The long awaited consolidation of Europe's huge leisure sector has fallen into place. What does it mean for the region's charter carriers?
After years of manoeuvring the past 12 months have seen a profound shake up among Europe's large leisure players. The end result is the formation of two huge tour operators. Together they have an annual turnover approaching $40 billion, 46 million customers and a fleet of around 265 aircraft.
The European Commission has cleared, with minor conditions, the merger of Thomas Cook and MyTravel, as well as that of TUI and First Choice. The Thomas Cook-MyTravel deal was finalised in June under the Thomas Cook Group label, while the TUI-First Choice amalgamation is due to be completed shortly with a listing on the London Stock Exchange. The new TUI Travel entity will be owned 51% by TUI and 49% by First Choice.
A third major player in the market was created in March when fast-expanding Air Berlin acquired LTU International Airways to add long-haul flights to its short-haul low-fare business. Interestingly, LTU's owner offered the airline to Condor, owned by Thomas Cook parent company KarstadtQuelle, with a view to merging the two airlines. But Air Berlin was quicker off the mark and is now understood itself to be in discussions with KarstadtQuelle about bringing Condor into its stable.
Air Berlin acquires LTU
In August, the German competition authority cleared the takeover of LTU without restriction, but this came too late for a harmonisation of services in the summer schedules. Air Berlin chief executive Joachim Hunold says the carrier hopes to achieve cost savings of €70-100 million ($95-137 million) next year. In the interim, Air Berlin has entered into a codeshare pact with Condor, but this has yet to be implemented. Nevertheless, TUI is sufficiently concerned about this "possible monopoly" that it is making plans for its own long-haul operation from 2008.
This consolidation in the travel sector reflects the increasing pressure on the traditional charter and package holiday market over the past decade from the rapid growth of low-cost airlines and the increasing access to travel via the internet. These two developments have offered greater choice and flexibility to the holidaymaker and have been the main drivers in irreversibly changing consumer behaviour. Some insiders believe these moves are also an attempt by the large tour operators to protect themselves against a possible attack on Europe by the online US travel giants such as Expedia and Travelocity.
Fourteen of the 37 member airlines of the Brussels-based International Air Carrier Association, which represents the leisure airlines, belong to the three enlarged groups, which also account for nearly 350 of the 750 aircraft operated by its members. However, "as far as IACA is concerned, the mergers will have no impact on the dynamics of our association", says secretary general Sylviane Lust. "IACA's board structure is based on country representation and is not weighted by size. This allows us to keep a balance between our members and enables all of them to express their views and needs as they so wish. This system has worked well for us throughout the association's history. We continue to respond to and assist with all the varied and different issues affecting our members."
Thomas Cook integration
The process of consolidation and integration is well under way at Thomas Cook. "The coming together of two of the best-known names in travel means that we will be significantly stronger together than as two separate businesses," says Manny Fontenla-Novoa, joint chief executive of the Thomas Cook Group. "The pooling of resources gives us a fantastic opportunity to create an international group and all the foundations are in place for Thomas Cook to build a remarkable future for itself and its people. Our key focus will be to deliver the best products, service, value and quality to our customers, and consistently deliver on our commitments to investors and shareholders."
The group hopes to generate synergies of around £95 million ($193 million) from the tie-up with MyTravel. It has already announced the closure of six UK sites and aims to cut its network of stores by 150. Up to 2,800 jobs could be affected by these proposals. Although not specifically mentioned, insiders fear that there will also be a significant number of pilot redundancies.
Before the end of the year, MyTravel Airways in the UK and Denmark will be merged into Thomas Cook Airlines, but the Germany-based airline will retain the strong Condor/Thomas Cook brand. Thomas Cook Airlines Belgium will remain unchanged. However, there are currently no plans to change the composition of the fleet, although this is under continuous review. "Each of our airlines is largely responsible for providing the flying arrangement of our respective tour operating businesses," says Fontenla-Novoa. "In the UK, for example, we operate a vertically integrated model whereby the distribution, airline and tour operating businesses work as one. Across our international businesses, we do move aircraft from market to market - UK to Canada - to satisfy the counter-seasonal peaks in the two countries." However, it is thought that the UK fleet will be reduced by four or five aircraft.
While Thomas Cook is still reviewing the make-up of the future fleet across its airlines, TUI Travel has shown its hand with two major orders that will harmonise equipment in the short- and long-haul markets. In May, TUI signed a firm order for 11 Boeing 787-8s and 50 Next Generation 737s, worth approximately $4.7 billion at list prices.
The 23 787s - First Choice already had 12 on firm order - will be put into service from 2009 with Arkefly in the Netherlands, Belgium's Jetairfly, the UK's Thomsonfly, Germany's TUIfly and Scandinavian operator TUIfly Nordic, replacing the existing fleet of Boeing 767s. The 787s will be mainly used to expand services to Asia and North America. The 737s, some of which have already been delivered, will be operated on short- and medium-haul routes by all TUI airlines, including Corsairfly in France and Jet4you.com in Morocco.
Not to be outdone, Air Berlin placed the largest European order for the Boeing 787 in June, signing a firm contract for 25 aircraft at a list price of $4 billion, and taking out 10 options and 15 purchase rights. It had already placed a large order for 60 Boeing 737s last November.
TUI and First Choice have yet to flesh out the details of their integration, awaiting the completion of the merger with the listing of shares in TUI Travel. A major step forward was taken in late July when First Choice announced its shareholders had overwhelmingly voted for the deal. "This means that, following the go-ahead of the anti-trust authorities, we have cleared the second hurdle on the way to TUI Travel," says TUI chief executive Dr Michael Frenzel. "We will be creating one of the most profitable travel groups in the world. The biggest tourism platform in Europe will come into being with TUI Travel."
In the prospectus published at the end of June, TUI estimates that pre-tax cost benefits will be at least £100 million a year, and are expected to be fully realised within three years of completion. Most of these will be delivered from the UK market. It also expects that the one-off restructuring costs associated with the delivery of the synergies will amount to £130 million.
The TUI airline group
TUI Travel will establish TUI Airline Management as the airline competence centre across the enlarged group. It will be responsible for co-ordinating group fleet planning and aircraft sourcing requirements, as well as the implementation of quality and safety standard procedures across the airlines.
"Consistency and harmonisation," the prospectus states, "will be achieved through the implementation of common business and IT platforms across the airlines and through a network of intra-group services between the airlines." The responsibility for implementing this harmonisation will be with aviation director Christoph Müller. Whether or not this will include a common name for the various airlines is as yet unclear, but it is most likely that Thomsonfly and TUIfly will be the pre-eminent airline brands.
With such headline dominance of the market by these German/UK axes, where does this leave the minor players? Has it marginalised the smaller independent operators so they are forced to feed off crumbs or are there sufficient niche markets shunned by the majors?
Travel industry consultant Keith Betton says the merged companies will become more efficient and will be able to make better use of facilities, thus reducing the availability of seats to the independent market. "The new merged entities will make huge savings," he says. "And if these are passed on to the customer, the smaller tour operators and airlines, lacking the necessary critical mass, will find it increasingly difficult to compete." Overall, the holidaymaker will benefit from this consolidation, Betton adds, "unless Thomas Cook and TUI Travel use their dominant position to put up prices. This would be bad news for the consumer."
Noel Josephides, managing director of Sunvil Holidays, a member of the Association of Independent Tour Operators, says in overall terms the consolidation is a good thing, as it will "enable [Thomas Cook and TUI] to exert more control over capacity", but he does not believe all their flying can be done in-house. "It has never happened in the past, and will not happen now," he says. But he also emphasises that in spite of having diversified into the seat-only and scheduled markets, the smaller independent airlines will not be able to fly their aircraft without the tour operator. He warns, however, that there may well have to be an upward movement in prices paid to the tour operator.
Tim Jeans, managing director of Monarch Airlines, the next biggest provider of charter seats in the UK after the two new vertically integrated groups, agrees the chances are that TUI and Thomas Cook will always require third-party flying in the summer, to avoid having overcapacity in the leaner winter months. He says that Monarch, which has always had a solid relationship with both, will continue to have a role to play, especially flying to and from destinations with insufficient traffic for the larger operators.
"As they [Thomas Cook and TUI] get bigger, they will concentrate on their profitable core business at the larger bases, providing scope for the independents to serve geographical niche markets, which will be sufficient to provide sustainable businesses," says Jeans. But, he adds: "We will certainly have to look at taking the risk of flying into our own hands, which we have increasingly been doing." Jeans says that 20 years ago 70% of Monarch's flying programme was undertaken for TUI and others. Today it is less than 20%.
Norbert Grella, managing director of German charter carrier Hamburg International, accepts that competition for the independent airlines will be tougher, but does not foresee any great change to the status quo. "We have been flying for all the tour operators, such as TUI, Thomas Cook, Neckermann and others for nearly nine years. We are a niche operator and expect to remain on good terms with the tour operators." Hamburg International derives 60% of its income from tour operators.
Market shake-up
The changed market will affect the airlines of the new larger merged groups as much as it will affect the smaller operators. Josephides says the traditional markets of Spain and other western Mediterranean resort areas have largely been lost to the package holiday market because tour operators never believed that the no-frills scheduled airlines would have the capability to muscle in on this market.
"The pure charter flights will in future be only to places where there is no seat-only demand," says Josephides. "This is an area where there is room for the smaller independent airline. But for the larger groups, the trend is towards the long-haul market." As some of Europe's low-cost airlines have hinted at attacking the long-haul market soon, TUI, Thomas Cook and LTU will likely face pressures in this arena also.
There is little doubt these new power blocks in the travel business will dominate the European charter market, but the effect on the independent airlines will not become evident for some time, although this is not expected to be as dramatic as some have feared.
However, all airlines, large and small, face the same low-fare and internet competition. For one charter airline executive, the key over the next five years is to fight back with the introduction of "dynamic packaging" where all elements of travel - flight, hotel and car - can be booked as a package online.
The idea is to allow customers to choose the individual elements of the package online with the price of each changing as the travel preferences change. This is a technique the online agencies like Expedia are well versed in, and the challenge for leisure operators and airlines is to do the same.
For more news relating to the Boeing 787 Dreamliner, please visit our 787 Aircraft Profile page
Source: Airline Business
