Steve Endacott
Filling the commodity gap left by Cooks
In the UK market, Cooks have decided to follow the lead of their biggest competitor Tui and focus on differentiated tour operating product. Since it is virtually impossible to differentiate short haul flights compared to the excellent service provided by the likes of easyJet, this differentiation is focused on the hotel element of the holiday.
First Choice and latterly Tui via their merger, has been focused on differentiation for nearly 10 years via their Holiday Villages, Sensatori and Thomson Gold brands. In doing so they have developed a higher price, higher margin proposition that is in demand and can only be purchased from them. Thomas Cook clearly has a lot of ground to catch up, but given their determination and new financial backing will make rapid progress.
So who is going to fill the “commodity gap”?
The birth of Flight Plus Atol, may also signal the age of “Travel Agent Packages” (TAPs). For many years we have seen the rapid growth of Online Travel Agents using dynamic packaging technology, but high street agents have been slower to adapt. However, as the majors shrink their capacities to focus on differentiated product, they will need less third party agency distribution, which may force evolution.
It is clear that independent agents have a gap to fill and the new Hays Travel packaging site is unlikely to be the only attempt to fill this space. It is likely most agents will use their own Flight Plus Atol to package holidays using no-frills carriers and bed banks like On Holiday Group’s “Holiday Brokers” brand.
The key driver of the “commodity” holiday market is the flight capacity on leisure routes provided by low cost carriers. This summer season has demonstrated that for every seat the traditional tour operators take out, the low cost carriers appear to be adding two!!
Years ago on joining MyTravel from Ryanair, Tim Jeans sat me down and explained how he could fly three Paris routes in the ten hours it took a charter flight to fly to and from Tenerife, creating 20% more revenue. However, as the recession has hit demand for city flights, the reverse argument has set in, with no-frills airlines switching aircraft to the Canaries in order to only have to fill one seat, instead of three to make the same revenue.
Although no-frills airlines would prefer to run their own direct sale tour operations e.g. easyJet holidays, these have not enjoyed the massive success they expected. Similarly, although Ryanair may not like agents using their flights to package, it is virtually impossible for them to stop it and one day they may even wake up to the benefits.
The “commodity gap” is likely to be filled by the rapid expansion of online companies like On The Beach and Travel Republic. However, the advent of Flight Plus Atol’s should give high street agents and homeworkers the confidence to build their own Atol bonded holidays to fill the “commodity gap” created by the withdrawal of the major tour operators, so don’t write them off just yet.
Has the rain dance saved the lates market?
For once the weather gods have smiled on the industry with the perfect combination of sunshine while families were at work or school, followed by a wet Easter and a constant barrage of grey skies and pouring rain ever since.
Even I’m sitting here planning a trip to get away from it.
More importantly, however, is the impact it may have on the peak summer school holiday period.
Although the government may be pushing the “staycation”, customers want relaxing sunshine as part of their holiday and the recent weather has hammered home how unreliable the UK weather is, which is likely to have strengthened demand for overseas holidays.
Another more obscure factor going in the industry’s favour is the lack of an England football manager.
We are only six weeks away from England’s opening game against France on June 11 and have you heard a mention of it?
The complete lack of hype this time around is a marked contrast to previous football tournaments, in particular the Euro 2008 in Germany when so many English fans jumped in cars, planes and trains to head out to watch it first hand.
Far fewer will be travelling to the less inviting Ukraine, so logically the impact on the nations holiday budgets will be less and even in the unlikely event England get to the final it will all be over by the July 1.
The most difficult part of managing lates yield is getting prices up from the £149 price points that dominate early season to £399 plus required post July 22 for school holidays.
The points above should help early season prices - and don’t forget that the Olympics do not start to after the schools have already broken up.
Hence although I do expect them to dampen demand, neither the Euros nor the Olympics will directly impact the crucial month of July
when prices need to be wound up quickly.
However, please don’t think I am saying this year’s lates period is going to be easy.
We are in the midst of a double dip recession and the year on year increase in fuel prices, while currency hedging has negated an benefit of the strengthening pound, means operators need to get £15 higher late holiday prices even to make the same losses as last year.
They say that every cloud has a “silver lining” and as we look up at the depressing cloud cover over the next few weeks, think of the job security they may be delivering to some parts of our industry.
Atol Flight Plus
There have been a few keystrokes of luck along the way. For example if DNATA had not acquired Travel Republic, it is likely that they would have again taken the CAA on head to head and gone down the perfectly legal “Agent of the Customer” route avoiding the requirement to offer Flight Plus ATOL cover. This in turn would have left the rest of the sector with the difficult choice of giving a competitor a significant pricing advantage or following suit scuppering Flight Plus in the process.
Secondly, Flight Plus is being launched at a time when the weakest airline players like Excel, Globespan, etc. have already bitten the dust leaving the bulk of flight supply in the hands of stable airlines like Ryanair and Easyjet. Hence, the market for SAFI and Supplier Failure Cover have opened up enough to allow Agents to re-insure their increased risk from supplier failures.
Flight Plus ATOL will definitely benefit the CAA and the Government, but I have reservations whether the changes will actually benefit the customer, as I can see even more delays in customers getting their holiday money back in the case of a major airline failure.
Historically when a tour operator collapsed agents made customers pay again for their holiday and then reclaim their money back from the CAA, which often takes up to 9 months. Under Flight Plus, legally the agent cannot charge the customer again and must replace the flight at their own expense and reclaim the cost from their insurers if they have SAFI or Supplier Failure Cover.
However, there is no legal requirement for agents to have such insurance cover and no way for customers to know which agents do or do not have insurance. So what happens when an agent does not have insurance and cannot afford to replace the flight? The customer can no longer directly claim from the CAA as it’s the travel agent’s liability and therefore they would have to take legal action against the agents and only if this forces them into bankruptcy would the CAA pay out.
The simple question is, how long would this take and how is this clearer for the customer?
Given that all major Dynamically Packaging companies have been providing SAFI or Supplier failure cover as financial protection for the holidays they sell, its hard to see how the move to Flight Plus ATOL has improved the protection offered to customers, but it is clear that a the ATOL logo is not the uncomplicated insurance customers may think it is.
Blog: January sales and the ‘have’s’ and ‘have not’s’
The “have’s and the have not’s”
I can honestly say I was one of the few people in my circle of travel friends who was confident before Christmas that January would be as strong a booking period as ever.
My logic has remained unchanged since the recession started two years ago and is based on the premise of the “Have’s and Have not’s.
The “Have’s”
Have mortgages, have kids and most importantly have jobs. This customer segment has never been better off financially, due to the exceptionally low interest rates on their family homes, which historically have tied up a lot of their disposable income.
This sector books early and hence its not surprising to me that the current January booking period has remained buoyant.
However, like most companies involved with the online travel sector, we have been surprised by the sharp rise in online searches this year with On Holiday Group’s b2b search traffic running 85% up year on year, with Google reporting a 26% year on year increase in searches overall for the travel sector.
Unfortunately, bookings have not risen at the same rate, as it appears customers are searching around much harder for their online holiday deals. This in itself is not a massive surprise given the recession, but it does mean that yet again the biggest winner is Google, who must be rubbing its hands while many OTA’s are seeing margins eroded due to falling conversion levels.
It would also appear that Thomas Cook’s financial woes have impacted both its tour operation, whose bookings are rumoured to be running 33% down year on year, and its 1,200 strong high street shop network.
How much of this is due to the recent negative PR about the Thomas Cook brands or a very passive discounting policy compared with Tui is not clear. However, the increased online traffic has to have come from somewhere and this is an obvious potential source.
“The Have Not’s”
Have not got job security and have not got the same access to credit they had pre-recession. Traditionally a lot of the late holiday market has been funded by credit cards and last year we saw a relatively weak late’s market due to this.
Make hay now, as it may not last.
Sorry to be the harbinger of doom in such a good sales period, but I can only recommend you fill your boots now, since it is likely to be long hard late booking market.
Sales may be great now, but the “Have not’s” have not kicked in yet and this year we have to deal with both Euro 2012 in June and the London Olympics in August.
So be warned its still going to be a tough year with the only obvious ray of light being the strengthening pound which will boost holiday makers overseas spending power compared to UK holidays and of course the unreliability of the UK weather!
If only “Differentiation” was a Christmas Present
Thomas Cook recently announced a new strategic direction, focused on increasing its “Differentiated” product from a claimed 30% to a healthy 50%. But what exactly is “Differentiated” product??
The tour operators seem to have been slow to define this! My own definition is very simple “ Product demanded by customers, which can only be brought from that tour operator”. The key phase, which makes defining differentiated product hard, is “demanded by customers”. There is little point having “Exclusive” product that you cannot sell, because customers are buying the hotel next door for £50 per person cheaper!!!
Thomas Cook and TUI have both decided to try to split its product portfolio between 50% differentiated product and by inference 50% commodity holidays, but what are the implications of this decision.
TUI or to be more accurate, their inherited First Choice management team, have lead the way in terms of creating differentiated product over the last 10 years with the development of First Choice Holiday Villages and more recently the outstanding Sensatori products. Both concepts have focused on a high standard of accommodation with markedly increased staffing levels to ensure the over all quality of holiday experience. Unfortunately, it has to be recognised that these investments cannot be delivered over night and represent a major increase in committed risk hotel stock. During the current recession where both major tour operators are cutting capacity by around 8% to reflect weak demand and with political upheaval in key location like Egypt slashing demand overnight, such investments require a long-term view and a relatively brave management.
So how else can tour operators differentiate their products??
To answer this question, it’s probably wise to focus on the key weaknesses of low cost “Commodity” operators such as Expedia, Travel Republic and On the Beach. These low cost retail operations rely on third party hoteliers or bed banks to provide their hotel stock. Therefore they have virtual no influence on the hotel delivery and few if any, in resort staff to deliver “On Holiday” services. Conversely traditional tour operators work much more closely with a narrower range of hotels and have many years experience of operating Holiday Reps and extensive excursion programs.
However, returning to my opening point…. these services only provide “Differentiation” if customers demand them. Tour operators have been relatively slow in my opinion for the changing demands of the 21st Century traveller and in particular children.
Here are just a few of the things I think could be implemented at low cost to create “Differentiation”.
- Internet access. I would install high-speed broadband into each hotel supported by comprehensive WIFI so that customers can access the Internet from the plethora of devices they now take on holiday e.g. Smart Phones, Ipad’s and Laptops.
- Sky TV. Its not just the dads who want to make sure they do not miss the big football games, but many parents with young children who need some entertainment in their rooms when they have to retire early to put the kids to bed. We may hate the thought of spending our holidays overseas watching TV but it does provide a useful support for those quiet moments.
- The age of Electronic Kids
- Electronic games competitions. The average games consol is less that £150 today, so it can not cost more than £10k to kit out and maintain an electronic games room. However, rather than just dumping kids in these rooms and leaving them how about running electronic Wii Tennis, Play station FIFA 2012 or many other interactive online sports competitions.
- Kids Karaoke or Wii Dancing. Face painting, colouring pens or more electronic fun? I know which one my kids would vote for.
- Sports Camps. This is already been done to some extent with the likes of Chelsea Football school and a limited number of Rugby camps, however so much more could be set up here and sold into UK sports clubs.
- Music Events. The massive popularity of music festivals and one off concerts shows how “Experiences” are highly valued by UK customers but major tour operators have left it to independents such as Ibiza Rocks to exploit this sector. This should not be just the domain of youth operators but could and should be brought into the mainstream.
- Increased staffing in resort. Mark Warner built their entire business on All Inclusive resorts with very high staffing levels to cater for the family market where customers where willing to pay for other people to keep their kids entertained while they sat and read by the pool. However, their prices are very high and given the advance of the All Inclusive concept in the mass market, you have to believe there is a lower priced version ready to be launched.
I have highlighted the above ideas since none of them are capital intensive, but are hard to deliver unless you control 100% of the hotels rooms and have an in resort staffing infra structure. By making the electronic options above fundamentals of a Thomas Cook hotel experience, I think the tour operator could create a differentiation over other hotels where these services may be available but also often are not.
If I could achieve the above in the Dynamic packaging sector, believe me when I say that I would have done it already!!
