UK Outbound Tour Industry: Investment Feasibility Analysis

Introduction

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 established operators' business.

This report looks at the feasibility of an equity investment in Contiki Holdings as it expands into the outbound tour operating business. 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 future growth trends within the industry. The third section examines the profitability of the sector by reviewing the performance of some major players in the market. The final section draws conclusions based on the information presented and makes recommendations on whether the investment should be made.

Historical Overview of the UK Travel Industry

The UK travel industry is regulated by the Association of British Travel Agents (ABTA), which came into existence in 1950 and has since overseen developments in the travel industry over the intervening decades. These developments include the improving economic circumstances of the mass of the UK population 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 — 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 travel in foreign lands had previously been impossible due to the 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, as elsewhere, this phenomenal growth brought its own unique problems. Apart from the sheer rate of 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 must collate and coordinate all the different aspects of a person's holiday by aligning services provided by third parties over whom they 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 must deliver on that hope. As a result, the reputation of the tour operator for delivering holidays as promised is crucial to the success of the company (Association of British Travel Agents, 2003).

It is because of these special factors 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 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 of 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 made it possible for travelers to plan their trips and book holidays online.

Review of the UK Outbound Market

The UK outbound tour market has been growing steadily in recent years. Due to the strength of the pound and, more recently, the introduction of the European single currency, travel has been made easier for British tourists. Furthermore, the costs of travel have fallen with increasing competition, allowing more people 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

Visits (000s): 1997: 45,957 | 1998: 50,872 | 1999: 53,881 | 2000: 56,837 | 2001: 58,281 | % change: 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 | 578.8 | % change: 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 | % change: 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 recent years, and the ease of booking directly with transport and accommodation providers — particularly through the internet — inclusive or package holidays increased their share of the outbound holiday market between 1997 and 2001. This is shown in the table below.

This shows that as the overall market for holidays expands, package holidays are also growing and taking a larger share of the overall travel market. As a result, investment conditions for this sector appeared healthy during this period.

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 | 16,630 | 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 growing at a faster rate than the market as a whole had been reversed to some extent. This shift 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 which offer an increasing number of destinations. This is accompanied by increased competition in the travel industry overall, as well as the market difficulties of 2001. The competitive environment changed dramatically in the preceding year, making it a more hostile environment for investment than before.

Table 3: UK residents' holiday visits abroad by type, January–July 2001 vs. 2002

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 comes from no-frills airlines. A survey undertaken for ABTA in October 2002 revealed that three in ten package holidaymakers had 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 those 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).

Additionally, 41% of those surveyed said they are likely to book travel and accommodation separately rather than as 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 are also concerning for a company wishing to enter the tour operation business, as they indicate that the market may have reached its peak and is 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: How UK residents booked holiday visits abroad, 2001 vs. 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 several unique attributes that distinguish it from other markets:

The UK is an island, making it more difficult and expensive to cross borders than it is for travelers in continental countries. The strength of sterling has increased in recent years, causing the relative cost of overseas holidays to fall steadily — benefiting tour operators, who earn revenue in the stronger pound while paying resorts and hotels in weaker local currencies. English is widely spoken in many countries, particularly tourist destinations, making holidaying abroad relatively easy for UK nationals. The UK also has a relatively wet and cloudy climate, making the appeal of sun holidays high and providing a lucrative source of business for tour operators specializing in both summer and winter sun destinations. Finally, the UK has a well-developed tour operating industry built on one of the most liberal and competitive airline sectors, which makes it difficult for new entrants to break into the market.

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

Cruises. The cruise market in Britain has grown exponentially in recent years to become second only to the United States. Efforts are underway to widen the market 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 join their cruise ship. There is also increasing interest in environmentally friendly cruises to colder climates for wildlife viewing.

Long-Haul Holidays. Long-haul holidays remained as popular in 2002 as they had ever been. Sales of round-the-world tickets increased, and destinations such as Australia, New Zealand, South Africa, and Thailand maintained their popularity as they were largely unaffected by recent terrorist concerns. Despite this, the United States remains the number one long-haul destination, while Australia is a close second (Association of British Travel Agents, 2003). Holidays to Mexico and the Caribbean also rose dramatically, reflecting increased charter flight availability, more competitive pricing, and British holidaymakers taking advantage of good-value resorts in Central America. The Far East, traditionally popular with independent travelers, is increasingly attracting those on inclusive tours as well. In Africa, Kenya continues to attract safari travelers while South Africa is proving popular as a winter sun destination.

Short Breaks. Short breaks have increased rapidly over recent years and continue to grow their market share. In 1997, 11.7% of all holidays were short breaks; by the early 2000s, that figure had risen to 15% and looks likely to increase further ("Current Developments in the UK Outbound Travel Industry," 2002). The reasons for this growth are numerous: people now take more than one short break a year rather than a single longer summer holiday; the growing number of couples without children has contributed to this trend; and the availability of cheap, short-haul flights to European cities has made frequent short breaks financially accessible.

Winter Holidays. Snow sports play a vital role 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 skiing destinations are resorts in Europe, though many travelers are now choosing to travel further afield, taking advantage of the strong pound and the availability of charter flights. Canada and the United States have seen a massive rise in popularity over the past decade. The most popular winter sun destinations are Tenerife and the other Canary Islands, but North African countries such as Tunisia, Morocco, and Egypt offer competitive alternatives, while the Caribbean, Florida, Mexico, Australia, and South Africa are increasingly offering affordable winter sun options. This represents one of the growing segments in the package holiday market.

No-Frills Airlines. The expansion of no-frills airlines has been accompanied by increasing numbers of consumer complaints as customers discover that budget airlines do not offer the same level of service as traditional carriers. However, there are no signs that no-frills airlines will stop growing, as consumers appear willing to accept lower service levels in exchange for cheaper fares. As the number of destinations served by these airlines continues to rise, budget carriers remain the single biggest threat to tour operators.