Reaching Travel Services To Consumers

In keeping with the theme of the recently concluded TAAI convention, New Ways-New Waves, Deloitte Touche Tohmatsu presents an international perspective taking into account the sophisticated US and European travel markets where the critical next step that the Indian travel agent is still to take, has already been taken. The consultant considers their contribution to a nation's GDP, the trends that have significant implications for the industry, and the different business designs that could lead the industry in future

Table 1.1

Market Share of Main European Tour Operators

Source: Amadeus annual reports, FVW, Mercer

The single, most pervasive theme resonant at the recently held TAAI convention was that of change. Change in the way the tour operator makes his money, deals with principals and clientele and moreso, a change in the way he sees himself. As international tour operators have begun to enter the Indian market either through representation or buy outs, the Indian tour operator has been compelled to adapt to global trends rapidly. While he still does enjoy a set of unique local advantages, he has little time or choice in so much changing his business model to stay competitive and relevant.

Compared to other segments of the travel and tourism industry, tour operating companies employ relatively few people across the world (a few tens of thousands). But their activities stimulate hotel and infrastructure development. History is proof that tour operators can have a significant impact upon economies. Balearic Islands were the poorest province in the whole of Spain in 1950, by the year 2000 it was the richest - almost entirely due to organised tourism by tour operators. Cancun in Mexico had a local population of 600 before tourism arrived; it now provides income for 6,00,000 people.

Tourism demand is affected by confidence in economic conditions and security as well as perceptions of discretionary income. Leisure travel has been growing at around one and a half times the growth in GDP in many countries and is not very volatile, unless there are safety concerns. Fluctuations in tourism revenues in receiving countries are more marked due to consumer perceptions of the relative safety and attractiveness of destinations, as well as changes in the relative price.

Adapting To Customer Needs

While independent tour operators (ITOs) are affected by the normal drivers influencing small and medium enterprises (SMEs) in general, such as a regional bias and a lack of economies of scale or inadequate funding, there have been unforeseen events in recent times that make business difficult for them. At the forefront was the bird flu and SARS crisis in 2002 and 2003, respectively, the effects of which the operators are still fighting against. However, a close look at the future of the industry points to a retardation of tourism growth rates - less due to the current world crises than far-reaching changes in consumer behaviour and preferences. To prosper in this new world market, tour operators need to face the challenge of adapting to increasingly diverse customer needs by focusing on their core customers and developing flexible services.

The slide in tourism at the start of the millennium hit European industry players perhaps harder than any other region, given that the European Union is the largest tourism market in the world accounting for almost 43 per cent of arrivals and 40 per cent in receipts. Tourism's direct contribution to the EU-15's GDP is five per cent, providing eight million jobs, while the indirect effects push the level of impact to 12 per cent of GDP and 20 million jobs. Intra-European tourism accounts for a significant portion of the European leisure travel market, and differs from other leisure travel markets in many ways. First of all, Europeans tend to take a long vacation in the summer, with a number of short breaks (extended weekends, full weeks) throughout the year. Furthermore, organised holidays, particularly 'package tours' that include transportation, accommodation, and additional services (with meals and excursions) are popular and part of a tradition in Europe. As a result, it has many large tour operators than is the case in other fairly mature tourism markets such as the United States and Japan.

Tour operators today serve a market that is beginning to shift dramatically. In particular, customer behaviour is increasingly unpredictable, with vacationers' preferences changing rapidly and becoming increasingly diverse. These trends represent major challenges for the travel trade:

• The market share of package tours has begun to stagnate in Europe. In Germany, for example, the share of organised travel has stabilised at around 44 per cent.
• More travellers are making last minute bookings (less than 10 days before a trip). In USA and Great Britain, they now account for 50 per cent of all travellers. In Germany, travellers booking less than four weeks in advance jumped from 15 per cent to 33 per cent in two years.
• Vacationers are taking more short trips in addition to their traditional long summer vacations, and more travellers (particularly seniors) are travelling throughout the year.
• Travellers are striving for more variety and 'category hopping'. For example, booking a low-cost package tour to Turkey followed by a luxury weekend in Paris.

These trends have had significant implications for the tourism industry:

• The traditional underlying growth driven by package tour segment has started to wane off and investor confidence in profitability of major players has been undermined.
• Some standard business practices are no longer working such as booking more than six months in advance and securing most bookings well before the holiday season.
• New offerings would need to be designed to capture value from shorter leisure trips that generally are also more expensive, in terms of daily spending, than long vacations where complementary spending is comparatively restricted due to extended nature of travel.
• Customer relationship management and direct marketing channels are becoming more important in order to identify diversified customer needs.

In addition to changes in the market, the tourism industry itself has undergone dramatic structural changes since the mid-1990s. Once dominated by SMEs, it has since become much more concentrated with the three biggest players generating more than 50 per cent of total revenues, and the biggest six (TUI, Thomas Cook, MyTravel, ReWe-Touristik, First Choice and Kuoni) more than 70 per cent of revenues. (See Table 1.1, 1.2) These heavyweights have achieved their status through numerous acquisitions. Their aim has been to expand their geographic reach as well as control the entire value chain - from travel agents to the tour operator, from charter flight to hotels and even the service provided to vacationers at the destination - with the goal of earning attractive profit margins at every stage of the value chain.

Global Travel Scenario

Table 1.3

Estimated US Travel Industry Sales By Segment

Source: 2004 US Travel Industry Survey, Travel Weekly

The tour operating industry in the United States accounted for over US$ 27 billion, representing a 10.2 per cent share of the sales recorded by the travel industry segments last year (See Table 1.3). However, the role of traditional tour operators has been rather low key, given the predominantly domestic nature of travel within the country. The extensive network of highways, easy availability of air travel at low costs, and an extensive list of domestic attractions have kept the US traveller within the country, and mostly within the continent.

It has been estimated that there are over 1,000 traditional tour operators in the country who specialise in niche markets/destinations. They distribute their products either directly or through the vast network of travel consortia in the country. In addition, the organised industry has also been through debilitating changes since the 1970s when a series of bankruptcies affected many leading players. This led to relatively low levels of usage of tour operators in the country over the next decades. This was also prompted by cheaper air travel and availability of cruises and other products, which a consumer could book directly. The major industry associations (the US Tour Operators Association, the National Tour Association and the American Society of Travel Agents, amongst others) have taken a number of steps to ameliorate this situation. (See Table 1.4)

Travel agents remain the prime point of access to customers, and large tour operators in Germany and the UK control this channel. In Germany, for instance, 44 per cent of travel agents are part of major chains and franchises and an additional 51 per cent participate in co-operatives that have marketing agreements with one of the large tour operators. Such agencies are critical for customer access, as they have a rate of repeat business twice that of the tour operators themselves.

But the dramatic changes in the industry in recent years have left the large tour operators ill-prepared for the recent market downturn. Of particular concern at the end of the 1990s was the unfinished nature of the consolidation process. The integration of acquisitions was still far from complete and operational synergies - a key rationale for consolidation-had yet to be realised. Nor had any large tour operator but one achieved a leading position in all key markets. Numerous acquisitions - some at rather high prices - had left most tourism companies with a high debt burden and limited financial reserves, while the potential for further growth through acquisitions became increasingly limited. External factors may have triggered the crisis, but industry-specific factors clearly have reinforced the effect. As a result,the current crisis has hit large tour operators the hardest. TUI, for instance, announced a nine per cent drop in revenue in 2002 in Germany compared to the preceding year, while Thomas Cook and REWE-Touristik suffered 10 per cent revenue declines. Similarly, MyTravel in UK has struggled to survive in an extremely competitive market. Part of the reason for these drops is that such operators are less able to flexibly manage their airline and hotel capacity, as well as being handicapped by high levels of fixed assets.

On the other hand, some traditional tour operators, which had already been written off by many industry observers, have been able to gain ground during the crisis due to their clear-cut specialisation. In Germany, the low-cost provider Alltours, for example, reported an eight per cent revenue increase, while the cruise specialist Seetours announced a 20 per cent increase, and GTI-Travel a 40 per cent increase.

The situation in the United States is rather different, in that the integrated tour operator does not exist. There are several large players who have multiple interests including travel (Cendant and Carlson for instance) who span the tourism industry in terms of hospitality/ accommodation and travel brands. The diversity of businesses here has prevented a vertical integration that is seen in Europe. (See Table 1.5)

Most players in the industry initially underestimated the duration and depth of the crisis, leading to significant revenue erosion and cash flow problems. In reaction to the continuing drop-off in business, many are trying to stimulate demand with substantial price reductions and special offers, accompanied by painful cost reductions. However, the impact of these measures is likely to be short-term. Over the longer term, market success will depend on addressing fundamental issues through adoption and implementation of the right business design.

Business designs that could lead the industry in future: (See Table 1.6)

• The international, integrated tour operator, with a strong presence in all of the major tourism markets, along with complete vertical integration and the broadest possible coverage of all travel destinations, different kinds of leisure trips, and customer segments.
• The focused tour operator, with a clearly differentiated competitive position, and a concentration on defined target customer segments and/or service offerings.
• The virtual tour operator, specialising in the simple, low-cost distribution of standard products (such as flights, hotels, rental cars), enabling the customer to pick and choose among individual travel components, even from different providers, to build individual travel packages.

Winning Business models

It is clear that international, integrated tour operators will need to implement production platforms (i.e., air transport, accommodation, and multi-channel distribution systems) to exploit scale effects. Moreover, the plethora of tour operator brands must be reassessed and pruned back in order to generate lasting identification in the market and long-term customer relationships in key target segments. The use of intelligent customer loyalty programs can increase these effects. Key to success is the employment of evolutionary strategies. The temptation to implement a wide range of parallel and therefore competing business designs must be withstood. Instead, the need is to focus on optimising and evolving the business design that make them so successful in the first place - the package tour.

The strength of focused/niche tour operators lies in their specialisation, whether with regard to a certain kind of vacation (such as cruises or mountain climbing), certain destinations, or a certain type of product (such as last-minute travel or club vacations). Focused tour operators offer a wide array of services and expertise in a narrow segment of the market. If pursued with sufficient rigor, this business design promises significant growth and income potential.

Virtual tour operators, which concentrate on the distribution of individual travel components, account today for only a small percentage of the international tourism industry's total revenue. However these specialised providers have significant growth potential, given increasing consumer familiarity with brands such as Lastminute.com and Travel24, and the fact that some of these have begun to expand their offering to include incentive travel programs, as well as cooperating with established providers.

Though the sales for independent virtual operators will grow with especially strong growth in the package tour segment, there would be an increasing concentration in this segment, eventually leading to perhaps only three or four big providers. Traditional travel agencies on the other hand face threat not only from integrated tour operators, which control their own distribution channels, but also by the expansion of alternative distribution channels such as the Internet, call centres, and even lifestyle television channels.

To be able to gauge the performance of a tour operator, life cycle of the holiday product needs to be reflected upon; from the planning stage, to the development and delivery of the product. The performance indicators can be grouped under five categories:

• Product management and development includes actions related to the choice of the destination as well as the type of services to be included (e.g., the use of train vs. plane).
• Internal management reflects all the operations and activities that take place in the headquarters or country offices (e.g., use of office supplies, production of brochures, direct employment).
• Supply chain management addresses actions related to the selection and contracting of service providers.
• Customer relations summarises the actions taken to deal with customers, not only with regards to the responsibility to serve them and reply to their comments, but also the opportunity to provide information and raise consumer awareness regarding sustainability.
• Cooperation with destination includes all activities and decisions related to destinations that tour operators make beyond the production and delivery of their holiday package. This mainly includes efforts made by tour operators to engage in dialogues with destination operators about the impacts of tour packages, and philanthropic activities.

Embracing a Challenging Future

After the world tourism market especially European markets return to moderate growth rates, the challenges for tourism companies will not come to an absolute end. The "Golden Nineties" are over and the rules of the game have changed fundamentally. To respond successfully, tour operators will need to do a better job; creating clear differentiated market positions and focusing in on their core target customer segments and business designs.

For international integrated tour operators, continuing to improve integration, better leveraging strategic assets, and ensuring a firm grip on distribution channels will be key to building strong, lifetime relationships with their customer bases. At the same time, large operators must accept that focused/niche and virtual tourism companies will capture value in certain horizontal and vertical market segments where such specialised operators can better serve customers with specific needs.

Whether large or small, all tourism industry participants must face up to a world in which they will be challenged to adapt faster and more flexibly than ever before to an increasingly diverse array of customer desires. As a first step, establishing and then sticking to competitive business designs suited to their skills and capabilities will enable them to create conditions favourable for future success.