One of the key reasons for Thomas Cook’s collapse was that unlike Tui, it did not manage to create a differentiated holiday product. This left it in the commodity holiday market that was disrupted by fundamental differences in yield-management procedures between low-cost carriers and traditional tour operators.
Traditionally, tour operators received a flat fixed-price from its in-house airline across the season. For example, a flight seat to Majorca would cost £135 per person from April 1 to October 31.
Tour operators then overlaid accommodation costs and margin profiles, to create base brochure prices per hotel, which were then overlaid by relatively crude “flight supplements” to differentiate between different departure airports and times. These prices were then printed in brochures and remained relatively fixed, until the lates market, which is defined as three months before departure.
In the lates market, tour operators moved to a per flight pricing model and would move allocated on arrival and named hotel prices up/down per departure, based on how many seats they had left to sell.
Historically, tour operators sold 40% of their capacity in the lates market and of this 70% was sold at a loss, in order to hit its target of 98% load factors on its flights.
Over the years this model evolved with fluid brochure pricing being introduced, but this did not change the fundamental proposition that early brochure bookers were charged the highest price and late bookers were often rewarded with lower prices.
Low-cost carriers’ yield models are diametrically opposite, with prices starting low and moving up as buckets of four seats are sold. They aim to do their yield-management early and penalise late bookers with higher prices, to create a virtual circle of rewarding and encouraging early booking, which I have to say is a much more logical model!
OTAs have exploited this model and could often buy seats to Majorca in the early market for £75 per seat, allowing them to package these flights with the same generic hotels as the tour operator and undercut them on price.
Tui recognised this threat and quickly moved to offer differentiated hotel product that was only available from them and could not be replicated by OTAs or low-cost airline holiday divisions. However, Thomas Cook, due to its debt levels, could not invest in hotels as much and so continued to be undercut, causing its profits to collapse and its tour operator carryings to shrink.
The obvious question is why did they not simply switch to the low-cost yield model?
The answer is relatively simply. As a Plc, its directors were paid millions in annual bonuses to improve profits and the radical change in pricing policy was likely to damage short-term profits.
This is because for 40 years customers have been told to book early to get the best deal, only to see cheaper late deals. It would have taken several years of re-education and could easily have resulted in cheap prices in both early and lates markets, as competition to dispose of committed seats drove prices down.
However, with Thomas Cook gone, there is likely to be a dramatic reduction in cheap deals in the lates market moving forward because of how the Thomas Cook capacity is being replaced.
A large element is being replaced by Jet2 and easyJet which do their yield management early and try to avoid last-minute stock. It will be interesting to see if their yield teams can cope with such a massive jump in capacity this year and in the short term they may still have to dump seats in opaque package prices. However, this is likely to be done months before departure and not at the last minute.
Tui, which is adding two million seats, still operate the old tour operator yield model, but importantly no longer face competition from Thomas Cook in the late booking market. Having a lates market controlled by one player only is likely to result in a major increase in late deal prices.
So after all these years of lying, it may be the first year that the industry can honestly advise customers to book early in January in order to get the best deal, not only in terms of availability, but also price.