ANALYSIS: The leisure industry rises from its sickbed

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Despite facing political and economic turmoil in core markets such as north Africa and Greece, a sluggish European economy and competition from low-cost carriers, leisure airlines appear to have had a remarkably good year so far.

UK leisure operator Thomas Cook, which is undergoing a major restructuring, reported a £1 million ($1.6 million) profit in the third quarter of 2013. This was its first positive quarterly result for two years and a turnaround from the £45 million loss reported during the same period in 2012.

This result is all the more impressive given that the leisure group was in a crisis just two years ago, having asked investors for an additional £100 million loan – and leading some commentators to question whether the tour operator has a viable future.

The same trend is being repeated by other leisure carriers, such as Jet2 and its package holiday arm Jet2holidays. Owner Dart group reports that total leisure airline turnover for the year ended 31 March 2013 – including sales of seats to Jet2holidays – increased by more than 20% to £556.2 million, on the back of a 13% increase in scheduled passengers to 4.84 million.

TUI Travel reported a £76 million profit for the third quarter ending 30 June – up by 3% on the same period last year – and predicts it will achieve a 10% increase in full-year underlying operating profit.

So could predictions that the charter leisure market is in terminal decline be premature or even misplaced?

Restructuring moves

Sylviane Lust, director general of the International Air Carrier Association (IACA) – which represents a number of leisure carriers including Condor, Thomas Cook and Thomson – says its members are increasingly moving to a hybrid business model, but the core proposition of offering passengers an all-inclusive package holiday product remains a viable business proposition.

“We asked our members this question 10 years ago, and since then the market has been completely transformed. It’s now a mixture of business models, with even the tour operator airlines offering seat-only options. So the answer to the question is they are not in terminal decline at all,” she says.

“Our members are implementing cost control and efficiencies on a similar model to the low-cost carriers, but they are also making improvements to the quality and comfort of the products they are offering,” adds Lust.

While leisure carriers and tour operators face fierce competition from low-cost rivals, Lust says the market this year has been encouraging overall.

“While it is definitely true that some destinations are still suffering from political instability – Egypt was the first, and continues to suffer – there has been a shift of capacity to other destinations which leisure airlines have achieved without too much trouble,” she explains. She adds: “Turkey still has seen very high arrivals. Greece is coming back because it is still offering a good product at a relatively low price. Spain is always a very strong destination and Tunisia and Morocco are also coming back, although Cyprus has been quite low this year.”

The Thomas Cook Group also reacted to the challenging market conditions with a wide-ranging restructure programme. This included axing 2,500 jobs, closing 175 high street shops in the UK alone and selling off its North American businesses.

Meanwhile its three airline divisions – Condor, Thomas Cook Airlines UK and Thomas Cook Airlines Belgium – have all been merged into a single division which is fronted by group head of air travel, Christoph Debus.

Previously chief financial officer of Condor and chief operating officer of Air Berlin, Debus brings significant experience from both a leisure and low-cost background, and is expected to drive the profitability of the airlines as a single unit.

Some industry analysts have argued that this reorganisation is a prelude to selling off the leisure group’s airline arm. Debus defends the move, saying Thomas Cook is “committed” to retaining its airline operation.

“We are part of the group – we will participate in the transformation of Thomas Cook and we will work with the tour operator to reach targets we wish to achieve by 2015, on the way to delivering enhanced revenue and capacity management,” he says.

Debus says the amalgamated group brings together the various strengths of each airline, allowing them to share best practice and achieve cost savings through standardisation.

“Historically it has been a siloed business. This was not just a specific airline issue but group-wide. This [restructure] allows us to achieve greater co-operation with other markets, our hotels, IT and procurement and share our strengths,” he says.

View from North America

Describing both Thomas Cook and Condor as “iconic” brands, Debus sees no need at present to absorb them into one business, and indeed says they are “very well positioned in the long-haul business, and we do not plan to change that”.

Another airline that has moved to restructure its leisure operations is Air Canada. In late 2012 the Canadian national airline created a new leisure group by combining the operations of its tour operator business – Air Canada Vacations – with a newly created low-cost division, Air Canada Rouge.

Headed by ex-Thomas Cook North America chief executive Michael Friisdahl, the new group seeks to combine a long established package tour brand offering typical sun and sand destinations with a dedicated fleet of leased narrowbodies. These are being operated under a low-cost model, with staff working on lower salaries than their Air Canada mainline counterparts.

The new airline began operating in July and now flies to Edinburgh and Athens in Europe, Samana in the Dominican Republic, Kingston, Jamaica and Santa Clara and Varadero in Cuba, amongst others. It is doing this with a fleet of two Airbus A319s and new Boeing 767-300ERs culled from the Air Canada mainline fleet. So far Friisdahl says the routes are performing “very well”.

“Air Canada recognised that the growing leisure travel market offered an opportunity to create a largely leisure focused carrier that would operate at a lower cost than the mainline carrier,” explains Friisdahl.

“Air Canada was operating numerous largely leisure routes unprofitably, and we saw that this was a chance to change that to profitable operations, still with an Air Canada brand,” he adds.

The combination of robust online booking, an excellent safety record and a well established loyalty programme combined with a low-cost operation gives the Air Canada leisure group a “powerful competitive advantage”, he adds.

“Air Canada continues to perform very well. Sales are strong as the leisure travel market continues to grow, and with the addition now of dedicated capacity on Air Canada Rouge the numbers have been very encouraging,” he says. “Caribbean travel remains very popular given its quick access from Montreal and Toronto [Air Canada Rouge’s main base of operations] and destinations in Europe are also very popular, in particular Venice with the cruise traveller.”

US-based MLT Vacations – a subsidiary arm of Delta Air Lines that handles Delta Vacations’ tour operations – has experienced a significant shake-up recently. The company’s relocation to Delta’s headquarters in Atlanta this April was then followed by the prospect of partnering with Virgin Atlantic’s Virgin Holidays branch.

MLT, which not only handles Delta Vacations bookings but United Vacations, Aeromexico Vacations, Alitalia Vacations, Air France Vacations and Worry-Free Vacations as well, recorded in excess of 600,000 combined customers in 2012, making it – by MLT president John Caldwell’s estimation – one of the largest tour operators in the USA.

And following the acquisition of Virgin Atlantic by Delta earlier this year, Caldwell plans to develop a close partnership with its leisure arm, Virgin Holidays.

“Our business hub is expanding very nicely. Alitalia, Air France and now of course Virgin [are] really giving us great presence in both leisure and business destinations such as Paris, Rome and London. Our London sales are up 46% compared with last year [ending 31 December 2012] and we are 19% up on the Paris and Rome markets and seeing significant increases in sales to Barcelona,” he says.

Caldwell says 2012 was the “best ever” year for the business, and expects the core markets of package holidays to Mexico and Caribbean to remain popular with customers.

“Some 60% of our business is in Mexico and the Caribbean. We’ve seen some nice growth specifically in Jamaica, Aruba, St Lucia [and] the Dominican Republic is really hot right now. Cancun remains our number one destination in Mexico, and we have a strong partnership with Aeromexico in that market,” says Caldwell.

Market outlook

According to data compiled by Airline Business, all three of the largest leisure carriers registered a decline in traffic in 2012, with Thomson Airways recording a fall of 3.1% to 10.7 million, while Air Europa reported an almost 7% drop to just over 8 million. Thomas Cook registered an almost 15% decline to 6.8 million passengers.

Nevertheless, several carriers grew their traffic in 2012 – including Condor, which saw a 7% increase in traffic to 6.6 million. Netherlands-based Transavia Airlines saw a 7.6% increase to 5.8 million, while its French sister airline Transavia France’s traffic also saw a rise in traffic of 6.3% to 1.7 million.

“In terms of the package holiday sector, we see the three biggest source markets as the UK, Germany and Italy, while the highest growth in arrivals year-on-year are Denmark, Turkey and Romania, which grew by an average of 7% for 2012,” says Nadia Popova, a travel and tourism industry analyst at Euromonitor International. “Three other markets that are performing well are Poland, Bulgaria and Russia, which is really to do with the fact that charter operators are strong players in these markets, and they are bringing in tourists from the USA, Canada and Asia. Charter operators are providing the price and the destinations not necessarily offered by scheduled carriers.”

Popova says charter operators have benefitted from one-off events such as the volcanic ash crisis, the failure of tour operators and the collapse of airlines. All of which is convincing consumers in the UK of the benefits of an ATOL-protected holiday.

The leisure sector’s enthusiasm to embrace online and mobile technologies, says Popova – who cites a recent agreement between German leisure carrier FlyTUI and Travelport to introduce e-tickets – should give it the resilience to continue to compete effectively with its low-cost rivals.