLIN BAKER BRUSSELS
Source: Airline Business
