Travel sickness

Over-reliance on discounting has brought the UK travel industry to its knees. Can German companies such as Preussag, which has just bought Thomson for £1.8bn, turn the tide and build strong brands? Or will they simply maintain the price war an

Taking one or two foreign holidays a year is normal for most British consumers. But instead of gaining fat profits from these sun-seeking travellers, the holiday industry is struggling.

This week, German company Preussag’s &£1.8bn takeover of the UK’s largest package holiday company Thomson Travel Group was cleared by the European Commission.

Once the sale is complete, Preussag-Thomson will have transformed itself into the world’s largest travel company. The UK travel industry will be waiting to see if the German company’s entry into the UK market will make a difference.

The sale, due to be completed at the end of next week, will leave the three remaining large holiday companies seeking partnerships across Europe.

Preussag’s rival C&N Touristic, which had been the first to open negotiations with Thomson, is tipped to merge with the UK’s second largest holiday company Airtours.

Some analysts say the Airtours acquisition is not a done deal and C&N Touristic may look at buying First Choice. The UK’s other holiday company, Thomas Cook, was 50.1 per cent owned by Preussag, which must divest its share under European Union competition rules. This share may now be sold to Carlson, Thomas Cook’s other joint owner, and one of the largest privately-owned companies in the US.

Some 17 million UK residents will take package holidays this year – the same as last year, or slightly under, according to Mintel. Meanwhile independent holidays are on the rise, and this year will equal the package deals for the first time at 17 million.

Discount ban

But since 1995 the industry has been unable to push through price rises and average “inclusive” holiday prices have stuck at &£400. With inflation at up to 12 per cent over five years, this means steeply falling margins for the &£6.8bn package industry.

But the Germans do things differently. German companies’ packages are just that little bit more upmarket than the British, with better air travel, and Mintel leisure analyst Jackie Robson adds: “The Germans tend to have four-star hotels rather than the three stars the British operators use.” Germany also bans any form of price discounting.

Robson believes the German takeover could enable the British to add premium to the holidays and help them to push up prices and margins.

Many holiday makers turn away from the traditional package tour, and many more expect early booking or late booking cut-price deals and margins are increasingly squeezed.

“Competition and discount has forced the UK travel market to its knees,” says one industry observer. “Travel agents started it and now they can’t get away from it. People actually like to see those hand written cards in the window and think that if they go inside they’ll pick up a bargain.”

And industry insiders say the new Preussag-Thomson holiday company is unlikely to stop discounts in the UK. Many expect the mergers to have little effect on the margin erosion facing the UK industry. But consolidation offers at least the prospect that tour operators will use the deep pockets of their new owners to improve branding, fight back against saturation and engender some loyalty among their customers.

A Thomson spokesman says: “Essentially Thomson Travel will continue to be a standalone business. Thomson is a very strong UK brand and you will see us build that business. There is no way we will ditch the brand.”

He says there are strong opportunities for sharing knowledge on customers and relationship management between Thomson and Preussag’s German travel company TUI. “We will be investing more in the brand. Our brand is one of our most valuable assets. We will continue to invest a substantial amount in advertising,” he says.

Steve Grout, managing director of loyalty marketing at Carlson Marketing, thinks moving away from discounting is a hard task for the industry: “It would take a brave man to hold out when all the other travel agents were offering cheaper holidays.”

In sickness and in health

The UK industry has not always been in such poor health. Discounting among travel agents – a trend that started in the late Eighties – is one of the main factors in its decline, the other is the fall in bookings.

Package holidays, invented 50 years ago, are not selling like they were 15 years ago. These holidays, which were set up for sun starved Britons, account for only half of UK residents’ trips abroad. At their peak, in the mid-Eighties, package tours accounted for more than 70 per cent.

“As people become more confident about travelling abroad, they are more likely to book holidays themselves,” says a spokesman from the Association of British Travel Agents.

Travellers who want to visit foreign countries, but prefer to make their own arrangements, have presented an opening in the market that easyJet and other low-cost airlines have capitalised on.

The overall stature of the UK holiday package market is also something that has come under scrutiny. The package holiday’s image – rows of sun loungers in Benidorm, against a back-drop of half-built high-rise hotels – needs some attention. The product has become associated with downmarket holidays.

While the market has been so price conscious, Thomson Holidays and its rivals have not invested as much in their brands as other service sectors. With the exception of last year’s launch of JMC, the low-cost, no frills package tour operation from Thomas Cook, the brands in the holiday market are generally weak.

Research by some of the country’s leading travel brands has reflected the need for increased customer loyalty. Many holiday-makers do not care which tour operators or travel agent they use because they consider many of them to be the same.

“As an industry, we have not been good at building loyalty,” says Virginia Dick, marketing director of Travel Choice, the travel agency launched last year by First Choice.

“Research we have conducted shows that consumers are more loyal to their travel agency on the high street, which they may go back to every year, but they are not loyal to the brand.”

Dick agrees that the price war between agents makes it difficult to build loyalty, and says trying to move consumers away from being price obsessed would be a hard task. She believes the future may be more about value for money.

The travel industry has loyal customers, but they tend to be consumers from the more mature end of the market. Young holiday-makers are traditionally a difficult audience to target.

Even with a small percentage of loyal customers, marketers within the industry say loyalty could not be improved by introducing any schemes.

“We are looking to develop direct marketing with some of our customers, with certain tactical offers,” says Dick. “But we are not setting up a customer loyalty scheme.”

Industry insiders believe Thomson’s overall UK offer is unlikely to change under new management, but that Preussag’s deep pockets will keep the price war alive.

As no companies look likely to cut out discounts, travel companies are turning to other areas to lure customers. One of the first they have been investing in is the retail experience.

A spokeswoman for Thomson travel agent chain Lunn Poly says there are plans to update the shops. “We already have 13 concept stores and there are plans to update all our 800 outlets.”

Retail experience

Dick says one of the first things which surprised her about her company’s research was that people did not actually enjoy shopping for a holiday.

“Comparing us to buying a mortgage was quite shocking,” she says.

Travel Choice shops are what Dick refers to as a retail experience. There are no queues and customers sit next to the agent and can see the screen. “They feel more in control,” she adds. Travel Choice also has concessions within Asda stores.

The UK travel industry has also been guilty of digging its heels in over the inevitable changes that new lines of communication have brought.

One source of great debate is call centres. While they may mean that consumers can ring and book a holiday at any given time, they also take the business away from the high-street shops. Some agents have been known to put stickers over any call centre numbers printed in brochures.

One high-street travel agency manager who wishes to remain anonymous says he accepts that call centre numbers have to be in brochures, but the holiday companies are putting them on every page, making his role in the sale redundant. If a holiday was sold through a call centre, and the brochure obtained in his shop, he would not stand to make a commission.

Some leading industry figures are claiming that the future of traditional brochures is uncertain and the real future lies in digital TV.

Net opportunities

TV Travel Shop launched last year on BSkyB, and it launched a second channel last week on Sky Digital, and features holidays from Thomson, JMC and Cosmos. A third is planned for next year.

The advantage of these channels is they offer real prices – unlike brochures which are often just a rough guide as the prices can be discounted. Availability information is also always up to date.

Thomas Cook has already recognised that tour operators will sell many holidays through digital TV. It recently announced plans to set up its own interactive TV service through Open.

The Internet, although at a relatively embryonic stage, will become an important sales channel for the travel industry, as will wireless application protocol (WAP ) phones. Travel Choice will this week launch a WAP flight booking service.

Whatever the travel industry’s woes, they may be something Preussag will struggle to change in the short-term. This is because, as suggested by industry insiders, the German company paid a lot for the business. The deal was more about stopping Preussag’s rival, C&N Touristic, from buying Thomson. The new company may struggle to generate enough cash-flow to make any dramatic changes in the first few years.

While Thomson has been keen to stress to consumers that its new owners will not change the face of its UK package holiday, this is something it will have little control of once Preussag takes the reins.

There is also little doubt that tour operators and travel agents outside of the consolidation loop will be chewing their bottom lip wondering how many tour operators there is room for in such a price-driven sector, where only the mighty are likely to survive.

The real determinants for the state of the market are long-term and economic. Fuel prices and the value of the pound are the major factors. Preussag-Thomson in its newly-combined state spells buying power that will keep its prices down, while other companies may struggle to keep up with lower costs.

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