Will good UK weather impact this year lates market?

Having managed Airtours yield team for many years, I’m more than aware of the impact good UK weather can have on holiday sales in the lates market.

 

With historically 45% of all package holidays sold within 3 months of departure, minimising losses whilst achieving 99% load factors, was a crucial element of the financial performance for the year. That’s why we often looked out of the window and prayed for rain!

 

A pattern of good mid-week weather, followed by rain at weekends maximises customer frustration and boosted sales the most, but it was good weather in May and June period that we feared the most. This often lead to a slowdown in sales and a build-up of excess capacity as we approached the peak summer period. With four major tour operators in those days, competitive pressure was also a key influence in driving rapidly decreasing prices and holidays being sold for £99 at the last minute.

 

Structural changes to our industry, with the consolidation of four to two major UK tour operators and a switch to “differentiated product” to drive early sales, has massively reduced the “excess” package stock in the market place. Similarly, the low cost yield models of Easyjet, Jet2 and Ryanair all seek to do their yielding early, leaving less stock available in the latest market, which in turn has led to a much more controllable lates market in recent years.

 

However, I think this has masked the impact of the “Connected” Internet world, which in my opinion has made the overseas lates holiday market more vulnerable to good weather in the UK.

 

When the pre-millennial generation were growing up, mothers dreaded the 6 weeks summer holidays, as kids quickly became bored at home. An overseas holiday was a welcome break and theoretically, an opportunity for Dad to step up to the mark and share the work load, by splashing with the kids in the pool or building sand castles.

 

But today’s kids have been brought up in a world with 1,000s of satellite TV channels, on demand TV and PlayStation’s that allow them to play games with a wide range of friends, without even stepping out of the house. One of my kids wouldn’t even come on beach holidays, as he did not see the point and did not like the sun. I’m sure these days he may not be alone!

 

If the kids are happy at home, it’s not surprising that if the weather in the UK is good over the summer, more mums and dads are opting for a few days in the garden gathered with friends around a barbeque, supplemented with a few days trips.

 

This is less of an issue for the asset light dynamic packing OTA’s as not holding perishable assets means its normally flight and hotel prices that take the pain required to get prices low enough to tempt customers, so the day jobs probably safe.

 

However, I personally think “UK Staycationers” are missing out on other key aspects of an overseas holiday. Namely, the experiencing of different cultures, sites, languages, food and even swimming in the sea. Not to mention the detox that the entire family experience by unplugging from the “Constantly on” internet world and enjoying meals out where the whole family engage in conversation. I know, a rarity in my house hold as well!

Does the OTA community need a new Monarch?

Easyjet’s appointment of Johan Lundgren as CEO, was bound to herald an increased focus on their holiday division and the poaching of Tui’s highly experienced product and contracting director Gary Wilson clearly heralds the start of a big push.

 

Given the introduction of the new Package Travel reforms and the increased costs imposed upon “Dynamic Packaging” retailers, the launch of a Easyjet Holidays B2B trade proposition for high-street travel agents looks inevitable. Why would Easyjet Holidays leave the trade Jet2holidays?

 

It may even be possible that Easyjet Holiday’s launch’s their first summer brochure to the trade in January 2019, but it’s a tight timeline to increase its direct buying to build a competitive product and a launch for Summer 2020 may be more realistic.

 

The high-street will welcome the move back to a “big four” tour operators, with the new boys of Jet2 and Easyjet servicing the “commodity” beach market, that both Tui and Thomas Cook have deserted in their quest for “Differentiated” product.

 

More competition normally means more commission for a high street distribution channel that only charges for results, unlike Google or Meta sites which primarily operate relatively high risk cost per click (CPC) models.

 

The news is more worrying for the OTA community, which historically has relied upon access to low cost carrier seats to fuel their packages. Until recently, OTA’s actively welcomed the shift away from charter flights on routes, where they only had access to 25% of seats, to low cost carriers where they had free access to 100% of seats.

 

However, the launch of low cost carrier tour operations has begun to change the rules of this access.

 

Jet2’s yield team, use “opaque” packages to boost its yield curve on routes, by pushing heavily discounted seats into its package holidays. These are invisible to its competitors pricing teams and allows them to maintain a stable flight only market price. This quite legitimate yield tool, also guarantees it’s in house tour operation has package prices that cannot be matched by DIY customers or OTA’s.

 

Easyjet take a different approach and make their seats freely available via an XML feed, but charge a substantial premium for the service at £6.00 per passenger per sector, which on average is £30 per booking over its standard flight prices. This has been in operation for a number of years and clearly works for all parties, however OTA’s will now be concerned that they may be competing with an inhouse tour operation, where such a charge is a mere “wooden dollar” internal transfer, that’s unlikely to effect the final holiday price.

 

Ironically, OTA’s key commercial advantage, remains the fact that they are NOT the asset holder and are free to sell the widest range of flights with the best flight times. They can also often generate substantial savings for customers via “Split Flying” where they combine outbound seats with Easyjet with cheap inbound seats from Ryanair or even Thomas Cook on routes like Turkey which is suffering excess capacity. Therefore, OTA’s will remain a key part of the holiday ecosystem providing competition for the new “Big four” in the B2C market and potentially moving forward via B2B products sold via the trade.

 

However, strategically the OTA community would welcome a new airline partner without its own tour operation and collaboration with airlines such as Emirates, Etihad, Turkish Airways or Norwegian to establish a new short haul network is not beyond the realms of possibility.

 

As ever cost effective customer acquisition and retention is likely to be the key decider between the winners and losers in the holiday battle and I would argue that OTA’s independence gives them a strong counter balance to the new big four “airline owning” tour operators.

Pre-booked Sunbeds – Creative commerciality or a step to far?

I personally applaud Thomas Cooks creative commercial thinking behind identifying sun beds as another chargeable optional extra in a package holiday.

Low cost airlines first brought this phycology to the market place, by first making luggage a chargeable extra and then pre-booked flight seats. They rightly pointed out that this allows them to charge a lower price for the basic flight seat and leaves customers to choose what they want to pay for.

For example, why should a customer who takes fewer clothes via hand luggage pay the same as a customer taking a 22kg suitcase, which requires airline staff to check it in, transport it to the plane and then load/unload it. In this case there is a clear cost saving that the airline can pass on to reward hand luggage only customers.

Pre-booked seats, when it was first introduced, was more controversial as there is minimal extra cost to implement this and most airlines already offered the service free of charge to its customers, who expected to be able to pre-book seats next to each other. Supposed “Full Service” airlines such as British Airways initially resisted such innovations, preferring to sell on the basis of “Differentiated Service”, but after a number of years of losing ground eventually followed suit.

Therefore, you can only applaud Thomas Cook for becoming the “Easyjet” of the package holiday world and evolving its product offering to give customers the option of paying to pre-book the best sun beds. Just like Easyjet’s “Speedy boarding” service, this not only is a valuable service to some customers, it also provides a degree of “show off ability” that they are smart enough to pre-book and can afford to do so. A few seasons of “sun bed” envy will soon see the uptake of this service soar.

The subtle down side of Thomas Cook launching this policy, is that it does allow its major competitor Tui to take the moral high ground over its “differentiated” holiday products, where I am sure it will claim sun beds are so plentiful that there is no need to pay extra to pre-book. However, for me this has echoes of British Airways stance and is unlikely to have any real impact in a world where customer choice, is just as “Customer Centric” as full service options that cost more.

This year, Turkey is not just for Christmas.

As we sit recovering from one to many Christmas turkey dinners, it may be time to look at the year ahead and assess the role that Turkey as a destination is likely to play in the success of the UK Travel Industry this year.

The collapse of Monarch airlines gave a stark warning as to how nasty the “Spanish route” price war had got, with average yields having dropped by 30% over a 2-year period for most airlines.

As we all know, terrorism and political unrest has seen a massive concentration of demand into Spanish destinations, resulting in scarce last-minute hotel availability and large price hikes. Fortunately, for OTA’s whose flexible model allows them to be “parasites living off the misery of others”, these hotel price increases were offset by reduced last minute flight prices, as airlines struggled with excess last-minute capacity to fill their aircraft.

For virtually the first time, we saw how disastrous the low-cost model of discounting early can be, if high hotel price’s mean they cannot fill the last-minute seats and have to “double discount”.

The failed Turkish coup in July 2016 ensured that not only late demand for Turkey in 2016 was dramatically reduced, but also led to large swaths of capacity being redirected to Spain in 2017. Therefore, even though Turkey remained stable in 2017 and late demand surged back, there were few seats left to match with the plentiful and cheap hotel availability.

However, some airlines desperate to remove capacity from the Spanish blood bath, are flooding capacity back into Turkey for 2018.

Ironically, in these situations a high degree of “Exclusive”, but committed hotel product is working against TUI, who have increased capacity by 100k passengers, compared to the massive hike in capacity that Thomas Cook have put back into Turkey, with a virtual doubling of capacity to 600k passengers. Although, exclusive product is highly profitable, it cannot be moved around and does expose the owners to big swings in destination demand.

Also, the successful short duration, high frequency flying model of Ryanair combined with 5th freedom flight permissions issues, resulting from being an Irish rather than UK carrier, has kept them out of this potentially lucrative Turkey alternative. Easyjet on the other hand have no such limitations and having acquired profitable routes from GB Airways many years ago, know Turkey’s yield potential.

Easyjet’s biggest UK competition is likely to come from Thomas Cook being nervous of their large capacity increase and reducing perceived risk, by dumping flight only seats at low prices early to boost load factors.

A more left field threat is Turkey’s own low cost airlines like Turkish Airways, which have the benefit of being based downstream and so are able to move capacity around

Europe to exploit regional peaks in demand e.g. both Scottish and English school holidays with one flying program.

Turkey is one of the UK’s few major beach destinations outside of the Euro and with the pound having strengthened markedly against the Turkish Lira over the last 12 months (+20%), the price benefit of an All-Inclusive holiday to Turkey over its Spanish compatriots has never been higher.

Unfortunately, the same price advantage also applies to Germany, the other European beach power house, and capacity is also piling back in from that source market, so 2018 may be the one and only year for the British travel trade to gobble up as much Turkey as possible.

Mobile is fragmenting the OTA booking process and re-shaping their basic infrastructure.

For most online player’s, mobile represents more than 50% of their traffic, but has a much lower conversion than its desktop cousin. It’s no surprise therefore, that a “Mobile First” approach has become the key focus for most OTA’s with literally 1,000’s of A/B tests constantly being applied to try to find the ultimate “User Interface” (UX) for mobile sites.

The original focus of the industry was on “Responsive” sites, that optimised the desktop journey to represent it better on mobile devices. Quickly, the UX guys realised that the “Friction points” on a hand-held device from “big finger “clumsiness issues, required different solutions to mouse driven desktop interfaces. However, the “Real Mobile” difference, is the very limited time customers view their mobile devices at one time and the development of what the marketers call “Mobile Moments”. This means that the mobile journey must be much faster and to achieve this simpler.

The latest movement in UX is focusing on “Removing friction” in the booking journey. In laymen’s terms, this means understanding the users’ intent and ensuring that the experience provided is exactly what the user wants providing clear actions, in some respect this could be perceived as “dumbing” down the booking journey by removing any possible distractions. Just have a look at how different the “Booking.com” desktop and mobile sites are. On the mobile site, filters are hidden and once a customer is in the booking funnel, any distraction from the key goal e.g. book a hotel, has been removed.

The result is that ancillary sales such as car hire, transfers and insurance, are being shunted to a post booking pitches via email or clever “Remarketing”, using cookies that allow highly targeted “post booking” advertising of ancillaries. This “two stage” approach is facilitated by getting customers to downloading the “mobile App”, as even though many customers forget they have the app on the phone, it allows much more effective push marketing and links to content rich post sale processes. What is dressed up as customer service by companies like booking.com and Airbnb, is highly profitable in-resort revenue, relating to local excursions, transport options or dinning out. These allow them to maximize revenues once a customer has been acquired, but in a two-stage booking process. They would never interrupt their mobile booking flows with these options, but once they have the app downloaded they can easily become the customers “pocket passport” and sale a whole range of “ancillary” products by using both geo location and time sensitive metrics.

Other companies have adopted similar processes, but may become unstuck due to their dependency on email as the secondary customer contract strategy. As GDPR comes into effect next

year, travel companies will be able to email customers about their booking as part of legitimate interests, however it’s still unclear whether these emails can provide a marketing up-sell message in addition. The line between allowable customer service follow up and the sale of new products, looks blurred and grey to me. For example, is it customer service to offer a transfer to customers who have brought a flight or hotel from you or a new sale they have not opted into? I would argue it’s fine, but I’m sure somebody may soon object.

Speed is also a key in a factor in a “mobile moments” environment and multiple layers of “caching” are a fundamental requirement of a mobile site. Slimed down content pages driven by AMP or price caching to drive the speed of results pages are now common. Again, compromise is required and here it is the absorption of price increases during the jump from cache to live, as not absorbing reduces conversion by up to 60%.

The ease of linking between mobile and desktop to allow a booking to be started in a “moment”, but to be completed at leisure on a desktop is key. Currently the only realistic method of doing this is to get the customer to login, which is tough in the travel environment where customers are promiscuous and on average visit 23 sites before booking. Easy login tools using Facebook etc. have helped, as do high levels of repeat booking customers, but this is a hard one to crack and will be a massive advantage to the travel company that gets this right.

OTA’s are also taking a good look at payment options and how these can be simplified, whilst at the same time pushing customers to the cheapest merchant clearing option. From January 2018, the industry will no longer be able to charge the global 2% surcharge for booking with a credit card, compared to a debit card. Logically, most customer will opt for the greater protection and better payment terms offered by booking via their credit cards. Many OTA’s already have plans centering around flexible deposits and payment terms only available for customers paying via debit card, but these tend to be complex and conflict with the requirement to simplify the mobile booking journey. Again, I think we may see a two-stage process with deposits being taken in the simplest way possible and any complexities being aimed at the balance payment process.

The key conclusion from this article is that Mobile is forcing not only a shift in booking flow but also a fundament review of booking process and the infrastructure supporting OTA’s, with caching and two staged booking process soon to become the norm. Well it would be boring if the rules didn’t keep changing in my view!

Easyjet Holidays trade launch and a further evolution of dynamic packaging in response to the European Travel Directive implementation.

Travel Agents quickly adapted to the dynamic package (DP) revolution, developing their own systems or buying relatively cheap pre-built Dynamic packaging platforms, that allowed them to combine low cost carrier seats with multiple bed bank XML feeds.

The initial DP battle was all about “Price and Range”, with agents looking to have the biggest range of hotels and the most suppliers per hotel, to ensure they could always offer the cheapest price. Many smaller travel agents and OTA’s have never moved past this “Range” is everything model.

However, over time, bigger OTA’s like On the Beach have consolidated consumer demand into a much smaller range of “Recommended Hotels”, so that they have enough volume to justify contracting the hotels directly via an in house buying team. This in turn yields lower rates and/or higher margins, which has allowed them to advertise these hotels harder and create a virtuous circle of growth, with 65% of all sales going into directly contracted product and expanding sales over all.

The introduction of the European Package directive, which comes into force in June 2018, effectively bans “Flight Plus” ATOL’s and will force all UK Dynamic Packaging companies to move from their current status as “Agent” of the Hotel to full “Principal” status.

We are told by legal experts, that this will not affect the VAT status, keeping DP agents out of the extra £20 per passenger cost imposed by UK TOMS VAT, however there is no avoiding the extra-legal responsibilities that principal status gives.

As “Principals” each agent will be responsible for implementing their own Health and Safety checking procedure and have at least one person in the company trained and responsible for implementing their policy.

In reality, H&S is a relatively low cost issue as there are a number of independent industry experts, offering off the shelf “Self-Assessment” systems that can provide the required protection. In my experience, it is very difficult for DP agents with relatively scattered sales, across 1,000’s of hotels, to actually influence the H&S implementation of an individual hotel. However, it is vital to identify any high-risk properties and to drop them immediately. In a world where you have 100’s of alternatives to offer your customers, not doing so is reckless and potential commercial suicide. Agents should also be warned, that the worst possible outcome is to implement a H&S policy and not follow it 100%, as this ratchets up the criminal liabilities of the management of the business.

In my opinion the biggest issue facing agents when they become “Principals” is the cost of Public Liability Insurance.

Currently, either customers or more beneficially the ambulance Chasing” lawyers powering the wave of “Sickness” claims sweeping the industry, do not bother with DP Agents who are acting as the agent of the hotel, as they cannot effectively sue them in the UK and would have to take cases to the hotels home country.

However, from June 2018, DP agents will become UK principals allowing customer to sue them in the UK for any accidents or sickness issues, which is obviously a major concern for the insurance companies providing Public Liability quotes. Currently, most agents have just extended their current policies up the change of law date in June 2018, as Insurers simply will not quote yet or are asking for up to tenfold increases in premiums.

I personally expect that the cost of Public liability insurance will quickly stabilize and reduce as claims histories under the new Principal status are understood. However, the need to reduce Public liability cost may force agents to cut the number of bed bank suppliers based on the H&S policies and public liability indemnities that each supplier is willing to give. This is because these “pass on” indemnities will have a major influence on the agents own public liability costs.

Conversely, not having a bed bank provider to pass on Public liability costs may make the benefit of direct contracting less attractive where passenger volumes are lower in the major OTA’s, although I expect this impact to me minimal.

It is also likely that DP agents will ask the question “Why have 1,000’s of hotels on sale, that we have not sold in the last year? as doing so increases costs.

Chuck into the mix, the need to have a 24-hour duty office and emergency procedure training for all senior management and you quickly get a strong case for consolidation of product supply.

Therefore, within the next two years, I therefore expect all major consortia such as TTNG, Advantage, Global, Hays Travel etc. to be powering not just part of their agents DP operations, but 100% with there also being an increase in sales for Low cost carriers holiday operations.

Jet2 Holidays have lead the rush to replace the supply of “Standard” beach holidays to the independent travel agent sector, as both TUI and more recently Thomas Cook, abandoned the “Commodity” beach holiday market, in favor “Differentiated hotels”. However, the appointment of Johan Lundgren, the Ex Tui Boss, as Chief Executive of Easyjet must spell a major move by Easyjet into the Holiday sector.

I have previously been critical in articles of Easyjet insistence of finding outsourced partners to run their holiday division, but believe that given Johan’s vast experience in the holiday sector, he will quickly move the holiday operation in house and launch a major program to the UK Travel agent community in time for Summer 2019. I may be wrong but I willing to take some large wagers if anybody but Johan is willing to make them!!!

Focusing on service to boost brand

I must confess to be a “Brand” convert, believing nothing is more important than building brand traffic to reduce ever increasing Google advertising cost and its nice to be Chairman of a brand like Teletext Holidays, which I’ve interacted with an for over 25 years now.

Teletext is lucky to enjoy unprompted brand recognition levels of 40%, which puts it on a par with UK travel giants such as TUI, Thomas Cook and Expedia. This alone delivers significant volumes of direct brand traffic via SEO and PPC channels, reducing average customer acquisition costs compared to other OTA players such as Travel Republic, On the Beach and Love Holidays.

Unfortunately, our customer “Consideration” is much lower as many customers lost touch with Teletext when it ceased to power the pages behind their TV and moved fully online. We are obviously addressing this with above the line TV advertising and sponsorship deals such as the recently announced tie up with newly promoted Sheffield United (Another historic giant on the rise).

Legacy brands such as Teletext Holidays also offer a key advantage that customers already know what the brand stands for. Extensive research shows that customers view Teletext as a “late deal” offer site for beach holidays booked by phone.

To offer the “by phone” service we outsource call fulfilment to Truly Travels Indian based call centre, at a considerably reduced cost versus an equivalent sized UK call centre. Conversion levels are extremely healthy compared to any UK call centre, and our ability to switch and directionally sell products means we have enjoyed strong margin growth, however the NPS scores were not at an acceptable level when I joined and have been a KPI that we have been looking working hard to improve.

It’s my belief that in today’s world of social media and review scores, focusing on the customers that do not book with you has never been more important as word of mouth and review scores can kill or make a brand. However, like many call centres our metrics and focus was primarily on conversion levels and profitability per call alone.

In order to find a cost effective solution to this problem we looked towards our sister technology business Zen3, and worked with them on the development of their Sayint Speech to Text system which has revolutionised our approach.

Sayint allows us to record every inbound and outbound call into the call centre and then translate these in too written words, so that they can be data mined using the latest big data AI (Artificial Intelligence) algorithms.

Sayint has allowed us to create “Sentiment” algorithms weighting basic factors such as call length, hold times, silences etc. and then overlay them with scoring based on the presence of both positive and negative phrases. Some examples of negatives are phrases such as “Can you repeat that, pardon, that’s more expensive, I don’t want that” and phrases like “Can I talk to your manager”. Over a period of time we have built algorithms that we use to automatically rate a call, in terms of customers satisfaction levels.

These allow us to generate a ranking by agent and an understanding of which agents are scoring well for service whether the customer books or not. The correlation between top seller and generator of highest customer satisfaction over all is often not what you may expect. The tool also allows managers to walk through calls with an agent, using drill down tools that allow them to enter the written conversational record where that negative phrase occurred, so they can then listen to that exact section of the call and coach a better approach.

This has allowed us to focus management review and training precisely where it was needed, which in turn has increased the average satisfaction levels on non-booking calls by 26%, as well as increasing call centre conversion by 15%.

It is however the improvement in satisfaction levels on non-booking calls that Teletext continues to focus on because this is both where its ability to increase profits lies and the biggest numerical influence on its average review scores in sites like Trust Pilot and Feefo. Good scores in these areas in my opinion make customers more likely to click on your brand adverts when they see them or book with you if they are looking for that third party reassurance.

Sayint also has allowed Truly to reduce its call audit team from 10 to 4 whilst increasing the volume of audited calls by 400%, by being able to accelerate the speed at which keywords in booking calls can be found.

Like most large call centres, I know we have and continue to have quality issues to deal with due to a relatively high staff turnover, but at least management now have a tool in Sayint that gives them the measurability and visibility to force the required action to make improvements.

Will Easyjet Holidays ever catch up with Jet2 Holidays?

At the recent Travel Weekly lunch briefing, Easyjet CEO Carolyn Macal admitted that EasyJet Holidays tended to get lost in the priorities of an airline carrying 58m customers and needed a separate management team to focus on it.

Having provided the technology powering Easyjet holidays for the last three years and the launch platform for Jet2 Holidays, I feel reasonably well positioned to contrast both company’s approaches.

Philip Meeson has relentlessly driven the growth of both the low-cost airline Jet2.com and Jet2Holidays on a very personal basis. Philip quickly realised that having a tour operation to complement his low-cost airline distribution, offered some major strategic opportunities.

Yield management

Low cost airlines use a yield model where they move prices up from launch, as buckets of seats are sold, depending on how its computerized algorithms estimate the required rate of sale, based on historical sales patterns by destination. However, the yield program also looks at the comparative price of other low cost airlines, since this obviously impacts the rate of sale. Price competition between airlines based on highly transparent flight only prices often suppresses yield.

Jet2 quickly realized that “package holiday” sales not only gave it another distribution channel, but because prices are “opaque”, gave it the ability to dump the prices of seats on slow moving routes, in a hidden way without impacting the higher volume flight only prices.

Early sales.

Low cost carriers tend to achieve higher average sales prices, the earlier the sales pattern is on a route, as early sales allow it to move seat only prices up faster and still achieve the targeted load factor.

Package holidays have an earlier booking pattern than flight only and thus have been credited with allowing Jet2.com to achieve higher average yields than some of its competitors.

Route development.

Initially Jet2.com saw its holiday program as a volume top up on its traditional flight only routes, but as volumes have grown, it now deploys aircraft based on its holiday company’s requirements and tops up sales with flight only.

The above points only work if you have a “One Company View” of profitability, with one yield team making the crucial seat pricing decisions and flowing those prices into both companies equally or with hidden discounts to the tour operations. For example, agents are often forced to sell Jet2 Holidays simply because the tour operation has access to lower priced seats than they can package up themselves using Jet2.com.

However, in my opinion the most significant decision Jet2.com made was in recognizing that the management of a tour operation is a very different skill set to managing an airline. They therefore recruited experienced operators like Steve Heapy,

who in turn picked up a lot of the staff Thomas Cook made redundant when they closed the Air tours operation in Rochdale.

The proof is very much shown in the results with Jet2 Holidays on the way to taking the number 2 spot in the UK away from Thomas Cook, with holiday carrying of over 2m passengers, whilst Easyjet collaboration with Hotel Beds has generated a much lower number.

In September 2017 the deal with Hotel Beds comes to an end and it will be very interesting to see what Easyjet decide to do next. At the end of the day, they still have the most customer focused brand in the low-cost sector and in my opinion could easily become one of the top 3 UK tour operators. But, only if they achieve the focus that Carolyn has now recognized is required.

The power shift to Spanish hotels will give bed banks headaches and is helping drive consolidation.

When mass market tour operating came to the fore, back in the 1960’s-70’s, the key holiday element was the charter flight, as it often provided the only cost effective route to get to the holiday destination. This led to a tradition where hotels and tourist boards put greater value on relationships with tour operators, giving them better “Package” rates and marketing contributions.

However, the rise and rise of low cost carriers such as Easyjet and Ryanair has flooded the beach leisure market with capacity and effectively turned the flight element into a mix and match bus service, where Online Travel Agents (OTA’s) can offer 100’s of flight combinations for most days of the week. This has negated any real advantage of owning your own charter fleet and turned it into a disadvantage at times, fueling the growth of OTAs using Dynamic Packaging (DP) technology.

The visionary management of TUI, saw this threat early and over a 10-year period repositioned the Thomson and First Choice tour operations into “differentiated” hotels, which they control and have exclusive distribution for, protecting them from the attack of the OTA’s who have taken control of the “Commodity” price driven market. As we all know Thomas Cook were slower to react, but under the leadership of Chris Mottershead are beginning to make progress on their own drive for differentiation.

The growth of OTA’s in turn fueled a growth in Bed banks who consolidated demand and negotiated rates with hotels. The best rates often came from their “Castles” where they paid hoteliers “Early” via large deposits, using working capital funds generated by paying other hotels up to 90 days post departure. The collapse of “Low Cost Travel Group” with massive debts exceeding £100m, severely “burnt” hotels and has caused a major tightening of payment terms. At the same time OTA’s due to competitive pressure have reduced customer balance collections for 8 weeks to up to 2 weeks before departure. Hence, there is simply less cash around in the sector to fund either “Castles” or Early Booking discount payments to hotels.

At the same time the threat of terrorism has re-shaped customer demand with the loss of Egypt, Tunisia and effectively Turkey focusing demand into Spanish destinations. Last year saw record occupancy levels in the Balearics and Canaries, which of course has led to higher prices. However, the bigger impact is how hotels are now seeking to yield manage.

Historically, hotels signed paper contracts with various tour operators allocating their stock between them at fixed rates and then “stop selling” when tour operators reported back sales and hotels realised they were fully booked. This model was replicated when “Bed Banks” replaced tour operators, with hotels able to yield downwards via special offers, but rarely able to increase prices.

Spanish hotels are using the current buoyant market to take control of their own destiny by forcing Bed banks and OTA’s to access their stock via “Channel Managers”. These allow hotels to hold their stock centrally and change rates daily. These rates are either “pushed” to bed banks, to update the rates in their system or availability/price is “pulled” via XML queries on a live basis.

This is a massive shift in power and is a big threat to bed banks as OTA’s can easily cut them out of the chain and connect directly to the hotelier. In a market place where the hotelier is confident of selling its product, why would they bother giving the bed bank a better deal to protect a distribution network they now openly question whether they need?

Cash is still an important commodity in the purchasing chain, but with less cash available hotels are now just as focused on yield management, which in turns requires them to control their stock. Any element of the chain that restricts this or does not add value is likely to be removed.

The best way to counter this threat is to be so big and to dominate the leasuire bed sector so much, that OTA’s direct can simply not complete with you buying power or distribution.

Hotel beds owners TUI did not have the pockets or the will to consolidate the bed bank market to achieve this and it has taken the entry of a major VC to hover up and combine Hotel Beds, Tourico and GTA into a “Super bed Bank” that can easily ride through the storms ahead. However, VC’s are normally only motivated by the “Exit” potential, so don’t be surprised if this new group is quickly sold on. Its now a strategic gem that Pricelines, Expedia and the ultra agrressive Chineese are likely to fighting over shortly.

So yet again we see a continuation of a travel threme. The big get bigger and smaller players need to be gobbled up or simple disappear.

Chinese App giant is about to arrive in Europe

Attending the Phocuswright conference in Los Angeles during November 2016 provided a fascinating insight on the strategic intentions of the Chinese travel giant C-Trip.

The Chinese market is entirely mobile focused, with smart phone penetration at 80% and the desktop market being bypassed as prosperity has exploded in the last 10 years. Countless research reports emphasise that although customers may download hundreds of Apps, they quickly focus down to using only 5-6 Apps daily, meaning that for their travel needs they expect a “one stop shop” service, with their every need being provided by the brand they choose to remain loyal to.

This degree of coverage and brand loyalty may seem odd to online Western customers, who have grown up with the range and diversity of specialist products, available with one click via a Google search on your laptop or desktop computer. However, as the Western world goes through its own mobile revolution, we are already seeing Facebook, due to its high mobile utilization, explode as a remarketing tool and one stop shops like Amazon take center stage for our shopping needs.

Just two years ago the Chinese market was a profit graveyard, that scared off even the deep pocketed USA travel giants like Expedia, as the dash for the dominance of the app market, in the mobile centric Chinese market reached its zenith.

However, two years later and the Chinese travel market is virtually unrecognizable, having become highly profitable on the back of a complete market consolidation by the giant C-Trip, taking majority stakes in its nearest rivals E-Long and Tunnar. This profitability, access to capital and ability to take a long-term view of profitability, suddenly provides serious competition to the global expansion ambitions of the USA giants Priceline and Expedia.

The first demonstration of this was C-Trip’s $180m investment into MakeMyTrip as the entry point to Indian Travel market. Like China this market requires a much longer term view of profitability and a massive investment to consolidate the currently heavily loss marking travel sector. C-Trip has experience of both the requirements and the benefit of this type of consolidation, which enables them to play the strategic long term game.

The publically quoted USA giants, seemingly must play by different rules, with every acquisition needing to be profit enhancing in a much shorter time frame. Hence, their acquisition strategies are more focused on adding products that they can market to their existing client base or globalizing the demand of e.g. Priceline’s acquisition of Rental Cars, Expedia’s purchase of HomeAway and Trip Advisors deal to take Viator.

At Phocuswright, C-Trip declared that their eyes are now set on the European market and immediately followed the conference with an eye watering £1.4 billion purchase of the UK’s Skyscanner.net. This is clearly just an entry point, providing a large volume of customer eyeballs and an essential building block of any European travel App e.g. a comprehensive market view of flight prices across the world. However, logic dictates that this will be followed by acquisitions in the online accommodation sector, ground transportation and potentially Dynamic packaging OTA area.

Don’t be shocked if we see a future shopping list including the likes of online hotel specialist Hotelopia (Ex TUI owned Hotel Beds), Bla Bla Cars or country specific OTA leaders like On the Beach in the UK. At the same time C-Trip will also be looking to hoover up popular app utilities like the National Rail app. There may even be opportunistic acquisitions like the specialist division of TUI, Travelopia which is currently on the market.

Major deals of this nature, will also herald a major upturn in the Venture Capital interest in the travel sector, as VC’s look to consolidate undervalued individual companies, which are too small to attract C-Trip’s attention, into a consolidated proposition that looks more attractive.

Therefore, for the first time since the spending sprees of the major integrated tour operators, the mid-term future could be looking good for travel owners, despite the current headwinds we are facing due to geopolitical unrest and the adverse head winds provided by Brexit.