While leisure airlines face the same challenges as the rest of the industry in terms of high fuel costs and the economic crisis, they have their own unique set of problems.
They have seen their market share eroded by low-cost competitors, in particular in Europe, where leisure carriers have been chased from their traditional sun destinations such as Greece, Spain and Portugal.
In response, these carriers were forced to develop destinations further afield such as North Africa and the Middle East. However, after developing these markets, they were soon joined on these routes by competitors such as EasyJet and Ryanair.
Since that time, leisure carriers have been trying to immunise their businesses from the threat from their scheduled budget rivals through a variety of methods.
Murray Smyth, principal of Transport & Technology Consulting, believes that leisure airlines are increasingly mimicking low-cost carriers. "It's because they see their business growth in seat-only sales rather than in package holidays," he says.
Monarch Airlines is one such carrier that has placed an increasing focus on its scheduled operations, which it says now accounts for approximately 80% of its traffic and growing. The UK carrier, which began its evolution from providing chartered holiday services into a scheduled airline over a decade ago, believes that it can compete in the crowded European marketplace by providing a level of service that low-cost carriers cannot match.
Lionel Guérin, chief executive of Transavia France, says he sees potential for growth in the leisure market, but believes any increase in traffic will be experienced by scheduled operators rather than charter carriers. Transavia, which was initially created as a charter carrier, still provides these services, but Guérin makes it clear that he sees scheduled low-cost services as the way forward for his airline.
"Effectively, the tour operating market is diminishing. We are having an increase in traffic of passengers using the low-cost carriers for leisure travel," he says.
In Russia, OrenAir, a charter subsidiary of Aeroflot, is preparing to move to seat-only sales as Smyth says they see this "as the engine for growth as packaging is diminishing in importance in Russia as well".
While this approach may bring more passengers, it also brings issues. "They're trying to work out: 'if the high margin piece of a holiday package is the non-air piece, but we're selling seat-only, how do we make money out of it?'," says Smyth.
He adds that if five years ago, an aircraft comprised 90% charter and 10% seat-only passengers, and if the balance has now shifted to 50-50, "how do they [leisure carriers] continue to be effective from a business point of view?"
In shifting their business models by selling seats through websites or online travel agents, Smyth says leisure carriers are increasingly seeking to improve their yields by actively selling ancillary products. By offering options such as seat selection and meals, Smyth says they've shifted to a low-cost approach - a key theme across leisure airlines in Europe. "The only difference [is], some are more advanced with this strategy than others," he says.
As airlines improve yields through the sale of ancillaries, Smyth says they must keep things practical and not make it too complicated. "You don't want to over-egg it either with ridiculously large excess bag fees which you see in the low-cost carriers," he says.
However, Sylviane Lust, director-general of IACA, the Brussels-based association that represents leisure airlines, believes that even if leisure carriers copy their low-cost counterparts' strategy, they must not completely emulate their rivals. She feels that leisure carriers must seek to differentiate their service by highlighting "their superior service and the ease of booking a package".
They should also ensure passengers are taken care of and are treated well, even during their time onboard. "The future will be less quantity, but more quality, and they are very well-equipped to deliver that," she says.
Another manner in which the leisure carriers are seeking to differentiate themselves is through offering long-haul destinations where low-cost carriers cannot follow. TUI for example has long boasted about the far-flung destinations it could develop, such as Borneo, Madagascar and Ecuador, when the five Boeing 787-8s it has on order begin to arrive.
"Our members are very positive about developing new markets, especially long-haul markets, which do not really have an established tourist infrastructure like Cambodia or Myanmar or even the BRIC [Brazil, Russia, India and China] countries," says Lust.
She feels that the established reputation of a brand such as TUI shows that "when people are considering travelling to destinations that are faraway and exotic, they need the comfort of relying on a very well known operator that offers a lot of certainty and no risk."
Smyth says developing long-haul markets "makes great sense" from the airlines' perspective as it is outside of the scope of low-cost carriers and away from the intense competition. "In airline economics, typically you make a good deal more yield on long-haul sectors than short-haul," he says.
While TUI's 787 order appears an ambitious move, he says: "If you have a 100% full 787 and you're making money on the non-air side, you've got a fair amount of margin to play with to get the price right."
However Peter Morris, chief economist of Flightglobal's data and consultancy division Ascend, questions how they will fit into TUI's strategy: "The issue that arises is at the time TUI put the order in, there was a different market environment and the expectation of the market environment for now was different to what it actually turned out to be.
"In looking at that long-haul model, I'm not sure TUI would have anticipated that at the margin, they would be competing with a whole raft of Middle Eastern carriers for example. The competition balance has changed and the calculations they would have done in terms of expected fuel price would have been rather lower than [actual prices] at the moment. You have all these things that detract from the economics of what they planned."
Morris questions whether it may be more prudent for TUI to delay the delivery of the 787s. "There are other people who might want to bump their place up in the queue The greatest value to them [TUI] could be not operating the aircraft. That's speculation, but the option must be there if it does not fit their business model anymore," he says.
Morris also says that with the consolidation among alliances, "they're becoming a lot more focused on the long-haul products that they offer" and the tour operator model is "facing a tougher and tougher time".
As to whether long-haul leisure destinations can provide new growth markets for leisure carriers, Morris says: "I think there is a problem for the leisure market that had definitely been drifting towards longer and longer-haul destinations like Thailand and Vietnam. They're going to face a lot of challenges, given the absolute amount of fare that's going to be charged, particularly for family groups.
"You do have different markets. There is quite a big move from France to the French Caribbean and French Polynesia, but there are a number of players in that market that are really well established and linked into things like Club Mediterranean and it will be difficult to dislodge those guys."
While many observers hold a pessimistic outlook for the leisure industry, Smyth believes it has all the tools necessary to win back market share. He says they possess a great opportunity if they are able to break down the product into component parts like the low-cost industry and "if you have a good merchandising website of your own and put plenty of product there like air product, hotel product, other travel product".
"Charter carriers are seeing that individual passengers want more choices and do not necessarily want to buy a package. They buy a seat from Thompson, but hopefully they'll buy a villa from Thompson, so it's more of a dynamic packaging environment than a packaged holiday environment," he says.
Pointing out that leisure carriers have experience "in doing the content deals with various hotels and properties and leisure product providers", he says: "All of the key stakeholders in the [leisure] business are coming to the same conclusion that they better get in front of the consumer and give them the choices they want if they want to remain sustainable, relevant and make money."
Smyth says that the transition of leisure carriers from selling packages to a segregated product will require a change not only of business strategy, but of processes, systems and enablement. He says nearly all leisure carriers "are only at the beginning of that ancillary product path. They've grown up as charter companies and got these big systems that help them sell package holidays".
While the online travel retail market is being targeted by airlines looking to expand revenue streams, travel agents and global distribution systems, Smyth believes the leisure sector is best placed to offer what the market wants.
This has been understood by Transavia, whose website offers customers the opportunity to separately purchase flights, rental cars, hotels, holiday homes and transfers. Guérin says Transavia's brand is "dynamic and young and adapted very much towards the low-cost leisure market" and its website is well established already in the markets it serves.