What a difference a summer makes. In May, tour operators were arguing that their industry was “recession proof”, with consumers unwilling to cut back on their weeks in the sun, even if it made for belt-tightening elsewhere.
Now, with up to 80,000 XL Group and K&S Holiday customers stranded in destinations across the globe, the recent high-profile failure of budget carrier Zoom and with Italian carrier Alitalia on the brink of bankruptcy, things no longer look quite so sunny.
Already this year, several airlines, including Zoom, Futura and business carrier SilverJet, have gone out of business. More grim news followed when budget carrier Ryanair reported an 85% fall in first-quarter profit, and British Airways and easyJet both announced management cuts.
Seguro Travel is also shutting up shop, while the demise of XL, the UK’s third-biggest travel company, is – at an estimated £60m to the Civil Aviation Authority – the biggest in 20 years. The nervousness is spreading across the spectrum. Thomas Cook and TUI Group – both of which posted bullish results in May – look likely to ride out the storm, but at some cost.
“The big daddies of the industry, such as TUI and Thomas Cook, will consolidate their market positions and be resilient, and smaller brands will face more doom,” predicts Caroline Bremner, Euromonitor global travel and tourism manager.
When Thomas Cook, the second-largest travel agent in Europe, reported in May that its losses had reduced from €267.7m (£212m) last year to €193.6m (£153.5m) with especially strong trading in the UK, it claimed that people were “unwilling” to cut back on family holidays.
Despite evidence going back to 1990 showing that holidays are one of the last things consumers cut back on, many analysts point to travel demand lagging behind consumer expenditure trends by six to 12 months, so the true extent of slowdown may yet to be seen.
The collapse of XL highlights an industry not only hit by the global economic slowdown, but by high costs such as fuel, as well as a weak pound.
This weekend both Thomas Cook and TUI launched national print campaigns aimed at reassuring stranded passengers that they were there to help, and to bring back confidence to a beleaguered sector – as well as communicating the strength of their operations.
Such a situation is likely to lead to changes in strategy and marketing plans – as the reassurance campaigns already suggest – and further consolidation. A few players are potentially able to capitalise on market volatility, but for others there are “more failures and worse times ahead,” according to one observer.
Even Thomas Cook has reduced 2009 summer capacity by 7% and is focusing on prioritising medium-haul destinations over long and short-haul ones. TUI, owner of Thomsons and First Choice, will reduce summer capacity by 15%, both substantially slowing a market that was growing.
Dresdner Kleinwort research estimates that the UK tour operator capacity will fall 11% in 2009, but the overall leisure market will remain in growth at 3%. Thomas Cook, which has already opened its summer 2009 booking in the UK, says less than 10% of the available capacity has been booked, but that this is in line with the previous year.
Some categories, like premium cruise, luxury trips and adventure packages, will consolidate, while “vanilla products”, like flights or accommodation only, will stagnate, according to experts.
Richard Cope, senior travel analyst at research company Mintel, says holidaymakers are altering their holiday shopping patterns and will opt for “a single big holiday, rather than numerous short-haul breaks”. He feels that the low-margin, high-volume players and the short-haul players will be hit the most in today’s challenging times. British Airways has already seen its short-haul numbers decreasing.
Flybe marketing manager Simon Lilley says this is one of the most difficult trading times for the airline industry. “The mix of high fuel prices and nervousness in the economy is undoubtedly having a massive impact globally among long and short-haul carriers,” he says. The leisure market is driven by discretional spend and is the most sensitive to any economic turbulence.
But short-haul carrier Flybe feels “insulated”, as less than 30% of its customers fly for pure leisure. BA agrees this is one of the toughest times as it “struggles to break even”. A BA spokeswoman says: “While we have witnessed growth in the premium holiday industry, our numbers in the short-haul segment is severely crunched.”
Much of BA’s marketing will revolve around promotional activity and communicating the heritage of the brand. But just like BA, other travel and tour operators, and airline companies will be under pressure to redefine their offerings to survive in a competitive market.
Bremner says there will be a tremendous negative impact on the tourism industry that has so far proved “recession proof” because of the lag effect. According to Euromonitor figures, total travel retail products are expected to grow from £2m in 2007/08 to £7.8m by 2012, but will remain almost stagnant till 2009.
Growth will be buoyed by an increase in popularity of more niche destinations and products, such as spa breaks, cruises and adventure-trekking holiday packages, all growing at 4% or more against the travel retailers’ average of 2%. Bremner believes the worst affected will be those selling commoditised and standalone products, like flights or hotels, and budget operators.
Such growth within the luxury and speciality sectors could see established players moving up the value chain to meet targets.
While high-street travel retailers alter their strategies, online players will cash in on the consumers approaching them. Dresdner Kleinwort’s survey of 200 travel agents suggests that “while some have experienced a downturn in activity”, there is clearly a slightly positive skew to responses, indicating an “unwillingness to sacrifice the family holiday, despite an increase in prices and decrease in disposable income”.
Consumers are expected to shift to well-established brands, according to Smarter Communications.
Planning director at Smarter Communications, Graham Hawkey-Smith, says: “Lesser known brands and short-haul players will be the worst hit as the pre-summer and post-summer holiday market will crunch severely.”
He says that for survival, companies will have to get more out of their existing client bases. “Currently, even established brands are seeing less than 20% rebooking,” he adds.
The CAA, however, continues to insist it is business as usual for the industry. It is bringing back passengers after XL’s collapse, saying such a situation is not unusual and urging the industry not to panic, as every year “someone goes bust”.
Perhaps so, but the regulator and industry players big and small are expecting further woe until at least the end of next year.