Business of Tourism Term Paper

  • Length: 9 pages
  • Subject: Recreation
  • Type: Term Paper
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Excerpt from Term Paper :

company, industrial and financial analysis of Thomas Venture Capital. It has 4 sources.

The UK outbound travel industry is highly competitive, with several large players dominating the market and many smaller firms catering to specialist requirements. The industry has been through a trying period in recent times, with the terrorist attacks of 2001 badly hurting air travel, and with budget airlines also cutting into their business.

This report looks at the feasibility of an equity investment in Contiki Holdings, as it expands into the outbound tour operating business, by Thomas Venture Capital. The report is structured into sections, each of which examines a different aspect of the decision. The first section provides a brief historical overview of the business including its evolution to its current state. The second section provides a review of the market as a whole, concentrating on statistical data regarding volumes and spending of travelers from the UK, as well as on the future growth trends within the industry. The third section looks at the profitability of the sector by examining the success or lack thereof of some major players n the market. The final section makes some conclusions based on the information included in the report, and makes recommendations on whether the investment should be made.

Section 1: Historical Overview

The UK travel industry is regulated by the Association of British Travel Agents (ABTA), which came into existence in 1950 and since has overseen the developments in the travel industry in the intervening years. These developments include the improving economic circumstances of the mass of the population of the United Kingdom in the years following the Second World War; the invention of the jet aircraft engine and the consequent popularity of air travel as a means of taking holidays and the emergence of tour operators as wholesalers as distinct from retail travel agents for providing people with their holiday needs (Association of British Travel Agents, 2003).

These factors combined to bring holidays abroad within the reach of millions of people for whom until then travel in foreign lands had been impossible due to the travel time and costs involved. The 'Package holiday' explosion thus began and grew to dominate UK outbound tourism in the second half of the twentieth century (Association of British Travel Agents, 2003).

In the United Kingdom like everywhere else, this phenomenal growth brought its own unique problems. Apart from the very rate of that growth which meant that infrastructure was being overwhelmed by demand, these problems also stemmed partly from the unusually difficult position of the tour operator and partly from the unique position of the customer.

The tour operator has to collate and coordinate all the different aspects of a person's holiday by aligning services provided by others over whom he may have little or no control. The customer pays in advance for a holiday in the hope that everything will go as planned, and it is the tour operator who has to deliver on that hope. As a result, the reputation of the tour operator for delivering holidays as promised is crucial in the success of the company (Association of British Travel Agents, 2003).

It is because of special factors such as these that the financial failure of, or inadequate performance by, tour operators or travel agents causes unacceptable social problems and great damage to the reputation of the travel trade as a whole. As a result, the industry as a whole is highly interdependent, with the failures of one company affecting confidence in the sector as a whole (Association of British Travel Agents, 2003).

With greater integration across Europe and an easing in travel restrictions, the nature of package travel has also changed. Travel to EU nations is now much easier, making such travel more frequent. Furthermore, the evolution of the Internet has also made it possible for travelers to make their travel plans and book their holidays online.

Section 2: Review of the UK Market

The UK outbound tour market has been growing steadily in the past few years. Due to the strength of the Pound and, recently, the introduction of the European single currency, travel has been made easier for British tourists. Furthermore, costs of travel have fallen with increasing competition, allowing more people to be able to afford holidays abroad. The following table shows the length and number of overseas visits from the UK over a five-year period, and the total spending over that time.

Table 1: UK residents' visits, nights and spending abroad, 1997-2001

1997 1998 1999 2000 2001% change

Visits (000s) 45,957 50,872 53,881 56,837 58,281 26.8

Annual growth rate 9.3-10.7-5.9-5.5-2.5

Nights (millions) 463.5 509.2 540.4 566.9-5-78.8-24.9

Annual growth rate 3.1-9.9-6.1-4.9-2.1

Spending (£ million)* 16,931 19,489 22,020 24,251 25,332 49.6

Annual growth rate 4.4-15.1-13.0-10.1-4.5

Excludes fares

Source: "Current Developments in the UK Outbound Travel Industry"

Despite the increased penetration of low cost airlines in the past few years, and the ease of booking directly with transport and accommodation providers particularly through the internet, inclusive or package holidays have increased their share of the outbound holiday market between 1997 and 2001. This is shown in the table below.

This shows that the overall market for holidays, as it expands, is also resulting in a growth of package holidays, and such holidays are taking a larger piece of the overall travel pie. As a result, due to the market being growing, investment conditions for this sector appear to be healthy.

Table 2: UK residents visits abroad by purpose, 1997-2001

Visits (000s) 1997 1998 1999 2000 2001% change

Holiday Independent 13,745 14,869 15,946 1-6,630 18,039 31.2

Holiday Package 15,393 17,437 19,077 20,055 20,631 34.0

Total Holiday 29,138 32,306 35,023 36,685 38,670 32.7

Business 7,166 8,033 8,161 8,872 8,220 14.7

Visiting Friends/relatives 6,004 6,452 6,598 7,718 7,718 28.5

Miscellaneous 3,649 4,082 4,100 4,102 3,664 0.4

Total 45,957 50,872 53,881 56,837 58,281 26.8

Source: "Current Developments in the UK Outbound Travel Industry"

In the first six months of 2002, the number of UK residents' visits abroad on holiday increased by 4.3%, as shown in the table below. The growth in independent holidays over this period was 6.6%. this shows that the earlier trend of package holidays increasing in greater proportions to the market as a whole has been reversed to some extent. This is due almost directly to the growth of low cost airlines which are now seen as an acceptable mode of travel by the public, and who also now offer many more destinations. This is accompanied by increased competition in the travel industry overall as well as the difficulties of 2001. Therefore, the competitive environment has changes dramatically in the last year, and is now a more hostile one for investment than it was before.

Table 3: UK residents' holiday visits abroad by type, January- July 2001,

Visits (000s) 2001-2002% change

Holiday Independent 8,076,666 8,607,982 6.6%

Holiday Inclusive 8,538,023 8,718,566 2.1%

Total 16,614,688 17,326,548 4.3%

Source: "Current Developments in the UK Outbound Travel Industry"

The greatest threat to the package holiday industry is by no-frills airlines. A survey undertaken for ABTA in October 2002 revealed that three in ten package holidaymakers have flown with a budget airline in the last two years, of which 61% booked their flights online and 14% booked through a travel agent. A third of the people surveyed also said they would be more likely to book flights with budget airlines if they were available through travel agents (Association of British Travel Agents, 2003).

41% of those surveyed also said they are likely to book travel and accommodation separately as opposed to a package holiday in the next twelve months, while a quarter of holidaymakers expressed the opinion that they will fly more often with no-frills airlines in the next two years. (Association of British Travel Agents, 2003)

These trends, as shown in the table below, are also dangerous for a company wishing to enter the tour operation business as they indicate that the market may have reached its peak size and be likely to shrink in the future as more people take advantage of the savings offered by no-frills airlines to book their holidays independently.

Table 4: UK residents' holiday visits abroad by type, January- July 2001,

Visits (000s) 2001-2002

Made own arrangements 42.7% 41.2%

Used travel agent for package 25.7% 24.8%

Used travel agent for accommodation only 3.2% 3.5%

Used travel agent for flight only 6.0% 6.0%

Used travel agent for other arrangements 4.6% 4.2%

Used tour operator to book package holiday 12.4% 12.8%

Used tour operator to book flight only 2.0% 1.8%

On the Internet 3.5% 5.5%

Total 100.0% 100.0%

Source: "Current Developments in the UK Outbound Travel Industry"

The UK outbound market has many unique attributes that make it different from many other markets. These peculiarities include:

The UK is an Island therefore it is more difficult to cross borders than continental countries. This would make it more expensive for holidaymakers in the UK to travel abroad.

The strength of Sterling has increased in recent years, making…

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