Lease costs and out-of-hours service ‘key to Hays success

Extract from Steve and Ian’s Pub-cas

A reduction in lease costs and the development of an out-of-hours homeworking network will be key to ensuring Hays Travel’s expanded retail presence has a long-term future, according to former Airtours chief Steve Endacott.

Speaking to fellow travel industry veteran Ian Brooks during the first episode of a new Travel Industry Pubcast, Endacott insisted high street travel retail continued to have a future following the collapse of Thomas Cook, but must evolve to become more convenient for customers.

The demise of Thomas Cook caused significant pain for the industry but led to Hays Travel acquiring all 555 of the travel giant’s agency branches for £6 million.

Brooks, partner in Gail Kenny Executive Recruitment and a non-executive director at Arena Travel, said: “The more you look into that deal, the more you can see he [John Hays] has bought himself wriggle room.”

Endacott doubted whether all the shops will be retained with the key element being how many leases can be re-negotiated. Given the current difficulty on the high street, he predicted that Hays will end up with 350-400 outlets.

“It won’t be 550, I can guarantee that, but I think it will work for him,” predicted Endacott. “It depends who will provide the stock for him, which leads on to our second question – who is going to replace the capacity taken out by Thomas Cook?”

Brooks backed the Hays deal but questioned how much longevity there is in the high street and how long retail can work in travel.

Endacott responded: “The key thing is customer access. If you are relying on Google to recruit customers it’s too expensive, so you have to have a 30%-40% return loyalty factor and it’s quite difficult to deliver in an online world where you don’t actually control the end result experience which is the case of most OTAs.

“Looking at the cost dynamics, I think that if he can get the lease costs of the high street down, if he can potentially put a homeworking network to support those shops to make them more convenient in terms of opening hours, I think the high street has a long-term future.

“They key issue is how it manufactures its own product, to go alongside the product of Jet2 and Thomson [Tui] because we both know they will drive as much direct to their channels as they can. If they perceive the independent channels weak, they will cut commissions.

“So I don’t think independent retailers can rely completely on those products, although in certain areas you have to sell them, but they have to complement them and complement with what?

“Yes, there’s expansion in long-haul, yes there’s expansion of tailor-made, yes there’s expansion of experiential but they still need beach product and I wouldn’t be 100% relying on the only two big players at the moment replacing that stock.”

Brooks admitted to being “quite shocked” to hear Endacott promoting high street retail to online.

Endacott responded by describing homeworking as the number one model followed by OTAs and the high street.

He added that the high street must still evolve to be more convenient for the customer at a time when homeworkers are available in the evenings and for home visits.

“They don’t demand that the customer has to repeatedly walk into their shop,” he said. “So, therefore, I think there is still an evolution to go but the relationships in the shops can and will be extended as we move forward into the next generation high street retailer.”

Will cheap late deals disappear for summer 2020?

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.