Leisure travel: New horizons

Leisure carriers are shifting their attentions to medium- and long- haul destinations as they face a stiff challenge from budget airlines and respond to changing consumer behaviour

Leisure travel has not always been an easy industry to be involved in this decade, with the growth of low-cost carriers, geopolitical worries and economic downswings just some of the challenges the sector has had to face up to. Still, 2004 and, so far at least, 2005 have seen the sector recover, mirroring the upswing seen in the wider airline industry.

The World Tourism Organisation (WTO) reports that between January and April, international tourist arrivals were up 8% compared with the same four months in 2004, around double the long-term average. “2005 started as a year of continued recovery from the various shocks felt in the 2001-2003 period,” says the WTO, although it expects this rate to ease with 5-8% expected for the year as a whole, partly due to capacity constraints in the busy summer season.

This steady growth is welcome relief for an industry that was battered by the economic downturn of 2001-3 and the fallout from the SARS epidemic. However, there are still plenty of challenges ahead.

European leisure carriers in particular have had to cope with the growth in popularity of independent travel, led, of course, by the rise of low-cost carriers. This has forced the traditional travel operators, based around high street stores, tour operators and charter airlines, to re-examine their business models. There is a widespread acceptance within the travel industry that while there will always be a place for the packaged holiday, there will also be little if any growth in this particular sector.

The challenges they are facing are perhaps best evidenced in Spain. According to the Spanish ministry of tourism, 57% of tourists who visited the country in 2004 did not buy a package deal. This is in a market that not so long ago was the mainstay of the standard sun-and-sand package deal.

Some 29% of tourists flew to Spain on low-cost carriers last year, up a third in terms of market share over 2003. Further demonstrating the challenges facing leisure carriers, over four-fifths of these low-cost customers booked directly, without recourse to a travel agent. The ministry also says that the growth of low-cost carriers has led to what it calls a deseasonalisation of travel away from the traditional summer holidays, and that while low-cost passengers were just as likely as those travelling with traditional airlines to stay for four to 15 days, charter airlines readily admit that holidaymakers are less than willing to be told exactly on which of those days they will be travelling.

Attempts to sell seven or 14 night return trips as seat-only products have met only limited success. Thomas Cook, for instance, now books passengers on other airlines for one leg of the trip to provide the flexibility that passengers are demanding.

A further challenge for the travel groups suggested by the Spanish tourism figures is that low-cost travellers book 48.3 days in advance of travel, compared with 72.3 days for those on package deals. The trend towards shorter lead times for travel gives leisure carriers a headache when planning capacity levels, and does not help with cashflow either.

Independent travel

Most traditional operators admit they were slow to wake up to the threat posed by the growth of low-cost airlines and the accompanying trend towards independent travel and dynamic packaging (whereby consumers put together their own package, usually over the internet). “They let the low-cost carriers go past them,” says Mark Darby, a partner at the Unisys transportation management consultancy. This is changing, however. Low-cost carriers are no longer getting the free ride they were in the early part of this decade.

While charter carriers have not been slow in launching their own low-cost products, such as Hapagfly, Thomsonfly, and the hybrid services offered by Air Berlin, there has also been a change of emphasis to the core product offering. “They are slowly tooling up with the right resources,” says Darby.

In some cases, leisure carriers are redeploying aircraft, following the “if you can’t beat them fly somewhere else” principle. The shift in services is preferably beyond the three rotations a day range favoured by budget carriers.

A good example of this is Thomas Cook, which three years ago used to fly five times a day on the London Gatwick to Malaga route – just on Saturdays. Today, this is down to one service. “As a tour operator, we have an airline, and what matters is being able to keep that airline flying. This means critically adjusting the flying programme,” says Rob Thompson, director of aviation and capacity planning at travel group Thomas Cook UK.

While other north European markets may not have seen the same amount of saturation coverage by low-cost carriers of Spanish beach destinations as the UK, forced changes are also taking affect. Arie Verberk, president of Dutch leisure carrier Martinair, notes that low-cost carriers tend to start off on major trunk routes. His carrier has seen the most competition from budget carriers on the Amsterdam-to-Barcelona route, which also offers year-round traffic, another ticked box on the budget carrier wish list.

However, Martinair still sees scope on destinations which Verberk describes as “full leisure” destinations. For instance, Martinair is actually adding an extra weekly flight to Malaga for the coming winter season. “We fight back,” says Verberk.

Others also insist that there will always be a niche for charter carriers. Futura International Airways of Spain has resisted the move towards seat-only offerings. The carrier’s chief executive Roman Pane, who is also the new president of the International Air Carrier Association, makes a differentiation between short leisure trips and longer holidays. “People still need to go on holiday, whether it is for seven, 10 or 15 days. People need to switch off,” he says, adding that “seasonality will remain as long as children have holidays in the summer”.

Futura has, however, been forced to change to some degree. “We can no longer rely on the four months of the peak season,” says Pane. “The low-cost carriers have changed this. They have made prices tighter.” Futura has responded by wet-leasing its aircraft to the USA in the off-season, and has also been using its Boeing 737s to fly for Spanish regional carrier Binter Canarias for certain peak-demand periods.

In general though, it is not difficult to see areas where the charter carriers have beaten a hasty retreat in the face of low-cost competition. Nice in southern France was one of the first markets to see this as easyJet built up a presence there in the late 1990s. Elsewhere, “a number of leisure carriers have pulled out of Gerona”, says Thomas Cook UK’s Thompson. The Catalonian airport was Ryanair’s first Spanish base. “The flight times are relatively short and much of the market is for non-standard duration periods,” says Thompson.

So where are these aircraft going instead? The answer lies increasingly into the medium-haul market, beyond the range of low-cost carriers. Greece is a notable example. In part, this is because low-cost carriers would find it hard to maximise rotations from key source markets in northern Europe. “They would struggle to get two-to-three rotations,” says Verberk. “The routes to the Greek islands are also too thin, and there are only a limited number of hotel beds in some destinations.” The only low-cost carrier operating to Greece at present is easyJet. But to date it only flies to Athens.

Turkey and Egypt, like Greece situated in the eastern Mediterranean, have also been a source of growth for charter carriers. “These kinds of destination aren’t year-round,” says Thompson, noting that this will be a minus point as far as budget airlines go. Similarly, he notes that the smaller Greek islands “all but shut down in the winter”. Leisure carriers also say they have shifted capacity onto the Canary Islands.

A look at the growth markets of world’s largest travel group, TUI, shows the increasing importance of destinations beyond the reach of budget airlines. TUI Deutschland, the group’s German tour operator, saw its second successive year of record growth in traffic to Turkey, with volumes up 22%, on the back of an 18% rise in 2004. Morocco (54%), Kenya (81%), Bali (38%) and the USA (46%), although all smaller than the Turkish market, are the other TUI Deutschland star performers in growth terms.

This growth in popularity of far-flung destinations has been something of a boon for leisure carriers. “There is plenty of growth in the long-haul sectors. It seems to be pretty universal,” says Thompson. Figures from the WTO show that the some of the fastest growth in terms of tourism has been in the Caribbean, Central America and the Middle East (see table). According to WTO figures, the Caribbean saw a 13% increase in tourist arrivals last year compared with 2002.

The Middle East saw tourist traffic up 17% for the January-April period this year, on the back of a 20% increase last year. Eastern Europe is also increasing in importance as both a destination and a source market. “Tour operators have been extending their offerings on medium- and long-haul routes,” says John Kester, senior researcher at the WTO. China, as ever, is also seen as having huge potential for both inbound and outbound traffic.

Currency conversions

The growth of destinations such as the USA for the European market is partly the result of exchange rate fluctuations. The dollar has been trading around the €1.20-1.30 mark recently, compared with around €0.80 at the start of the decade. Kester says the price of package deals from Europe to areas such as the Caribbean has been coming down, making them more attractive destinations. “With tariffs on long-haul going down in comparison to short-haul, people are realising that you can go on holiday to Miami for a similar price to Malaga,” says Verberk of Martinair.

Also helping boost long-haul travel is a liberalising of air service agreements, as governments perceive the benefits of bringing in more tourists outweighing their desire to protect national flag carriers. “Regulation is becoming less common,” notes Thompson.

How long leisure carriers can rely on long-haul and medium-haul is a moot point. Low-cost long-haul travel is still in its infancy, with Canada-based Zoom Airlines being a notable player, offering services across the Atlantic mainly to the UK. Darby of Unisys says: “I think it is inevitable that it [low-cost long-haul] will happen. It’s just a question of time.“ TUI, for instance, has been scouting out the possibility of restarting UK-Australia leisure flights, but would face stiff competition from Middle Eastern carriers.

Martinair’s Verberk also points out that there is bound to be an element of cannibalisation of short-haul traffic in the growth of long-haul leisure travel. The issue of deregulation is also a double-edged sword, as while it may open up long-haul markets, it could also see some medium-haul markets closer to home attract low-cost competitors.

In the meantime, leisure carriers can confidently say that, while the product may need some modification in terms of destinations and selling techniques, the package holiday is, indeed, here to stay. “We think this concept will keep for a long time. There is still a clear market,” says Futura’s Pane.

COLIN BAKER/LONDON

Source: Airline Business