Europe's package travel giants know they need to respond to the low-cost airline threat and are employing a range of strategies to fight back. But is it too late?
Ninety million Europeans may have booked package holidays last year, but the continent's inclusive tour (IT) industry is under no illusions. It realises that growth in the sector has ground to a halt and is never again likely to reach the levels enjoyed just a few years ago. With the low-cost carrier (LCC) business booming in Europe, the IT players are facing up to the fact that their slice of the leisure market is shrinking, and have mapped out varying strategies to resolve their predicament.
It is now almost 50 years since the first package holiday tourists set off on IT vacations, and, given that the industry is driven by people's prosperity, it has always been cyclical. In the past, when there was growth, it was extremely strong, with huge capacity increases leading to oversupply of seats and hotel rooms. But each recession has spelled devastation, with at least one major casualty resulting from each one.
Leisure airlines such as Britannia Airways, Hapag-Lloyd and Monarch have been around for decades, operating aircraft in high-density seating layouts to Europe's sunshine resorts. The fully integrated travel giants - complete with high street travel brands and in-house airlines - began to emerge in the 1980s.
After several rounds of consolidation, and a little bed-hopping, Europe's travel industry has gravitated around two main international players - Thomas Cook and TUI - which along with fellow integrated travel groups First Choice of the UK, LTU parent Rewe and the UK/Scandinavian group MyTravel represented almost 60% of the European IT charter airline passenger market in 2002
But no sooner had the industry consolidated than the LCC revolution began to bite. The no-frills operators have not really killed the IT market, but rather have stopped it in its tracks, and this is what is concerning the tour operators. The level of the LCC impact has varied by country, depending on its distance from Europe's beach destinations.
So worried about the state of affairs are Europe's charter airlines, that at the recent annual general meeting of Europe's leisure airline industry group - the International Air Carrier Association - the subject up for debate was: "Is package travel dead?".
According to AGM speaker Charles Gurassa, who was chairman of TUI's airline group until a boardroom shake-up last year, Europe's three largest IT markets - Germany, the UK and the four Nordic countries, have gone "ex-growth", having declined from 100 million (four-night stays and longer) package holidays in 2000 to 89 million in 2002: He says that, while the decline of the largest market - Germany - may reflect that country's larger economic difficulties, "the UK has enjoyed very strong consumer demand over the period, yet the previously strong link between demand and growth in package travel seems to have been broken". Gurassa adds that "the four Nordic countries have had a very difficult time, and the market has shrunk significantly".
Internet influence
While a number of factors are at play in causing a decline in the appeal of IT holidays, it is the advent of the internet and scheduled no-frills operators that have been the main drivers. "The LCCs have introduced a degree of flexibility not previously on offer to the holidaymaker," says Gurassa.
"The LCCs took much of the IT airlines' formula, but used it differently," says Thomas Cook Airlines UK (TCUK) managing director Glen Chipp. "They share our high-density seating and low cost structures, but whereas charter operates, say, three 3h sectors and aims for a 92% average load factor, the LCC model works on a formula of 2-2.5h sectors with four rotations and no more than an 80% load factor.
"Secondly, the LCCs go on to 'thick' routes with high frequency, where our model is tied into packaging bed availability with flights," says Chipp.
The first factor, says Chipp, explains why the LCCs have had less impact on the UK's charter airline market despite their relatively long-standing presence there, compared with Germany. "Unlike the UK, in Germany the European beach destinations are all within the LCCs' 2-2.5h flying time."
This has helped Air Berlin to become a major player in the German low-fare scheduled market, operating 41 Boeing 737s on a network connecting Europe's holiday resorts to most major German cities. The airline had previously been a major third-party charter operator, but was forced to re-invent itself when consolidation by the vertically integrated tour giants caused much of its business to dry up as they brought their passengers in-house. Ironically it is now Air Berlin that is calling the shots in the German leisure market.
TCUK was created last year following the 2001 acquisition of JMC Airlines' tour operator parent Thomas Cook by German tour operator C&N Touristic - which itself is 50%-owned by Lufthansa and controlled German charter airline Condor. JMC had only existed since March 2000, resulting from the merger of charter airlines Caledonian Airways and Flying Colours.
Prior to the C&N link, JMC was briefly owned by Germany's TUI (then called Preussag) and aligned with that German leisure giant's airline Hapag-Lloyd. These links were severed when TUI purchased UK travel company Thomson and its airline Britannia Airways, forcing Thomas Cook and JMC to be sold due to competition issues.
Rebranding business
Following the take-over of Thomas Cook, C&N rebranded all its businesses under the name of its new acquisition, and now has airlines in Belgium, Germany and the UK that carry the group's branding, as well as a Turkish arm - Sun Express - in which it holds a 40% stake. The decision to drop the well-established Condor name in the German market looks likely to be reversed. With Thomas Cook Group poised to announce some major developments in the German leisure market, including the expected launch of a low-fare scheduled operation, the German arm of the business declined to be interviewed.
Asset sale
Loss-making MyTravel Group has had its own problems to deal with in recent years - its operating deficit reached around £360 million ($650 million) last year - and it has been selling assets like its cruise ship business, to focus on core activities.
MyTravel carried about a quarter of the 10 million passengers who travelled by air on UK originating package deals last year. Of these, about 82% were travelling to the Mediterranean basin and Canary Islands resorts. The group has three airline operations including two in the UK - charter carrier MyTravel Airways, which operates from main hubs in Manchester and London Gatwick, and its Birmingham-based low-cost scheduled arm MyTravelLite - and a Scandinavian charter airline division also branded as MyTravel Airways.
Tim Jeans, chief operating officer of MyTravel Airways UK, is confident that the traditional charter business has a future: "Anyone who believes we're facing the cliff edge on traditional charter holidays is wrong," he says.
Chipp agrees that reports of the charter market's demise are greatly exaggerated and believes there is room for IT and LCC business in the UK leisure sector: "The charter sector is a classic mature market - averaging around 3% annual growth for the last 10 years." But Chipp is not complacent and acknowledges that "the tour operators have been slow to respond to the growth in online and direct bookings".
Jeans says it is clear that the vertically integrated leisure companies like MyTravel Group will have to look to redefine their functions to ensure that they can meet the 21st century holidaymaker's demand for more flexible holiday arrangements.
MyTravel recruited Jeans from Ryanair in 2002 to use his knowledge of the LCC sector to steer the group's UK airline strategy. "The LCCs have hit the UK's charter airlines on services to the core Iberian destinations, where increasing UK property ownership has driven demand away from charters towards scheduled services that offer more flexible frequencies," says Jeans.
Chipp says that Thomas Cook was helped in delivering its highest-ever profit last year by the group's strategy of "concentrating aircraft in markets where we can sell IT packages and where they deliver the most profit - what's the point in trying to protect market share at a loss?" This has seen TCUK shift its emphasis to the longer- haul eastern Mediterranean resorts where the LCCs cannot compete as effectively compared with the closer resorts such as those on the Iberian peninsula.
But if the charter airlines are to counter the increasing LCC threat, they will have to restructure their operations to introduce greater flexibility and enable their aircraft to win back passengers that are migrating to EasyJet, Ryanair or another low-fare carrier.
"As a tour operator we are duration controlled, which means we are largely tying our flights to hotel beds - that is, seven- and 14-night stays," says Jeans. This means that, while the MyTravel fleet often offers similar frequencies to the resort airports as the LCC carriers, it cannot offer the same level of booking flexibility as seats are tied to hotel room availability, he explains.
"We are evaluating how we break out a proportion of our seating capacity and make it available for more flexible frequencies," says Jeans.
Flexible flying
The group knows it already has a flexible flying programme, and must now make this more available to the customer. "We can use our low cost per available seat kilometre (ASK) to beat the LCCs at their own game."
This task of gearing up to offer so-called "dynamic packaging" is easier said than done, as, like other mature, integrated travel groups, MyTravel - which rebranded from its old name Airtours in early 2002 - has "legacy issues". These include a string of long-term contracts for hotel beds, and distribution and booking systems designed for the old fixed-duration business model for so long the life-blood of the leisure industry, says Jeans. "We also have a large chain of high street travel agents with old information technology systems."
Jeans says that this sort of bottom-up reorganisation will not be achieved overnight and, given the length of the industry's planning cycles, will not start to be introduced until the 2006 season. When it arrives the group will be able offer more flexible inclusive packages which should counter the migration to the scheduled LCCs, as well as a better product to seat-only travellers.
"One of our biggest challenges is to break the cycle of long-term contracts on hotel beds at resorts that are no longer at the top of people's shopping lists," says Jeans.
Countering the threat
Through mergers and acquisitions, TUI now controls airlines in five countries operating over 100 aircraft. The entire airline operation is run by Hanover-based TUI Airline Management, headed by chief executive Kevin Hatton - also managing director of UK arm Britannia Airways. The group has already responded to the low-cost threat by creating scheduled low-fare carriers in Germany (Hapag-Lloyd Express) and the UK (Thomsonfly).
Although still predominantly a charter airline group, TUI's strategy has ensured that it has both bases covered, which Hatton believes makes it well placed to respond to the changing market: "The package charter is not deadÉ.but I'd be very wary of predicting which way the business will go - we have the flexibility to adjust and are very conscious of not saying that one size fits all."
This will see the package side of the business becoming more "dynamic", with TUI developing a variety of portals to offer flexible IT holidays or "seat-only plus accommodation", says Hatton.
To achieve this, TUI has the same deep-rooted issues to resolve as the other vertically integrated leisure giants. "We control 157,000 beds in 290 hotels and have the legacy of a tour operating system designed around fixed-duration, seven- and 14-night holidays," says Hatton.
MyTravel's Jeans says the charter airlines must learn the LCCs' premium pricing policy in relation to booking time: "Where the LCCs increase fares for late bookers, the charter airlines do the opposite - our prices get cheaper the nearer to departure."
This, of course, goes back to their two different business models, with charter airlines being driven more by load factors as they aim to fill their aircraft to ensure their hotels are full. MyTravel Airways achieved an average load factor of 95.3% for the whole of 2003, says Jeans. "This was up to 97% during our summer season, and dropped to the low 90s in the winter".
Jeans says seat-only passengers make up around 20% of MyTravel Airways UK's passengers, and the airline carries 75% of all the parent tour operator's passengers with the remainder put on third-party carriers. Around 7% of MyTravel Airways' passengers are from third-party tour operators.
The creation of a scheduled low-fare arm - MyTravelLite - at Birmingham in 2002 enabled the group to "test the low-cost concept, prove that the model could work out of the charter business, and evaluate the booking tool", says Jeans.
No "me-too" need
TCUK's Chipp says that he does not see a need for a "me-too LCC" in the UK market, but it is a very different situation in Germany: "The question 'Is the package deal dead?' is much more relevant in Germany than in the UK. They've got no choice but to respond to the low-cost threat - LCCs like Air Berlin are selling capacity to TUI and Thomas Cook."
Whereas MyTravelLite was created by redeploying surplus Airbus A320s and utilises the charter airline's flightcrews, TUI's Thomsonfly has been set up as a completely standalone operation with flight and cabin crew on different contracts to Britannia staff - although it is run under the Britannia's air operator's certificate.
"We had a cost per flight hour we needed to achieve to be competitive with the LCCs, and spent a week locked away with the unions to get to that," says Hatton. "We can drive the pilot hours to a higher level than with the IT model, as the LCC formula is about utilising the assets, whereas charter schedules are driven by hotel bed availability."
Thomsonfly currently operates four Boeing 737-500s from a base at Coventry and will increase this to eight for the 2005 summer season from a second base at Doncaster Sheffield airport (the former RAF Finningley airbase). No further expansion details have been revealed, but Hatton does not rule out further growth.
So the consensus is that there is still a future for the charter industry, but only if the giants can drag themselves into the more customer-focused, e-enabled world of the 21st century. But whether that can be achieved in time to prevent a major shift in the balance of power within Europe's leisure industry, is (to quote one industry executive) "the 64,000 euro question".
MAX KINGSLEY-JONES / LONDON & BRUSSELS
Source: Flight International
