Tourism business models and operations

¶ … 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 the relative cost of overseas holidays fall steadily. This has made it more profitable for tour operators, as they make money in the stronger Sterling and pay their resorts and hotels in their local currency, which continues to weaken.

English is widely spoken in many countries, especially tourist destinations, which makes holidaying abroad by UK nationals relatively easy.

The UK has a relatively wet and cloudy climate making the appeal of summer sun holidays high. This is a great source of lucrative travel for tour operators, who specialize in both summer and winter sun deals.

The UK has a well-developed tour operating industry based on one of the most liberal and competitive airline sectors, which makes it difficult for a new company to enter the market.

Some of the future trends in the UK tour operating market, as identified by the ABTA, are as follows:

Cruises

The cruise market in Britain has grown exponentially in the last few years to become second only to the United States. 2003 will see the results of the travel industry's efforts to widen the market still further to include families and younger passengers, as its current appeal is mainly to more mature travelers. The Caribbean and the Mediterranean are very popular among those flying to their holiday destination to join their cruise. Furthermore, there is increasing interest in environmentally friendly cruises to colder climates, for viewing wildlife.

Long Haul Holidays

Long haul holidays have remained as popular in 2002 as they have ever been. Sales of round the world tickets have increased and because destinations such as Australia, New Zealand, South Africa and Thailand have not been affected by the recent terrorist problems, their popularity has been maintained. Despite this, the U.S. remains the number one long haul destination, while Australia is a close second (Association of British Travel Agents, 2003).

Holidays to Mexico and to the Caribbean have risen dramatically in recent years, reflecting the availability of increased choice in charter flights, more competitive prices and the British holidaymakers taking advantage of good value resorts in Central America. The Far East has traditionally been very popular with independent travelers, but those on inclusive tours are also being increasingly attracted there.

In Africa, Kenya continues to attract those looking for a safari experience while South Africa is proving popular as a winter sun destination. At the same time, the Middle East has struggled due to the uncertain political climate there, but should recover once the situation recovers.

Short Breaks

Short breaks have increased rapidly over the last few years and continue to increase their market share. In 1997 11.7 per cent of all holidays were short breaks, whereas now 15 per cent of holidays will be short break holidays and this growth looks likely to increase further in the coming years ("Current Developments in the UK Outbound Travel Industry," 2002). The reasons for this rapid growth are numerous. For one thing people now take more than one short break a year rather than just one longer break in the summer. The increase in numbers of couples with no children has also contributed to this trend as has the number of airlines who offer short-haul, non-flexible (but very cheap) flights to European cities.

Winter Holidays

Snow-sports play a vital part in the winter holiday market. Around 1.5 million people take a skiing or snowboarding holiday each year ("Current Developments in the UK Outbound Travel Industry," 2002). The most popular destinations for skiing are resorts in Europe. Many people are now choosing to travel further away, taking advantage of the strong pound and availability of charter flights. Currently, Canada and the United States have seen a massive rise in popularity over the past 10 years.

The most popular winter sun destinations are Tenerife and the other Canary Islands, but the North African countries of Tunisia, Morocco and Egypt do offer good value alternatives, while the Caribbean, Florida, Mexico, Australia and South Africa are all beginning to offer more affordable winter sun experiences. This is one of the growing areas in package holidays.

No-Frills Airlines

With expansion of the no-frills airlines has come increased numbers of complaints as customers realize that they do not receive the same level of customer service from budget airlines. However, there are no signs that no-frills airlines will stop growing in 2003, as people seem to be willing to put up with the lower levels of service for cheaper flights. As the number of destinations serviced by these airlines rises, budget airlines are the single biggest threat to tour operators.

Section 3: Sector Profitability and Major Players

Tour operators create, arrange and operate tailor-made tours and travel programmes which they market to their customers either through travel agencies or directly via websites, TV adverts and call centers. The outbound sector is currently dominated by the four major players: Thomson, Thomas Cook, MyTravel and First Choice. All of these provide several services to their customers, such as air travel, tour operator, call centre and travel agency services. The remainder of the market is shared by small and medium sized operators, many serving specialist segments of the market such as wine tours or singles holidays years ("Current Developments in the UK Outbound Travel Industry," 2002).

The large tour operators have many thousands of employees working in a range of functions such as marketing, operations, sales, administration, IT, and product development. They also employ significant numbers of representatives located on the spot in each resort to provide information and support to holidaymakers. On the contrary, smaller tour operators employ a handful of people who perform a wide range of duties. Couriers or tour guides are usually engaged on a tour-by-tour basis to accompany groups of holidaymakers on tours years ("Current Developments in the UK Outbound Travel Industry," 2002).