The leisure sector is quietly confident it has the tools to tap the steadily rebounding holiday market, but only those with brand strength or a unique selling point will be able to generate decent returns, writes Mark Pilling in London
When Thomson Airways begins flying its Boeing 787s from early 2012 it hopes that, for once, it can boast that the aircraft taking holidaymakers to far-flung points is as much part of the experience as the destination.
"We want to offer more and more unique long-haul experiences," says Peter Long, chief executive of TUI Travel, the world's largest leisure travel company with annual revenues of £14 billion ($21 billion). "We don't want to be in the commodity space, which is why we think we can get an advantage with the 787 because it will be a unique flying experience."
Thomson, which is one of the seven airlines in TUI's airborne armada, made a rare appearance - for a leisure carrier - in the limelight at July's Farnborough air show. Managing director Chris Browne was waxing lyrical about the 787's ability to offer passengers more personal space, less jetlag through lower cabin pressure and broadband connectivity.
© Rex Features
The 787's excellent range means exotic destinations such as Borneo, Madagascar and Ecuador can grace the pages of TUI's European holiday brochures as non-stop markets. That is not to forget the 20%-plus efficiency gain of the aircraft: "The fact that the economics work is clearly a positive," says Long.
From its position of strength, and with a confident air about the prospects for its business model, TUI Travel has weathered the economic downturn better than most in the leisure sector, which has seen its share of failures among tour operators. As the Airline Business leisure carrier rankings show (see page 60), TUI, along with fierce rival Thomas Cook, are by far the largest players in this sector.
Many are members of IACA, the Brussels-based association that represents leisure carriers. "My members have been coping pretty well with the crisis," says Sylviane Lust, IACA director general. Although IACA has members from around the globe, Europe's large tour operator business means most of it members come from this continent. "They are suffering, but are in decent shape," says Lust.
"We have proved to be quite resilient," says Long. "As tour operators, we've always been able to sell our capacity - the yield at which we sell it is another question." For TUI, the arrival of the 787s will herald a fresh period of expansion. The group is looking at new markets such as Russia and Asia for growth.
But for now, most carriers are cautious. "We hope 2009 was the bottom [of the cycle]," says Lust. "The market is getting better, but it is still very fragile and it is difficult to see the shape of the recovery."
A major development in the leisure sector over the past couple of years is the admission by Europe's giant tour operators TUI and Thomas Cook that short-haul scheduled operations, aimed at taking on low-cost carriers, is not their business. "We made the fundamental decision that TUI Travel would have a tour operator strategy and not an airline-driven strategy - our airlines are only there to support the tour operators," says Long.
In late 2008 TUI ditched its Thomsonfly low-cost brand, which had started in 2004 operating services from the UK to European holiday destinations. Last year a strategic partnership saw TUI's scheduled operations in Germany being handed over to Air Berlin.
On reflection, Long observes, the tour operators reacted slowly to the threat of low-cost players. In many cases these start-ups focused on popular sunshine destinations with cheap, high-frequency services. They ate into the traditional core business of the leisure carriers, which had a legacy model of operating low-frequency services at fixed seven and 14-day intervals. That has changed; tour operators are now much more flexible. "Some of our best-selling durations are 10 and 11 nights," he says. "We have reached a scale where we can offer frequency. Customers want choice."
TUI will not offer its flights on a commodity basis, explains Long, even though it can fly virtually as cheaply on a per-seat basis as low-cost carriers. "We don't want to be in that space. We are never going to compete head-to-head [with low-cost carriers], therefore we have to differentiate with our big, tourism power brands. Customers want that."
This is not to say leisure carriers have entirely left the low-cost, short-haul seat-only business. Some, such as Air France-KLM owned Transavia and the UK's Monarch Airlines, have developed hybrid models offering both scheduled and charter capacity. "These carriers are comfortable with this hybrid business model," says Lust. "It is mixed, but it suits them."
So why have leisure carriers not only survived, but seen a revival in the package holiday? "With the economic crisis people like to know exactly how much they are spending," says Lust. Packages that include flights, hotels, cars and so on offer this assurance. The flight element of the package usually includes assigned seating and in-flight meals.
TUI is beginning to play up the fact that it does not charge ancillary fees for customers, something that low-cost carriers in particular are keen to increase. "We don't want to alienate the customer with all these irritating charges," says Long. TUI could be ignoring a lucrative revenue stream, but its strategy is to stress the all-encompassing service element it provides. "We are seeing the benefit, but it won't be overnight," he says.
| IN IT FOR THE LONG-HAUL|
| While low-cost carriers have beaten up many leisure players in the short-haul arena, the prospect of the same thing happening on the long-haul side of the business appears remote. “Some have talked about it, but nothing has materialised yet,” says Sylviane Lust at IACA, commenting on the suggestion that low-cost carriers may launch long-haul offshoots.
New long-haul entrants could perhaps beat a carrier such as Virgin Atlantic Airways in terms of pure unit costs, but achieving the all-important mix of leisure and business traffic is another issue. Virgin Atlantic has eight aircraft dedicated to its long-haul leisure business, representing about a quarter of its flying, says Edmond Rose, commercial director. “With its very long booking lead times, long-haul leisure moves to a different dynamic compared to the overall network carrier business,” he explains.
Taking on a network carrier on long-haul routes would be an uphill task. “In some ways we are a long-haul, low-cost carrier. Our 747s are high density, they have very high utilisation and we deliver that full-service experience, but also with a sharp eye on the cost,” says Rose.
“Going into the downturn the leisure segment remained more resilient than our London Heathrow business,” says Rose. The latter features routes with a higher business travel component. “Coming out of the downturn things are going very smoothly this year on the leisure side,” he adds.
Virgin’s strategy is for steady growth as far as new routes are concerned. It will add two Airbus A330s to its leisure flying next year with more frequencies from its Manchester base in the UK to Las Vegas and Orlando in the USA. Five A330s will be added to the fleet, while the first Boeing 787 is scheduled to arrive in 2014.
Long also points to research from TripAdvisor, the online travel review site, that shows travellers value the security of going on holiday with large tour operators. The feeling is that these operators will sort out problems and repatriate travellers if something goes wrong with the holiday. This is a very real worry. For example, 13 smaller tour operators have gone bust in the UK this year so far.
Being big is beautiful for TUI's Peter Long in terms of the structure of the airline market going forward. "On a macro scale what has changed [following the economic crisis] is the cost of capital and the appetite for risk. What we see are a few large, successful tour operators, strong flag carriers that are consolidating and three or four leading LCCs. I doubt we'll see a [LCC] start up in Europe in the next five years. We'll get consolidation and we'll get stronger businesses."
TUI's strength is in the package. Simply being an independent supplying seats is tough as they are the marginal providers. "That is not a good place to be," suggests Long.
Vytautas Kaikaris, the chief executive of Small Planet Airlines, a small Lithuanian leisure player that is seeking to expand on shorter-haul routes, acknowledges the challenges. "Yields are definitely going down - that is an obvious trend because there is still too much capacity out there," he says. "They love it of course," he says of the tour operators taking advantage of the low per seat prices.
"Some players are desperate to keep their aircraft flying and go down with prices even below cost," says Kaikaris. "This creates a very big pressure on the margins." So how can Small Planet - formerly FlyLAL Charters before being rebranded in July - make a living? The bottom line is that Small Planet has to have the lowest cost structure possible to compete and be profitable at its operations in Lithuania, Estonia, Italy and Poland. "Being based in Lithuania gives us some labour cost advantages," he says. Small Planet is also part of the Avia Solutions Group that includes maintenance, leasing and training operations.
"We are able to achieve rates which are extremely competitive from the group," says Kaikaris. And while tour operators want to work with reliable partners, the requirement for good service delivery does not yet extend to the on-board product. "There are still very few tour operators willing to pay a premium to get a better [in-flight] service."
In the higher-cost Swiss market, leisure carrier Edelweiss is carving out a niche with a strategy that emphasises having a strong partner and creating brand loyalty. The partner is one of the biggest: Lufthansa group-owned Swiss. It bought Edelweiss in 2008 from travel group Kuoni after business began suffering in Switzerland with the entry of low-cost carriers. "At that stage we studied whether to go the low-cost way or go the leisure way," says Karl Kistler, Edelweiss chief executive. The carrier, which operates short- and long-haul services, has revived under the Lufthansa/Swiss umbrella and is preparing to expand again next summer "because we are successful".
Edelweiss has become the leisure operator for Swiss flying to warm-weather destinations. All its flights are codeshares with Swiss and about a quarter of its traffic comes via the network carrier. "We have a low-cost structure and we can compete with low-cost carriers, but we concentrate on quality. We think that people in the leisure sector want to have more than just a flight from A to B," says Kistler.
Whether by virtue of costs or service, carriers like Edelweiss and Small Planet are keeping the leisure carrier flag flying for the smaller players. They know they have to use all the natural advantages they have as the giants like TUI continue to wield the power.