The hurdles may be high, but leisure carriers are used to going against the odds and surviving. After all, these airlines were born to overcome regulatory barriers and - despite widespread liberalisation and the advent of low-cost carriers - the package holiday lives on.

Sylviane Lust, who heads leisure airline body the International Air Carrier Association, recalls an annual general meeting in Brussels a few years back which questioned whether there was any future for package holidays. "The feeling was that packages would disappear with low-cost carrier entry," she says. "It is quite funny remembering that now because our members are coping with the economic crisis thanks to package travel."

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Although money is short, people are not willing to sacrifice their annual holiday. "Holidays have certainly become a basic need for the vast majority," says Gianni Rossi, chief executive at Italian airline Eurofly. "Holidays remain a must-have," agrees Franco Pecci, who is president of Blue Panorama, another Italian carrier. TUI Travel statistics also support the resilience of leisure demand. Group commercial director Will Waggott says: "All our research shows that our customers believe their annual summer holiday is an essential."

With low-cost carrier penetration and their drive into dynamic packaging, many believed leisure carriers would be squeezed out of short-haul operations and into longer-haul markets. David Huttner, managing director at consultancy firm Planely Spoken, says: "In the under four-hour range, low-cost carriers have reduced charters from a position of dominance to that of niche players.These operators are still not as exposed in the long-haul sector, but if more and more long-haul airlines like Emirates and Virgin Atlantic offer strong affiliated holiday products, or if the long-haul low-cost carrier concept works out, then one has to ask, what is left that is truly theirs?"

But Lust counters that, rather than being forced out of the short-haul sector, the leisure market has seen a "definite shift" from long- to short-haul holidays during the downturn. "It is something people probably wouldnot have predicted," she says.

Price-sensitive customers are using packages to manage their holiday budget. "All inclusive vacations are back in style because consumers prefer to know how much they are spending," says Nelson Gentiletti, who is executive vice-president, tour operators, at Canadian leisure firm Transat which includes airline arm Air Transat. He argues that leisure carriers have "come back in strength" over the past few years, with many posting stronger financials and "surviving a hell of a lot better" than their scheduled rivals. "This sector is a vibrant business which has changed a lot and still has growth behind it," he says.

Gentiletti adds that some traditional carriers have been bruised by the drop-off in premium demand and are now turning to leisure routes to weather the downturn. He uses Air Canada to illustrate his point, as it has just announced new services to Athens and Barcelona from Montreal and Toronto firmly aimed at the leisure sector. "The airline industry is a business of fads. In a down cycle [traditional operators] go back into leisure because they see it is more resilient," he says.

While the obituary for the leisure sector may have been premature, times are still tough. The long-haul breaks thatare dwindling in popularity carry a higher price tag and demand patterns have shifted, with breaks becoming shorter and less concentrated in the peak summer period. In Germany, Air Berlin Group sales director Detlef Altman says there has been "an extreme trend" towards short-term bookings and price-sensitivity has further increased. Blue Panorama chief Pecci adds: "Growth in the charter sector has stalled in the last 12 months, particularly following the closure of a number of major Italian tour operators. Needless to say, these are very difficult times."


Looking around, all the major players seem to be suffering the fallout of the downturn. Half-yearrevenues to June at TUI Travel totalled €6.9 billion, down 13.9%,and underlying divisional operating profit fell 14.3% to $191.2 million. Over at Thomas Cook, revenues at for the nine months ended 30 June rose 10.7% to £5.9 billion ($9.8 billion) and net losses widened slightly to£175.6 million.

Over recent times this harsh backdrop has led to a revamp of the leisure landscape. TUI has merged with First Choice, confirming its position as the goliath of the leisure sector with over 25 million passengers. This places it firmly at the head of the 2008 Airline Business leisure rankings with Thomas Cook, now merged with MyTravel, again taking second place with nearly 11 million passengers.

To put the structure of the industry in perspective, Thomas Cook is half the size of TUI and the next largest carrier is Air Berlin at 3.5 million. In short, the top two are huge and they dwarf the remaining players. But perhaps the most dramatic change to our rankings this year is that two of the top five carriers -XL Airways and Futura International Airways -have disappeared, illustrating how fragile things are even among the larger carriers. Mott MacDonald director of aviation strategy Laurie Price says: "Each recession tends to cause the loss of one charter carrier, but this is a very nimble industry which has fought back."

Lust says her members responded quickly to depressed markets, with key players such as TUI cutting capacity at an early stage. This kept yield management tight and load factors high. Waggott says non-euro based destinations, such as Turkey and Egypt, are "performing well" and "proving very popular" for TUI, while Pecci notes that Egypt, Spain, Greece and the Caribbean have "held up best" in Italy. He adds: "The strong euro has enabled Europeans to seek advantageous deals in countries whose currencies are linked to the dollar." But the strong euro has also made traditional charter destinations, such as Greece and Spain, expensive for UK holidaymakers looking for a getaway. Travel to Mexico is also down because of the H1N1 virus.

On the other side of the Atlantic, Gentiletti says the economic meltdown has not affected Canada as badly as the UK and USA. This means long-haul packages to the Caribbean and Europe have generally held up well, although top-end premium holidays are slightly down. In its European operations, Transat has also witnessed the switch from long- to short-haul breaks. Demand for Canada is down, says Gentiletti, but services from France to Turkey, Greece and Spain are "not doing as badly as you wouldthink". He adds: "Our short-haul operation in France, which has competition from low-cost carriers, has been doing relatively well this summer."


Today most leisure flights are technically scheduled and the sector is keen to shake off the charter label. "I donot know that charter is the right word," says Gentiletti. "Charter is the way we did business 25 years ago."Lust agrees the term "charter" is now old-fashioned: "We have called on leisure airlines to abandon the charter label. It has bad connotations and isnot relevant any longer. It disappeared with the Third Package [of European liberalisation]. This definition doesnot make sense any more."

Low-cost carriers came in when the regulations which gave rise to charter operators came down. Many charter carriers used the newly opened market to move into scheduled operations, responding to the low-cost threat by branching out into direct, seat-only sales or by creating their own low-cost arms.

Eurofly chief Rossi explains: "More than saying the charter sector is growing or shrinking, I would rather say it has changed, because passengers' needs have also changed. Passengers now regularly bypass the travel organisations and buy tickets directly. For this reason many airlines, such as Eurofly, have increasingly rethought themselves as leisure carriers, more than charter operators, promoting the direct sale of tickets to final customers."

In many ways leisure and low-cost carriers are different breeds of the same species. Price from Mott MacDonald says: "Charter carriers were the original low-cost carriers. Charter carriers have tried to add value through on-board premium seats, meals, pre-boarding and duty free - all the stuff that low-cost carriers are catching up with and replicating. Low-cost carriers have been saying 'we inspired this'. No, it's been going on for years."

With the landscape now mature, low-cost carriers have mounted a fresh sortie on the leisure carriers by offering hotels and car hire on their websites through dynamic packaging, using systems such as Navitaire New Skies. Huttner says: "The smorgasbord is now being offered in a flexible, consumer friendly and cost-effective manner, which leads one to wonder what advantages leisure operators still have to stand behind."

Even IACA chief Lust agrees this change has "completely blurred" the lines between the leisure and low-cost sectors. "It has become very difficult to clearly identify the various business models," she says. "You are talking more about what kind of technology is used to book the holiday." And as this two-way shift intensifies, with low-cost airlines morphing into leisure carriers and vice-versa, it is tricky to predict what will come next.


Gentiletti observes that low-cost and leisure airlines have a similar mission: to deliver a low unit cost product to a price-sensitive customer. But the core mission of budget airlines is to sell competitively priced air seats, whereas leisure carriers are primarily marketing holidays. "The leisure guys have to reinvent themselves," he says. "The challenge they are facing is making their package more attractive. Things like hotels and car hire are really not a priority for the low-cost airlines. I'm sure they're not selling a whole lot of it."

On the flip side, seat-only may now be a commonplace offering among the leisure players, but for many it has not replaced the traditional holiday package. Waggott says: "For TUI Travel's airlines the flight is part of the holiday. Seat-only is a lower margin business for us and our priority is selling holidays." Blue Panorama chief Pecci agrees: "We are selling some seat-only but the majority of our seats are sold as part of packages."

Michael Buck, who is commercial director at Turkish leisure carrier SunExpress, says over the last three years his carrier has shifted from a "pure charter airline" to instead serve three key market segments: leisure, Turkey-Europe ethnic links, and the domestic market. Although he says the seat-only business is "growing rapidly and with great success", tour operator work remains the "bread and butter business" for SunExpress, accounting for 40% of its passengers.

Lust believes the seat-only business is now a fundamental part of the leisure market. "It makes sense to combine the two types of traffic. I don't see that disappearing. It is here to stay, although the proportions might vary." Rossi from Eurofly agrees: "The pure charter model will definitely continue to thrive in certain market segments, like the ad-hoc or the common interest group options, but will be growingly flanked by the provision to sell seat-only as well."

But Gentiletti is less optimistic about the future of the low-cost arms which were formed as a defensive move by the leisure players to maintain market share. "Now what we are noticing is that the leisure guys are essentially shutting down their low-cost airlines because what they are realising is that they can't be all things to all people," he says.

Going forward leisure carriers will have to draw on their strengths: a low cost base, high adaptability and a tailored product. Lust says: "Above all, the key to survival is flexibility and over the last few years leisure carriers have demonstrated their ability to adapt to market conditions." She adds that during the downturn there has been reduced take-up for premium cabin travel, but demand for paid add-ons, such as extra leg room, has held up. Waggott from TUI says: "We are seeing increased demand for product that is differentiated across all our markets, including premium product. Differentiation will be increasingly important in the future."


Dynamic distribution will also be increasingly important going forward. Gentiletti says: "The advent of the Internet has changed views on distribution. Today we are in a pull industry. The power is in the hands of the consumer and low-cost carriers understood that from off the block." Customers expect to browse and compare products on the internet in real-time, but the complexity of bringing together the elements of a package holiday -compared with the relative simplicity of selling an airline seat -is a huge technological challenge for the leisure carriers and their supply chain.

"Today if you say 'sorry, the product that you saw is not available', people don't accept it," explains Gentiletti. "If you say 'we'll check the hotel availability and get back to you in 24 hours', the consumer will go elsewhere. The customer makes the decisions and they need accurate information on time, with no disappointments." He says the players which deliver this technology and successfully shift their culture to the new model will succeed. "There will be some operators which will not make change, but there have also been low-cost carriers which have gone bankrupt. Just because you're a low-cost carrier doesn't mean you will survive the war. Over the next two or three years, whoever executes these changes will emerge much stronger."

The roll-out of more dynamic systems will be pricey and Lust says the industry has already "cut the fat and now only the bones are left". Gentiletti says leisure players have turned to consolidation as a way to squeeze costs still further and fund this reinvention, as players would struggle to make the shift on their own. Gentiletti believes further consolidation will probably come at the tour operator level, where he feels casualties are most likely. Lust agrees that consolidation is "definitely in the air" and there is still "room for more". She adds that strategic co-operation is also on the increase among leisure carriers, such as the new tie-up between TUIfly and Air Berlin.

But some carriers will not survive the downturn and Waggott from TUI believes we could see further failures this winter. "When fuel costs were high there was a real danger that a number of airlines across the industry would not survive. This has eased as the price of fuel has come down, but the winter could prove difficult for some if they are not financially robust. Fuel costs are a bigger problem for single airlines than tour operators who use their airlines to service their business."

Gentiletti says there are "very few" independent leisure airlines left thatare not dedicated to a major tour operator, adding "the jury is out" on their future, while Price from Mott MacDonald observes that recently casualties have "been largely non-vertically integrated". But, Lust counters: "Just because they are not integrated does not mean that they donot have strong tour operators as customers. Thomas Cook and TUI may be spreading their wings all over Europe, but some independent players like Monarch are doing extremely well." Price also notes non-vertically integrated carriers can be more agile.

Lust is reluctant to predict when the eventual upswing might come, although she is hoping that things will rebound in 2010. Eurofly chief Rossi agrees: "We assume the turnaround will start in 2010." Once demand picks up, leisure carriers may be able to exploit long-haul routes which have so far remained out of reach for low-cost carriers. "Although low-cost carriers have eroded market share from charter airlines, sometimes in a significant way, there is still potential to exploit in the long-haul charter market," adds Rossi. Gentiletti agrees: "In the longterm, long-haul looks very attractive for the leisure sector, while on short-haul European routes traditional leisure operators will have to continue to reinvent the model."

The true picture of the leisure sector remains murky. On the one hand, the leisure sector has shown itself to be mature, robust and adaptable. Package travel has survived against the odds but, if the recent revival has been triggered by the downturn, will it continue once market conditions improve? As always. it is extremely difficult to separate the effects of the downturn from fundamental changes to the game.

On the one hand, you have the sceptics, like Huttner, who says: "Charters have become a niche market.While they still play a notable role in continental Europe and are unlikely to ever completely disappear, there are few in the industry who believe they will ever regain their previous dominance in the market." But Blue Panorama chief Pecci has a different view: "These are difficult times, and as such leisure carriers need to adjust their business models.However, do not rule a strong comeback from pure charter operations.We are already seeing the first signs of recovery."

One thing which is clear is that anyone who wrote off the leisure players a few years back may have underestimated the resilience of the sector. "The announcement of the death of the package tour was premature," says Price from Mott MacDonald. "This industry has been around for 50 years. Some carriers have gone by the wayside, some have adapted. But these are some of the longest-surviving carriers. You donot hear them declaring multi-million losses. You ignore these people at your peril."

And despite the gloomy theme at the IACA annual general meeting a few years back, Lust is confident that her members have proven they have the skills and determination to remain in the race: "Four years ago people thought the package holiday was dead. Absolutely not. It has boomed and regained confidence. It goes through cycles. Package travel, which was on the decrease due to dynamic packaging, is becoming very strong again."

Source: Airline Business