The European package holiday market is stagnating, especially to the traditional hot spots around the Mediterranean, forcing charter carriers to adapt to the new environment, or die. There is no mystery about the reasons for the creeping decline. The rapid growth of the low-fare airlines, led by Ryanair and easyJet, caught the big tour operators on the hop, while the internet has encouraged people to become travel agents in their own homes.

However, the fight back is well underway with more long-haul flights and an enhanced passenger experience replacing the "cattle truck" mentality of the past. Andrew Monk, a London-based analyst at Oriel Securities, says that charter airlines have slimmed down and are learning to adapt. "There is no doubt that the low-fare airlines have had an impact," he says, "but have the charter airlines been driven off the short-haul market by the low-fare competition? I don't think so." Rather, he adds, tour operators have withdrawn capacity because profits on the classic Mediterranean package holiday were increasingly hard to come by.

"Holiday demands are also changing," says Monk. "More people want to go to exciting destinations further afield, providing opportunities for charter airlines to add more long-haul flights, which produce much better yield. However, the reality is that if you want the cheapest 7-day or 14-day holiday, you fly with a charter airline, but if you want flexibility in timing and length of stay, you have to pay more [on a scheduled airline]."

Sylviane Lust, director general of the Brussels-based International Air Carrier Association (IACA) that represents charter carriers, points out, however, that tour operators have become more flexible, offering tailor-made packages that are not rigidly fixed to weekend departures and specific durations. "Cost-wise we can compete," Lust says. "But our product has had to change. Charter airlines have created various business models." This includes "combining two different products on the same flight and achieving the best of both worlds".

Carriers have also been moving more into seat-only sales, while others have formed their own scheduled low-fare subsidiaries like the UK's Thomsonfly or Hapag-Lloyd Express in Germany. "The pure charter airline simply no longer exists," says Lust.

The UK's First Choice would dispute this. "We are a 100% charter operation and are very proud of it," says managing director Chris Browne. First Choice was one of the quickest to react to the new market dynamics. "Some five years ago we decided on a strategy of differentiating our product. We have gone for margin over volume, and this will not change," she says. "We are not in the numbers game and will not get involved in direct competition with low-fare carriers." Browne admits that the business has grown very little over the last two to three years in terms of volume, but has been more profitable for the carrier.

Although the western Mediterranean remains popular, there has been a shift away from short flights to long-haul destinations which, for now at least, are out of the reach of the low-fare carriers. Browne says that this move has not only been driven by the low-fare competition, but by a more adventurous holidaymaker who wants to explore more exotic destinations and experience new cultures. But boosting its long-haul business has brought the airline up against the legacy carriers, where it had to face challenges it could meet only by offering a superior product. "We recognised that we could no longer offer a 29-inch seat pitch, if we were to compete successfully," she says.

"We are a 100% charter operation and are very proud of it." Chris Browne, managing director, First Choice
First Choice consequently invested in Boeing 777 interiors for its growing 767 fleet, removed 52 seats to increase legroom in both economy and premium classes to rival that of the scheduled carriers, and installed the world's first (9-inch) widescreen TV, with interactive video games, as well as video-on-demand programming. The in-flight experience will be further enhanced with the delivery from spring 2009 of the Boeing 787, which the airline sees as the natural evolution of its long-haul strategy. With improved pressurisation, the airline maintains, it will effectively be the world's first "non jet-lag aircraft". Browne says First Choice is still experimenting with numerous layout proposals, but the 787 will probably have around 270 seats.

However, the enhanced in-flight experience is only one aspect of the complete First Choice differentiation, says Browne. Its parent tour operator has moved from three-star to four-star hotels, developed holiday villages for exclusive use of its customers, and employed specialists to manage activities such as children's clubs. From a modest 10% of the business, the long-haul market is growing towards 25%, which, if achieved profitably, is a level the airline is happy with, says Browne.

Competitor MyTravelAirways, which operates out of the UK and Denmark, has also cut back on short-haul flights under three hours, eliminating some destinations and reducing the number of daily rotations on others. More flights are now operated to the eastern Mediterranean, the Canary Islands and Morocco, while long-haul routes have also been rationalised. The overall reduction in capacity was part of a major reorganisation of the parent company to stem heavy losses. The reintegration of low-fare arm MyTravelLite, which operated out of Birmingham, was also part of this process.

Tailored travel

In Germany TUI group member Hapagfly has seen a trend away from the package holiday and towards individual travel, although in overall terms it has not experienced a reduction in the short- to medium-haul market. Hapagfly has not found it necessary to move into the long-haul business, although some TUI airlines in other European countries all serve long-haul destinations in addition to the popular locations around the Mediterranean.

Hapagfly operates the majority of its capacity for the TUI tour operators, which in the high season may reach 70% of the total capacity. The remainder is covered by seat-only sales. "The seat-only business has expanded over the past 15 months," says chairman Christoph Müller. "We are always trying to concentrate on highly profitable tourist routes to the main medium-haul resorts, as well as to some city destinations such as Cairo, Istanbul or Tel Aviv. The load factor in the first six months of 2006 is improving in comparison to last year's figures." With the phase-out of the larger Airbuses by the end of the year, leaving an all-Boeing 737-800 fleet, loads are expected to improve further.

"Hapagfly follows the integrated strategy of the TUI group which means in short that we plan and control the capacity and the load factor in a combined work force between the airline and the tour operator," says Müller. "The result is high and improving load factors. Moreover, we are planning to strength ties to our [low-fare] sister airline Hapag-Lloyd Express in terms of crew management, fleet management and network planning."

Establishing a low-fare airline in the same stable or linking up with a scheduled operator is a deliberate move to grab a slice of the mushrooming low-fare pie, while retaining pre-eminence in the inclusive-tour market. Prominent German carrier LTU International Airways is a case in point. Although it has embraced the charter and scheduled sectors for 20 years it does not consider itself a typical charter airline. It has linked up with low-fare airline dba of Munich, whose former majority owner, Intro, bought a controlling stake in LTU in February. This co-operation will continue even though dba has just been bought by Air Berlin (see related story on page 21). "LTU and its partner airline dba are forming the first low-fare alliance operating flights worldwide," says LTU chief executive Jürgen Marbach.

What this means is that dba will provide feeder services at Düsseldorf and Munich to LTU's long-haul flights, which the airline intends to expand further. One new long-haul aircraft will be added to the 11-strong Airbus A330 fleet each year.

Marbach admits that on certain short-haul routes LTU has seen a drop in business due to competition from low-fare airlines, but adds that at the same time, other destinations, especially in Spain and city connections in general, have grown. "Yes, there is a trend to more individual travelling, but no move away from the Mediterranean," he says. "Countries like Spain and Italy are witnessing a real renaissance."

This is at odds with the experience of other leisure airlines and Marbach puts this down to a better inflight service. "LTU has upgraded its product by introducing a very successful business class on short- to medium-haul flights, as well as increasing its long-haul operations, for example offering a daily service to New York. Today, LTU is the only carrier in the low-fare sector offering a low-price business class in Germany."

There are other examples of co-operation between carriers in Germany to extend reach. In March Condor, a Thomas Cook company, and low-fare carrier germanwings linked their websites to expand internet booking possibilities. Their networks at many German airports are largely complementary. In April and May, Condor initiated a new low-fare city programme, which connects Munich with 11 popular destinations in Italy, France, Belgium, Hungary and the Czech Republic.

In partnership with Lufthansa, a joint owner of Thomas Cook, feeder flights from 14 German and 13 European cities connect into all Condor flights at Frankfurt and Munich airports. Travellers booked long-haul in Comfort Class, which offers a seat pitch of up to 50 inches, are entitled, for an extra charge, to fly in business class on Lufthansa's feeder services. "Competitive pricing and a product that is accepted by the market are the prerequisites for our continued growth path," says Thomas Cook board member and Condor chief Ralf Teckentrup.

New leisure focus

While long-haul development is top of the agenda for the larger tour operators and their airlines, the short- to medium-haul market is far from dead. It is clear that, with a few exceptions, the pure holiday charter company has mutated into a multi-force operator that tries to encompass all elements of the air transport market: package holidays, ad hoc charters, scheduled low-fare services and two-class long-haul flights.

In addition, the market is still strong. According to the United Nation's World Tourism Organisation, tourist arrivals grew by 5.6% to over 800 million in 2005. These travellers spent an estimated $682 billion. If spending on foreign passenger transport is added, the total passes the $800 billion mark. On both, Europe accounted for more than half.

How this market is shared out, and whether or not the charter airlines and tour operators can maintain their position will depend on how quickly they can adapt. What is not in doubt is that the charter airlines are fighting back. ■

IACA's controlled aggression

The Brussels-based International Air Carrier Association (IACA), founded 35 years ago, has a 39-strong airline membership, which operates 850 aircraft with an average age of only 4.4 years and carries 100 million holidaymakers annually to more than 600 destinations worldwide. These are impressive statistics, yet the "recognised voice of the leading leisure carriers" is less well-known than its more strident contemporaries and gets minimal press coverage.

"We are not silent," insists softly-spoken director general Sylviane Lust. "We are as active as others, tackling EU [European Union] issues we consider important for our members and conveying a strong message to the regulators. Our purpose is to deal with issues that affect the bottom line of our members, we just adopt a different tone we communicate differently, our approach is more to the point."

Two issues in particular have highlighted IACA's firm stance in its dealings with the EU - airport charges and the complex flight and duty time harmonisation. IACA is at one with other organisations in berating the monopolistic behaviour of airports and the lack of regulations that sets a cap on yearly increases. "Our only option is to pay up or go away, but our carriers are dependent on the tourism stream and have little or no choice of alternative airports," says Koen Vermeir, director aeropolitical and industry affairs.

The high fleet utilisation and crew flexibility that is responsible for the efficiency of IACA's members is being threatened by proposed flight time limitations, which, Vermeir says, are based on those of the least efficient carriers. "This proposal jeopardises this pattern of operations and as a consequence, the very nature of their business model." Further down the line, if the EU plans to open the intra-European market to non-EU airlines come to pass, "our airlines have to compete on the same routes with airlines bound by less stringent regulations", he says.

Source: Airline Business