While the sun is shining on Europe's holiday makers this summer, the tour operators have been hard at work on an industry-wide consolidation. The events of the last year or two have begun to reshape the major travel markets of Germany and the UK. The transformation has continued this year with two major mergers and a flotation in the UK tour operator market alone, while the German tourist industry is well on course to regroup around three travel giants.
What already seems likely to emerge is a handful of powerful integrated groups, each complete with its own in-house airline. The next step in the battle also appears to be to expand beyond national borders - a challenge already laid down by the UK charter companies as they edge into Scandinavia and Germany.
The backdrop to this is the recent booming market which operators have been enjoying since they emerged from the recession of the early 1990s. The UK and Germany are the two largest charter markets within Europe, with sizeable proportions of the populations holidaying overseas. The UK in particular is experiencing its busiest summer season, as the combination of a poor weather cycle and the strong value of the pound encourages much of the population to holiday abroad.
For the 1998 summer, the dozen or so UK holiday airlines operate a combined total of more than 150 aircraft, representing some 36,000 seats, with daily utilisation averaging more than 12h. The combination of high aircraft utilisation and seating capacities, along with some of the lowest employee costs in Europe, make them the envy of their continental European rivals and put them into the driving seat when its comes to strategy. This summer the German charter carriers, which generally have less dense seating layouts, are operating about 140 aircraft and around 30,000 seats.
All the major UK charter airlines are now vertically integrated with tour operators as a result of a consolidation process over the past 10 years that has seen the demise of some of the independent carriers, such as Dan-Air and Ambassador. Another high profile casualty was Air Europe, which disappeared after its parent, International Leisure Group, went down in 1991 - although the Italian and Spanish airline divisions managed to survive.
The causes of the collapse of the independent charter airline are not difficult to trace. With the UK economy hitting rock bottom in the early 1990s, the holiday market crumbled. The first to feel the brunt were the smaller independent tour operators which had provided a mainstay for the standalone charter carriers. The integrated tour groups simply retrenched around their in-house airlines, leaving the likes of Dan-Air struggling to fill seats.
At the same time, the major tour operators, fighting in the fiercely competitive package holiday business, have emerged from recession with their own drive for consolidation. Major mergers and acquisitions has also included a move towards greater self-sufficiency in providing airline seats, with major tour groups such as Thomas Cook now beginning to build up their own sizeable charter carriers. The major airlines are now captive to their tour operator parents - for example, 90% of flights operated by London Luton-based Britannia, which is the UK's largest charter airline, are for its parent Thomson.
RESTRICTIONS ON GROWTH
The UK carriers' immediate concerns have centred upon the restrictions on growth at the country's premier charter airport - London Gatwick. During the five summer season months (May to September), charter airlines represent around half of the movements at Gatwick (and proportionally more of the passengers). The continued growth of scheduled operations, predominately by British Airways and its franchise operator, CityFlyer Express - which between them have around 40% of the slots at Gatwick - is frustrating the incumbent charter airlines. The carriers are unanimous in their complaint that the airport is effectively closed to growth for their operations.
"We've found it impossible to put a third aircraft into Gatwick this summer, but BA can get another 25 slots if it wants," says Leisure International Airlines (LIA) managing director Philip Ovenden. "This is not a fair way of doing things-why should the leisure traveller be discriminated against in favour of business people?" he asks. Air 2000 director of engineering Gareth Cunningham echoes Ovenden's concerns, explaining that the slot situation is already affecting planning. "We are examining the acquisition of larger aircraft, such as the Boeing 757-300. This is the only way we can grow at Gatwick, given the slot limitations," he says.
Some redeployment of operations to Luton and Stansted airports, which offer the prospect of relatively unlimited growth, seems inevitable, but some observers see a second runway at Gatwick as the only long-term solution.
The situation may resolve itself in the near term, however. The last boom at Gatwick during the late 1980s came to a halt when recession hit, providing the airport with the breathing space to cater for the expansion of scheduled operations. Concerns are already growing that the economy is set for another slowdown, which would coincide with the UK charter industry's best year in available seat terms. There are already deals in place which will see five narrowbodies (three Airbus A321s and two 757s) and six widebodies (including the UK's first four Airbus A330-200s) enter the market in 1999.
As early as last year one charter industry observer was warning that, although 1997 and 1998 set new records, in his experience the UK charter industry has never had three good years in a row. This may help to explain the recent flurry of activity to consolidate among the major tour operators. The recent purchase by Air 2000's tour operator parent, First Choice, of rival tour operator Unijet (LIA's parent) will create the UK's largest single long haul tour operator. Meanwhile, Sunworld, a division of Thomas Cook, has bought the Flying Colours Leisure Group, which consolidates its position as a major European tour operator.
These two deals will see two new major UK charter airlines emerge by the time next year's season starts. The First Choice/Unijet deal brings Air 2000's size and capacity to a par with the UK's third largest charter airline, Monarch Airlines (a division of tour operator Cosmos). The combined Flying Colours/Airworld fleet will create the sixth largest carrier, with an extensive European charter network.
Meanwhile, the small UK independent airline, Sabre Airways, has been the subject of speculation that it is to become the centrepiece of Virgin Holidays' new European airline operation, Virgin Sun, which will launch services next summer. Virgin was tipped to purchase the Gatwick-based carrier, but it now seems that the airline will just adopt the Virgin Sun brand.
In Germany, a series of reorganisations has seen Condor parent Lufthansa break its ties with Hapag-Lloyd in favour of Karstadt Group and its tour operator, NUR. The result is the creation of new jointly owned C&N Touristik, which brings together the tour operations with Germany's largest holiday airline. Meanwhile, Hapag Lloyd has linked with C&N's main rival, Germany's largest travel group, tour giant TUI.
Swissair parent SAir Group is in discussions to acquire a shareholding in LTU from the Westdeutsche Landesbank. The bank, which owns the UK's Thomas Cook, is being forced to sell its LTU stake by competition watchdogs as it has acquired a stake in rival TUI.
The combination of the UK's airport congestion and its relatively mature holiday market means that growth opportunities are limited, forcing tour operators to look elsewhere. The prime candidate for this expansion is continental Europe, where the low cost structures of UK carriers make them highly competitive.
Britannia has been making some significant strategic moves overseas, but many observers see relative newcomer Airtours as the true trendsetter. Airtours, long established as a tour operator, set up an airline division in 1990 operating Boeing MD-83s on European charters. It quickly consolidated its position with the acquisition of another UK airline, Inter European Airways, in 1993 and in 1994 moved into the long-haul market with the Boeing 767-300ER.
Airtours began to pioneer expansion elsewhere in Europe when it took control of Danish charter airline Premiair in 1994 through the acquisition of a stake in SAS Leisure Group. Britannia is now aggressively following suit with its own offshore expansion. In 1997, Britannia parent Thomson spun off an all-new German division and earlier this year it took over Swedish charter airline Blue Scandinavia through the acquisition of major Nordic tour operator Fritidsresor. There is now talk of Thomson starting an Australian operation.
This battle of the UK charter carriers for a stake in the German market looks set for further developments, with Airtours recently acquiring a stake in German tour operator Frosch Touristik International - the company that the German Britannia division was created to serve - signalling a possible move from Airtours to set up a German flying programme.
The pressures of maximising aircraft utilisation during the summer months has seen a new industry spring up in the form of the back-up airline. New carriers such as Classic Airways and European Aviation provide aircraft from the size of the 100-seat BAC One-Eleven to the 390-seat Lockheed L-1011 TriStar on 24h standby. These aircraft are ready to move at a moment's notice to act as substitutes.
With business booming, these carriers have grasped a niche market opportunity, but, like the independent airlines before them, they will be the most critically exposed when the next recession bites.
UK charter airline mergers/failures since 1989
1989 Paramount Airways Ceased operations
1989 Cal Air International Sold by BA and renamed Novair
1989 Orion Airways Merged into Britannia
1990 British Island Airways Ceased operations
1990 Novair International Ceased operations
1991 Air Europe Ceased operations
1991 TEA UK Ceased operations
1992 Dan-Air Acquired by BA
1993 Inter European Airways Merged into Airtours
1994 Ambassador Airways Ceased operations
1995 Caledonian Airways Sold by BA to Inspirations
1996 Excalibur Airways Ceased operations
1998 Leisure Int'l Airways Merged into Air 2000
1998 Flying Colours Airlines Merged with Airworld
Source Airclaims CASE database
Major UK charter airlines - summer 1998
Operator Aircraft fleet Seats Parent
1 Britannia Airways 37 9,600 Thomson
2 Airtours International 24 5,680 Airtours
3 Monarch Airlines 21 5,460 Cosmos
4 Air 2000/Leisure Int'l 23 5,230 First Choice
5 Caledonian/Peach Air 15 4,240 Inspirations
Flying Colours 12 2,570 Thomas Cook/Sunworld
Note ranked by total seats
Source Airclaims CASE database
Source: Flight International