LECTURE NOTES 9

THE TRAVEL TRADE

A. THE TOURISM PRODUCT MARKET
The tourism product market is composed of goods and services combined into diverse
tourism packages.
A.1 Definition of tourism/travel packages
Travel packages are organized trips following predetermined and detailed
programs involving several tourism services. The packages are sold in advance at a
fixed price.
Preliminary organization
Tourism products are developed and established well before client demand is
actually expressed. The tour operator will choose the destination, the means of
transport, the accommodation, catering services, the level of escorting and guidance
included in the package before offering the product to the public.
Variety of services provided
At the most basic level, the services provided may just consist of the holiday stay.
Most complete products offer several other services. These include return transport,
escorting, transfers, accommodation, provision of meals, entertainment and
insurance. Certain companies offering holidays with a particular focus also provide
specific services.
Fixed prices
The price of the product is set in advance and usually payment is settled before the
journey begins. For certain products (holiday clubs, mixed formulas in which only
parts of the tourism components are provided) credit payment is becoming
increasingly frequent.
A.2 Classification of tourism packages
There are two basic types of tourism packages: all-inclusive and the mixed
formula:
1. The all inclusive package
This is the traditional package in which the operator provides all the services.
Products in this category include full-board holidays, organized tours and cruises.
Full-board holidays. Full-board holidays involve return travel
arrangements and transfers, accommodation and all meals. This type of
holiday has mainly been offered by hotels and resorts, although recently
holiday clubs are providing similar services, including entertainment and
sport facilities.
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There are several variations on this type of holiday. Products are being
developed offering half-board, breakfast only or the increasingly popular self-
catering holidays in apartment hotels.
Organized tours. Organized tours usually combine accommodation with
excursions. They can be on a FB, HB or BB basis. Certain tours are fully
escorted by tour managers, while others may just include travel and entrance
fees. Transportation during the tours is either by coach, plane or train.
Cruises. Cruises are all inclusive packages. The development of this type of
tourism products is compensating for the decline in the number of sea-
traveling passengers. They can cruise all year round, as the tourist season in
the two major zones (Caribbean and the Mediterranean) falls at different
times.
2. The mixed formula
These are packages which offer transport to and from destination with other
services. Fly and drives combine flights and hire-car at the destination. Flight +
hotel packages include flights to the destination and hotel vouchers which can be
used at a number of tourist resorts and sites. Many innovative products are being
developed offering travel and accommodation with specialized services for special
interest groups: sport holidays, cultural tours, health and spa holidays, adventure
travel, incentive and conference travel etc.
A.3 Economic characteristics of tourism products
Tourism products have three main economic features: inelasticity, complementarity
and heterogeneity
Inelasticity
Tourism products are inelastic because they do not adapt well to changes in short
and long term demand. There cannot be stocked, meaning they are perishable.
Short-term increases and falls in demand for a product will have little influence on
its price. It is the long term fluctuations that affect the composition of the product
and its selling price. Tourism products are dependent on existing superstructures at
destinations such as hospitality facilities, transport and accommodation.
Complementarity
The tourism product is not just one single service. It is composed of several
complementary sub-products. Production of the overall service and the quality of the
service is dependant on the components complementing each other. A shortcoming
in one of the sub-products will undermine the final product. This remains one of the
major difficulties in tourism production.
Heterogeneity
The tourism product is said to be heterogeneous because it is virtually impossible to
produce two identical tourism services. There will always be a difference in quality,
even if the nature of the proposed service remains constant. The heterogeneity
allows the possibility of a certain amount of substitution within the different sub-
products. However, the resulting product will never be exactly the same.
Substituting one hotel for another, even if they are of the same category, will create
a different experience and produce a different final product.
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B. TRAVEL INTERMEDIARIES
B.1 Tour Wholesalers
The tour wholesaler functions as an intermediary between the supplier, also
known as principal, of the tourist product and the travel agent who acts as the
retailer. The tour wholesaler designs, prepares, promotes, and executes the sale of
tour packages, buying large volumes of products from a variety of travel suppliers.
These products may include air travel, accommodations, meals, entertainment,
ground transportation, sightseeing tours, and special entrance fees for attractions.
The products are grouped by the wholesaler to form attractive tour packages which
are made available to travel agents for sale to the end consumer.
The Role of Wholesaler
Wholesalers generate a large part of the revenues in the travel industry since
purchasing in bulk increases their buying power and ability to negotiate discounts.
In this respect, larger wholesalers have a leveraged advantage over their smaller
competitors. The cost savings is ultimately passed to the consumer by making tour
packages available at prices lower than the sum cost of all components bought
separately at retail.
In addition, wholesalers provide advantages to the suppliers of tourist products who
enjoy the financial security of having advance sales commitments for large blocks of
rooms, seats, or other products.
Wholesalers make a significant contribution to the travel agent and customer alike
by developing and making available an array of tour packages to satisfy different
travel customer tastes and income levels (Gee, Boberg, Choy, & Makens, 1990, p.
49).
Types of Wholesalers
Tour wholesalers can be classified in various ways including the following:
The inbound wholesaler arranges tour packages for tourists visiting the country
where the wholesaler is based. Inbound wholesalers do not necessarily operate only
in the country where they offer tours and some maintain sales branches in other
countries.
The outbound wholesaler arranges packaged travel for tourists who wish to travel
to destinations outside the country where the wholesaler is located. Unlike the
inbound wholesaler, the outbound wholesaler does not usually focus on a single
destination, but may offer a wide variety of packages and destinations.
However, both of these wholesalers tend to cater to the needs of the mass market in
order to have the necessary volume leverage.
The domestic wholesaler designs and packages tours for local residents who travel
within the country where the wholesaler operates.
The specialty wholesaler centralizes its business in making tours available for
special-interest groups (e.g. retirees, singles) or focuses on particular destinations,
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accommodations, or alternative forms of tourism of interest to adventure travelers,
culture seekers, or nature enthusiasts.
The airline wholesaler can be either a subsidiary selling the seats of a particular
airline or a wholesale business that has formed a brokerage relationship with an
airline.
The wholesale travel agent is a travel agent who puts together customized
versions of tour packages to satisfy the needs of market niches within their customer
base. These travel agents such as American Express Travel Related Services and
Thomas Cook Travel often assume the retail and wholesaler roles at the same time.
Similarly, the wholesaler may sometimes act as a travel agent by operating retail
outlets.
The travel clubs and incentive travel companies arrange travel packages in ways
similar to the wholesalers. However, these packages do not become available for
general consumption and are only offered to their individual members.
The Economics of Wholesalers
Unlike travel retailers which benefit from commissions, wholesalers generate their
gross profits using a 20-25% markup. The markup is applied only in the ground
services portion of the tour. Although 90% of wholesale packages include air
transportation, in general, wholesalers do not make any profit on this part of the
package. This part, which represents almost 50% of the total price of the package,
generates profits that go to the travel agent in the form of commission. For the
wholesaler, after the subtraction of its operating expenses, there remains an average
3% percent before-tax profit out of the total price of an all-inclusive tour.
Consequently, high volumes of sales have to be reached in order for a wholesale
business to be profitable. Additionally, strong sales are required in order to reach
the average break-even point of the industry.
More specifically, before it starts generating a profit, a wholesaler must sell as much
as 85% of its packages (Coltman, 1989, pp. 326-327). In contrast to the low return-
on-sales that characterizes the business, wholesalers benefit by a favorable return-
on-equity ratio. This is due to the low requirements in initial investment.
The travel wholesaler is not required to pay in full when booking from a supplier.
For example, only a minimum deposit is necessary to secure the desired number of
rooms of a hotel for a certain period. Next, the wholesaler can redeem his cash in the
form of deposits and/or payments submitted to him by the travel agent when
individual travelers buy the packages. It should be emphasized that while the
customers pay the wholesaler for their trips in advance, the wholesaler does not
usually pay off the supplier until after the trip is completed.
Thus, the wholesaler can take advantage of the excess funds also called the float,
before it actually pays the supplier in full.
Despite this cash flow benefit, the wholesaler faces considerable risks as well.
Factors such as changing preferences, unfavorable weather conditions, safety
concerns, or political upheavals can destabilize markets and render destinations
unsaleable. Moreover, when making a large number of advance reservations with a
supplier, the wholesaler must enter into a sales contract for which he is bonded.
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Despite the inclusion of typical cancellation clauses in a contract, the wholesaler
may still incur significant losses from forgone deposits and prepayments, and the
closer the cancellation is to the departure date, the greater the reduction of the
deposits.
Trends Affecting Wholesalers
In the growing tourism market, wholesalers are likely to face increased competition
coming mostly from the suppliers.
For example, after the deregulation of the U.S. airline industry in 1978, airlines
began arranging their own tours by combining their services with those of other
suppliers.
In addition, lower prices offered by various suppliers, such as discount airfares made
available by airlines, have had an impact on the wholesale business. Lower airline
ticket prices allow the option of creating a personalized tour with a total price that
could be comparable to the one offered by wholesalers.
Moreover, wholesalers may be affected by changes in consumer tastes as
experienced travelers move away from the typical group travel that characterized
the last two decades toward independent travel.
In recent years, wholesalers have also been increasingly subject to lawsuits from
consumers who are better educated and aware of their rights. False advertising has
become a problem together with the growth of the tour business, largely attributable
to the exploding demand for tours that has allowed the entrance of many new and
inexperienced wholesalers.
Sometimes, the claims and promises made by the advertising of wholesalers are in
conflict with what the consumer ultimately receives.
Other problems that wholesalers are sued for may be changes in the scheduled
flights or the prices of packages or hotel rooms. Even though wholesalers might not
be the only ones responsible for those changes, which can be the result of airline
schedule changes, exchange rate variation, or hotel errors, they are the ones that
consumers can usually hold liable.
The future of the wholesale business will also be affected by the impact of the
communication revolution in the travel industry.
For example, information experts suggest that a good tour is one that can be booked
quickly, preferably in four minutes.
Inevitably, computers become mandatory for the accomplishment of this task, and
the hiring of more technical personnel by wholesalers has already been observed as
a result of technological changes.
B.2 Tour Operators
In the travel world, the term wholesaler is often used interchangeably with the term
tour operator.
Even though these two terms describe similar types of intermediaries, a distinction
should be made in order to avoid confusion.
In general, the tour operator, also referred to as ground operator, can be thought of
as a tour wholesaler with a smaller scale of operations. The word operator indicates
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the main function of tour operators which is to operate or run tour packages. In
other words, tour operators are responsible for the delivery of the parts of a tour as
promised to the buyer of the tour. To deliver services, operators may employ their
own ground equipment and facilities, such as motorcoaches and accommodations, or
rent these from other tour operators or individual providers (Gee et al., 1990, p. 50).
In contrast to a wholesaler who designs and offers a large number of tours, the tour
operator can offer only a limited number of tours on a yearly basis.
These tours in combination are referred to as the tour program. While the
wholesaler will typically include transportation to and from a destination, the tour
operator offers his/her services only at the destination itself. The tour operators
defined business is to make the land arrangements at the destination
encompassing hotel transfers, accommodations, sightseeing, prepaid admissions,
and other special arrangements. Much like the wholesaler, the tour operators are
free to design and offer their own packages which can be geared to all travelers. In
some cases, however, operators have to comply with the specific preferences of the
wholesaler interested in buying their services. In other instances, they compete with
wholesalers who operate packages of their own.
In recent years there has been a trend for tour operators to specialize.
For example, companies might concentrate in incentive travel or others may focus on
sailboat charters.
Due to a progressively higher segmentation and the sizable free and independent
traveler (FIT) market whose customers travel independently of a group, the need for
additional specializations of tour operators has increased.
B.3 The Travel Agent
Traditionally, the role of the retailer in the travel industry has been played by the
travel agent. The travel agent is the final link in the consumption process,
connecting the receiver (the consumer) and the source (either the supplier or the
wholesaler) of various tourism goods and services.
The travel agent is also the visible intermediary in the distribution chain selling
transportation, accommodations, meals, activities, attractions, and other travel
elements directly to the public. These products can be sold individually, in various
combinations, or as tour packages to the clients. It is the responsibility of the travel
agent to act on behalf of prospective travelers and understand their desires in order
to satisfy them by arranging the necessary parts of the trip (Gee et al., 1990, p. 48).
Legally, the travel agent is a commissioned agent or an authorized representative
who is approved to sell the products of a company in a certain geographic area.
In terms of distribution, the travel agent maintains a delicate balance between
serving the client and promoting the interests of the principal the agent represents.
Above all, a travel agent has to use knowledge and expertise in responsible ways to
successfully plan and secure a safe and enjoyable trip.
This may involve carrying out numerous detailed activities including but not limited
to preparing individual itineraries, informing about travel insurance, documents,
and immunization requirements, as well as giving descriptions of destinations,
hotels, and local customs. The demands on the agent have increased as the product
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mix has expanded. Even though almost every agent can sell the products of all sorts
of suppliers, there are agents who choose to specialize in particular areas, and they
play many different roles.
Travel Agents as Counselors
The retail travel agent plays an important role in promoting the efficiency and the
quality of the distribution of the various travel products.
To the customer, the travel agent is the means for researching, organizing, securing,
and realizing a desired trip. The agents goal is to understand what satisfies the
travelers needs and try to provide it. That is why the term counselor is frequently
employed to describe the advising service that the agent provides.
Due to the increasing complexity of the reservation and pricing systems, a client
would have to spend substantial time and money to arrange a trip or tour
individually. Alternatively, the services of a travel agent may be used which are
generally offered free of charge.
The travel agent is a specialist who has developed an expertise in researching and
collecting large amounts of appropriate and reliable information in very little time.
In order to add value to the customers travel experience, the agent is required to
know or have access, at least, to schedules, prices, different types and qualities of
accommodations, airlines, and other travel components.
Moreover, the agent has to personalize the results of this knowledge to fit the
specific needs of the prospective traveler.
Operating as a responsible and trustworthy professional is an integral part of an
agents mission. The travel agents business depends greatly on repeat customers
and is severely affected by word-of-mouth. The significance of customer loyalty for
the industry is indicated by the fact that approximately 85% of an agents clientele
consists of repeat customers.
Travel Agents as Sales Representatives
The travel agent carries out an equally important function as a salesperson.
Ultimately, this is what determines an agencys financial condition.
Most people who seek the travel agents advice already know what they want.
Because the value-conscious consumer does not hesitate to research and shop
around, agents must not only service and sell what he or she requests, but be able to
close the sale as well.
Maintaining a harmonious relationship between serving a client and selling the
products of preferred suppliers has always been a challenge for travel agents.
The deregulation of the field has allowed agents to obtain different commissions and
even overrides (commission rates that increase according to the level of sales) from
different suppliers.
To the supplier, the retail travel agent plays a critical role in promoting and selling
its products to the ultimate consumer. The agent provides three basic elements that
facilitate the suppliers business. These include a location where information can be
obtained for the suppliers products, an outlet where a potential customer can
purchase those products, as well as a place were payments can be collected.
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In the U.S. and elsewhere, airline deregulation and other developments in the
industry have had a dramatic effect on travel agencies. In 1995, most of the major
U.S. airlines adopted a cap policy limiting commissions in order to cut costs. For
example, Delta Air Lines provides travel agents a 10 percent commission on U.S.
domestic tickets as long as the total commission per ticket does not exceed the
amount of $50. The average commission rates for domestic air sales have declined
for travel agents placing increased pressure on agencies to move larger volumes of
tickets to attain the same profit. Another concern is the low-fare trend for domestic
tickets. When airline price wars are in effect, fares often become so low that the
money an average agent makes selling a ticket may be less than what it costs to
issue it. Even though this situation is not new, it comprises a serious burden,
especially in combination with restricted commissions. Because of the commission
cap, travel agents cannot balance losses incurred in selling cheap air tickets with
higher fare tickets.
B.4 Regulation of Intermediaries
Travel Agents
Historically, travel agents have been affected by regulations, especially from the
airlines which restrict the number of agents because of concern over increased
competition for their own sales offices.
Until 1959, a travel agency could not be established unless it had the sponsorship of
an airline and the approval of two-thirds of the members of the respective domestic
or international travel conference. The subsequent rapid expansion of the airline
industry forced airlines to rely more heavily on travel agents to reach and service
their clientele. Although there has been a relaxation of restrictions since the
deregulation of the airline industry in the U.S., even today an agency has to comply
to certain regulations before and during the time it is in business.
In the U.S., where a travel agency is not legally obliged to be licensed in many
states, certification or accreditation consists of the approval from industry
conferences. A conference is a regulatory body made up of transportation companies
that impose requirements in order to promote certain standards. For the U.S., there
are four major conferences: (1) The Airlines Reporting Corporation (ARC)
responsible for domestic tickets, (2) The International Airline Travel Agency
Network (IATAN) responsible for international tickets, (3) The Cruise Line
International Association (CLIA) responsible for cruises, and (4) The National
Railroad Passenger Corporation responsible for domestic rail tickets (Mill, 1990, p.
321).
An agency which is appointed by one group will usually receive an appointment by
the rest of the conferences. Major requirements of ARC, for example, are that
agencies carry a minimum bond to cover for the possibility of default and maintain a
minimum cash reserve. There are also minimum experience requirements for agency
management, and the agency must be accessible to the general public, actively sell
tickets, and promote travel.
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Some states in the U.S. require a license. The license can be obtained by passing an
examination given by the state licensing boards.
Additionally, a city license and possibly a county license are required in order for a
travel agency to be operational. Travel agents may also choose to follow the rules
imposed by various trade associations which they have joined as members.
The EC (European Community) Travel Directive was initiated in 1993 to eliminate
differences in laws among member European states related to group or package
travel. The Directive, however, does not replace national laws regarding ground
travel, package holidays, tours, and tour operators and agents and leaves
implementation to each state (Downes, 1993).
Japans travel agency law is considered one of the most organized and advanced, and
its travel agents are divided into three classifications: general, domestic, and sub-
agency. All agencies are required to register with the Ministry of Transport and are
bonded (Travel Journal, Inc., 1995, p. 185).
Travel agents have a legal obligation to perform in a professional manner. They can
be held responsible for the quality of the service they provide. The provided service
has to be in accordance to the promises made to the customer and consistent with
the average industry performance. Agents have to take into consideration any
special factors in the destination that may influence the customer such as political
stability, health care, and other conditions. According to court rulings, agents can be
even held liable in the event a wholesaler goes bankrupt before the trip.
The American Society of Travel Agents (ASTA) in the U.S., the Association of
Canadian Travel Agents (ACTA) in Canada, the Association of British Travel Agents
(ABTA) in the U.K., and the Japan Association of Travel Agents (JATA) in Japan
are some of the groups or organizations which set industry standards. International
organizations include the International Federation of Travel Agents (IFTA) and the
World Association of Travel Agents (WATA).
Wholesalers
For a new wholesaler to enter the industry, usually a local business license and
compliance with governmental and airline regulations are required.
Nevertheless, wholesalers may be subject to additional constraints, some of those
monetary, if they choose to join certain professional associations.
In the U.S., the tour operator industry is largely self-regulated, and most belong to
the U.S. Tour Operators Association (USTOA). The USTOA requires an indemnity
bond from its members. This goes toward the Consumer Payment Protection
Program which helps refund the money to customers in case the wholesaler goes out
of business.
C. PACKAGING THE TOURISM PRODUCT
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Packaging tourism products involves several stages which can take several months
and sometimes several years. The three main stages are:
1. Market research
2. Negotiation
3. Commercialization of the tourism product
1. Market research
The aim of market research is to understand and analyze the key elements
associated with a particular market and its environment. Because of the specific
nature of the tourism product, each market research survey should be tailor-made to
the aims of the project. However, the research methodology remains the same. It
analyzes the environment of the project, the characteristics of supply and demand,
time schedules, controls and costs.
The strategic aim of market research is to test different hypothesis so as to identify
the most realistic ones. The most important research tool is the questionnaire.
Surveys provide a range of information on consumer behavior towards a specific
product. They reveal attitudes, reactions and prejudices towards destination
countries. Three main questions must be addressed to gather information required
from a market survey:
Who should be questioned? size of the sample to be surveyed and the sampling
method to be used.
What should be observed? nature of the information. It is important to understand
who is the potential clientele and to target it. The aim is to identify a potential group
of customers in order to adapt products to their needs and mount an efficient
promotional campaign.
How should it be undertaken? face-to-face, by telephone, trains, airports etc.
2. Negotiating contracts with different suppliers of tourism products
The product manufacturer assesses the motivation and purchasing power of a
potential market by undertaking market studies. Once he is satisfied that he has
enough information on the target markets demand for tourism products, he must:
- design products that match the demand of the target market
- create packages by negotiating the required services with suppliers of each
of the elements making up the product
- finalize contracts with them
2.1. Designing the product
Faced with intense international competition, the manufacturer must design his
products to meet the requirements of the consumer. He must have a good knowledge
of the tourist-generating market and of the quality-price ratio of the products he
plans to offer
- knowledge of the market
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This is based on the body of information gathered by the market surveys. It relates
to:
- the clientele segmentation by age, professional category, area, income
bracket, lifestyle, usual holiday preference
- the competition choosing the right elements to differentiate the final
product from that of competitors; having the necessary promotion and
publicity superstructure available to reach the target clientele
- tourism resources at the destination area natural resources, cultural
resources, superstructure and services, entertainment and excursions
- the best quality-price ratio
The manufacturers strategic aim is to offer products that correspond more to
consumer demand than those of his competitors.
To implement this strategy, he must consider three points:
- competitiveness the manufacturer must successfully manage a range of
products catering to different market segments.
- product range extending the product range has several benefits: it offers
the consumer a wider choice of products; it contains competition by
controlling a large enough slice of the market to eventually dissuade
competition; it allows necessary adjustments dictated by changes in the
market tastes or circumstances to the companys supply; it averts commercial
vulnerability to political instability, fluctuations in exchange rates and
competitor actions
- strategy extending the product range must not jeopardize the
competitiveness of prices and the efficiency of management. It is therefore
essential to formulate a product-range strategy. This must be flexible enough
to adapt products to the changing tastes of consumers, to fluctuations in the
exchange rates and to variations in the consumer purchasing-power.
2.2. Negotiating the package
The manufacturer must negotiate with each supplier in order to be able to offer
competitively priced quality products to the market place. He makes arrangements
with several suppliers: transport companies, suppliers of accommodation, catering
and entertainment and those providing services for certain specialized products such
as cultural tourism, health tourism, MICE and so on.
The tour operator must be financially strong to guarantee the operation of the
product and to be in the position to pay his suppliers in advance.
The manufacturer will often choose destinations in low-cost countries because of
their low labor costs, low taxes, government subsidies, incentives designed to attract
foreign visitors or favorable exchange rates. These destinations must however fit
consumer tastes and have a good quality-price ratio.
Certain tour operators avoid being too dependant on suppliers by integrating some
of the services they offer. For instance, an airline company may set up a tour
operator and a hotel chain (BA Holidays top end of the market and city breaks;
Italtour (Al Italia); Caravela Tours (TAP Air Portugal)).
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Several hotel chains and large tour operators also create subsidiary companies to
provide them with the necessary services. Thomson, the largest tour operator in UK,
distributes its products through its retail arm, Lunn Polly, the largest chain of
travel agencies in UK, and fly their clients on their own airline, Britannia, the
largest charter airline.
The aim of negotiation is to reach the best competitive price for a satisfactory
quality-price ratio. The selling price of the tourism product includes commissions to
travel agents or other distributors, marketing costs, administration costs and the
risk cost of falling short of the forecasted sales volume for the product.
2.3. Finalizing international contracts
Once negotiations have been successfully concluded, international contracts are
drawn up with different service suppliers: agency contracts with travel agencies at
the destination countries; contracts with hotels; charter agreements.
These contracts allocate responsibilities to spread the commercial risk between
suppliers and the operator. Generally, the tour operator is responsible for the
package he has designed. He must pay for services he has ordered (booked), notably
transport and accommodation allocations that he has not used. This risk is built into
catalog prices, which are calculated on an 80-90% take-up rate.
This is one of the biggest risk factors for tour operators. For this reason it is
essential that he develops a range of very diverse products to many different
destinations to compensate for any downfall due to political instability, fluctuations
in the exchange rate etc, as well as bad choices of product or errors committed in
product packaging.
As a general rule, the elements that make up the cost of a trip in Europe can be
broken down as shown in the table below:
Package tour costing example (London-Canary Islands, one week, half board, 3-star
hotel)
Service High season (Euro) Low season (Euro)
7 days HB/person
- transfers
- ground handling
- Sub-total
225
12
6
243
135
12
6
153
Flight
(London Tenerife London)
Other costs
Sub-total
270
15
285
195
15
210
Commissions
Tour operator 8%
Travel agent 10%
42
57
29
39
Total selling price 627 431
Cost elements of an original trip
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Distribution (travel agent ommission!
"our operator margin
Cost of pro#ution$
- a#ministration%management
- aommo#ation
- transport
Cost
8-12
24-42
30-50
10
8
82
100
However, competition has forced many service suppliers and particularly tour
operators to reduce their margins. Leading tour operators have been compelled to
reduce their margins as low as less than 1% for some products.
Tour operator profit margin in a highly competitive situation (based on an average
price of 411E for a 15-day package to Portugal
Cost (euro)
Travel agency
Airline company
Administration
Transfer
Hotel
Tour operator profit
42
157
30
7
172
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3. Commercialization of the tourism product
The travel distribution systems
We usually associate a product with its production and consumption stages, often
overlooking an intervening process which moves the product from production to the
consumption stage. This process is called distribution.
Theoretically, the distribution of the tourist product resembles that of other
industries. It involves the participation of wholesalers, retailers, and other
intermediaries or middlemen, all responsible for bringing the product from the
supplier to the consumer in a sales distribution system.
In practice, however, two factors make the distribution of the tourist product
unique.
First, unlike manufactured products which can be transported to the consumer, it is
usually the consumer that has to be transported to the point of consumption for the
tourist product.
Second, unlike tangible products with a shelf-life, the tourist product is highly
perishable. An unsold hotel room, meal or tour bus seat has no income value in the
marketplace the day after.
Collectively, these factors make the selling of the tourist product a challenging task.
Thus, in order to better understand the mechanics of the tourism market and its
economic significance, it is important to gain a basic understanding of the sales
distribution systems and their role in influencing sales.
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3.1. Historical Background
Todays travel distribution system can trace its origins to the 1840s when Thomas
Cook organized what could be called the ancestor of todays tours. An ambitious
entrepreneur and innovator, Cook also introduced several types of tours including
the first pleasure tour to North America in 1866 and the first around-the-world tour
in 1872.
In the 19
th
century, tours were almost exclusively for the upper classes, but Cook
tried to reduce the cost of traveling by chartering entire ships and booking blocks of
rooms in hotels.
In 1874, Cook was also the first to introduce circular notes to be used by travelers.
These were accepted by foreign banks and hotels and relieved travelers from
carrying large amounts of cash. They were a simple version of the travelers checks
of today (Milne, 1991, p. 78).
Before the introduction of the travel agencies at the end of the 19
th
century, it was
common for hotel porters to make steamship and rail reservations on behalf of hotel
guests. Hotels usually were built close to rail stations and ports where hotel porters
were sent to make reservations and bring back the tickets in return for a
commission by the supplier and a delivery charge from the client.
To compete with the railroads, commercial airlines starting operations in the 1920s
also used hotel porters as their agents, paying them a 5% commission. Later,
airlines began establishing their own sales offices in hotels in an effort to avoid
paying out commissions.
As international and leisure travel increased following World War II, the travel
agency business expanded rapidly. Tours also dramatically increased in popularity
with the introduction of jet aircraft in 1958.
The advent of wide-bodied planes in the 1970s further reduced the price of air travel
which increased the affordability of tour packages. The demand for tours also
expanded as the disposable incomes of people in the U.S., Europe, and parts of Asia
rose, and consumers became aware of the advantages of buying a complete tour
package instead of organizing their own itineraries and bookings.
3.2. Types of Distribution Systems
There are two broad categories of sales distribution systems, direct and indirect,
which involve different variations and combinations, depending on the number of
intermediaries used by suppliers in the distribution pipeline.
Suppliers include hotels, airlines, cruise ship companies, car rental companies,
railroads, and sightseeing operators.
While most of the suppliers are part of the private sector distribution system, many
destinations also have public sector distribution systems in tourism.
Some governments run travel agencies such as Saigontourist and Vietnamtourist in
Vietnam, railways, and hotels. African Tours and Hotels Limited, for example, is a
leading quasi-governmental hotel management company which runs properties
throughout Kenya.
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Each of the systems offers advantages and disadvantages, depending on the type of
customers to be served.
3.2.1 Direct Distribution System
In the direct distribution system, sales are realized through direct contact
between the supplier and the customer without any intermediary (see Figure). An
example is a prospective traveler who calls the reservation department of a hotel to
book a room or who walks up to the airline ticket counter at the airport to purchase
a ticket.
The advantages of this method include:
Time Savings. There is a direct communication between the two parties and the
transaction is a simple one.
Increased Profits. Suppliers are not required to give a commission to any
middlemen resulting in greater profit per unit.
Flexibility. Direct communication with the supplier offers the traveler the option
to make possible changes in the itinerary. This becomes more complicated or even
impossible when, for example, the traveler buys a tour package from a travel agent
where the itinerary is usually fixed.
Greater Control. For a number of customers, buying from the supplier and
confirming a booking directly provide a feeling of comfort and security in the
transaction. For the supplier, dealing directly with the customer provides an
opportunity for recommendations and promotions of additional products.
There are also some disadvantages of the direct distribution system.
First is the high cost that the supplier faces in order to maintain a permanent
sales force. Another disadvantage is the possible reaction of the dissatisfied
intermediary, since the supplier attracts customers that could otherwise be served
by them.
Finally, if the supplier uses this distribution method exclusively, it risks losing an
opportunity to increase its revenues by selling to travelers who prefer to use an
intermediary (Collier, 1994, p. 198).
3.2.2 Indirect Distribution System
In the indirect distribution system, the supplier makes use of one or more travel
intermediaries in order to reach the consumer. For example, a travel wholesaler can
book a large number of rooms for a certain period, and these rooms are made
available by the wholesaler as part of a tour package. The customer can then book
the tour package through the travel agent who serves as the intermediary between
the supplier and the customer.
Some benefits of this distribution method for the consumer include:
Professional Consultation. Working through intermediaries, the consumer can get
a professional opinion about the comparative advantages of different options. The
travel agent, for example, can provide the traveler with unbiased and personalized
guidance, advice, and expertise.
15
Greater Variety. Dealing with a number of different suppliers allows the
middlemen to offer a wider array of product options that the consumer might not
have the necessary knowledge or resources to explore individually.
Lower Price. Travel intermediaries are often able to negotiate lower rates than
otherwise would be available to the consumer.
Single Payment. The customer is charged in advance and pays for all different
elements of the trip such as the flight, hotel, or car rental. This increases the
convenience of the purchasing process and eliminates the need for the traveler to
remit separate payments to different suppliers.
The indirect distribution system benefits the supplier as well.
The most significant benefit is the savings from not having to hire sales personnel
since the intermediaries function as a sales team.
The collection of sales revenues is also facilitated with the presence of middlemen,
and cooperating with middlemen as preferred suppliers can help the supplier to
generate additional business (Collier, 1994, p. 199).
Variations of indirect distribution may involve two or more intermediaries in moving
the travel product from the supplier to the end consumer.
Where there is a third intermediary, this is usually a specialty channeler. Various
types of middlemen can fit under the term specialty channeler. These include, but
are not limited to, meeting and convention planners, corporate travel offices,
incentive travel agents, and hotel representatives.
The added benefits to the consumer coming from the involvement of the specialty
channelers are based on the easier flow of information, the provision of customized
service (often to large groups of people), and a favorable price of the package.
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D. MARKETING THE TOURISM PRODUCT
The tour operator will either offer his products directly to the market or sell them
through travel agents. Whichever method of distribution he chooses, sales will hinge
on products being presented in brochures designed by the tour operator and on the
marketing and advertising campaign.
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1. The brochure
This is the main marketing tool used to sell tourism packages. The largest tour
operators print over 1 million copies of their brochures. These are distributed
through travel agencies and their own retail outlets. Brochures are also sent directly
to past clients that have been identified by market research.
The advantage of the brochure is that it represents the tangible evidence of a service
that will be consumed in the future.
Because of the high expense of designing and producing a brochure, only the largest
tour operators with strong financial power can afford the cost. Therefore, the supply
of tourism packages is concentrated in the hands of a few operators. Furthermore,
the lead time necessary to bring a product to the market can be between six months
and a year. The risks of inflation, fluctuations in exchange rates and the price of gas
makes it difficult to predict prices so far ahead. Tour operators now include the price
list separately from their main brochure in order to react to changes whenever
necessary. However, this reduces the strategic impact of advertising promotional
prices.
2. Marketing by travel agents
Travel agencies are tourism firms whose main activity is to sell tourism products on
a commission basis to consumers. The activity of travel agencies is based around
transport sales and the marketing of tourism packages.
Ticketing is the main activity of most agencies. This involves booking transport
space, but also associated travel services.
Transportation sales are the bulk of the agencys business. To sell airline tickets,
travel agencies must be accredited by IATA or by an airline company member of
IATA. The organization protects both consumers and airline companies against
bankruptcy and also serves to regulate the industry.
3. Advertising and promotion
Marketing and advertising campaigns are often undertaken by different
organizations whose interests are complementary:
- governmental tourism organizations from destination countries are
responsible for general information and promotion of the destination
- tour operators and travel agencies mount marketing campaigns to sell their
products
National tourist organizations cooperate with tour operators and travel agencies
who sell products to their destination. Ultimately, the destinations success in
attracting tourists is linked to the operators and agencies ability to sell products to
the market.
Operators who develop products in destinations which are not promoted by a
government agency bear the total cost of promoting both their products and the
destination.
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A product made up of several integrated images is promoted on different fronts by
each supplier.
The marketing costs shouldered by tourism firms are mainly made up of:
- brochures and leaflets distributed to travel agencies, at trade fairs and travel
exhibitions
- posters
- advertisements, newspaper features and competitions in the media;
- commercials on the radio, TV and cinema
- postage of brochures to past and potential clients
- the organization of press conferences
- familiarization trips for journalists and travel distributors
E. THE TREND TOWARDS CONSOLIDATION
1. The dominance of conglomerates
Since the distribution network is the last sector of the travel industry to move
towards consolidation and integration, it is only natural to speculate on the
motivations behind the current merger mania.
For many players, consolidation is a wise course, made all the easier by the financial
communitys view that leisure has become a leading industry. Little by little, major
players are divesting themselves of some of their traditional activities to concentrate
more on tourism and travel, considered more profitable because of their ability to
attract capital investment.
To better understand the extent of this consolidation, an overview of the major
conglomerates that make up the distribution network is in order.
Preussag > TUI
German group Preussag is the leading European tour operator, although as recently
as 1997 it was completely absent from the travel market. Having divested itself of
its shipbuilding and mining activities, Preussag has invested heavily to refocus on
the travel industry in the last few years.
The push began in 1997, when Preussag purchased TUI, the top German tour
operator. The company then acquired Thomas Cook and Carlson U.K. of Great
Britain in December 1998. Finally, in May 2000, Preussag took over Thomson
Travel, the number one British agency, for US$2 billion. However, for this purchase
to receive EC approval, Preussag had to promise to sell off Thomas Cook. In France,
Preussag acquired a 6% interest in Nouvelles Frontires in November 2000; this
share gradually increased to 34% by March 2002.
In other transactions, Preussag purchased GTT26, the number one Austrian tour
operator, in February 2000. In Spain, after gaining a foothold with the RIU hotel
chain, Preussag acquired Viajes Marsans in April 2001. That same month, it
acquired all remaining shares of TUI Belgique, thereby becoming sole proprietor. In
May 2001, it purchased a 10% interest in Alpitour, Italys number one tour operator.
19
In February 2001, Preussag (through its subsidiary, TUI), Maritz Travel Company
(U.S.),
Internet Travel Group (Australia), Protravel (France) and Britannic Travel (U.K.)
joined forces to create a global business travel network: TQ3 Travel Solutions. Sales
reached aprox. $9 billion.
In 2002, Preussag changed its name to TUI AG and completes the 100 percent take-
over of France's leading tour operator Nouvelles Frontires.
With effect from 1 January 2003 TUI AG takes over the majority holding in the
incoming agencies of S.C. Danubius Travel Agency, based in Constanta, Romania,
and Mex-Atlntica Tours S.A. de C.V., based in Mexico City.
TUI Hotels & Resorts, which operates the World of TUI hotel shareholdings,
acquires a 50% stake in Sol y Mar Hotels. In France TUI France - the latest tour
operator brand in the World of TUI - starts sales. Discount Travel - the latest retail
brand in the Central Europe source market- is launched.
In 2004, TUI sells its 10% holding in the Italian Alpitour group. The transaction also
includes the sale of the 50% interest in the Italian airline Neos.
TUI sells its share of the vacation ownership provider Anfi del Mar.
TUI takes over with immediate effect the 49% share in TUI Suisse held by Kuoni
Reisen Holding AG. TUI AG again holds a 100% stake in its Swiss subsidiary.
TUI enters the Russian tour operator market and builds up TMR (TUI Mostravel
Russia), a joint venture of TUI and Russian tour operator Mostravel. This company
starts work on 1 August 2004. TUI holds a 34% share in TMR.
In UK, TUI launches a new airline under the brand Thomsonfly on 31 March 2004.
In connection with this new business Coventry airport in central England is aquired.
In Belgium, TUI launches its own carrier TUI Airlines Belgium on 1 April 2004.
TUI increased to 100 percent its holding in the Austrian club holiday provider Magic
Life with effect from 31 October 2004.
TUI increased to 100 percent its holding in the TV Travel Shop Germany GmbH
with effect from 31 December 2004.
In 2005 TUI enters the Indian market and now holds a 50% share in the incoming
agency Le Passage to India Ltd'.
TUI also acquires on the American stock market 9.03 percent of the American
Travel Management Company Navigant International Inc., Denver.
TUI starts with its own airline TUI Airlines Nederland which will operate under
the brand name of Arkefly on 21 April 2005.
TUI acquires a 51% holding in the incoming agency Acampora Travel S.r.l.,
Sorrento, Italy with effect retrospectively from 1 January 2005.
The rail logistics business, pooled under VTG AG, was divested to the Compagnie
Europenne de Wagons in June 2005.
In 2007, TUI AG and First Choice Holidays PLC agree to merge TUI Tourism and
First Choice Holidays PLC to form TUI Travel PLC. In December 2007, TUI Travel
PLC enters FTSE 100 index.
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In 2008, TUI Travel PLC signs Memorandum of Understanding with S-Group
Capital Management Limited to jointly develop a Russian and CIS leisure tourism
presence.
In 2009, TUI Travel PLC announces a strategic cooperation between Air Berlin and
TUI Travels German aviation business TUIfly
Condor & Neckermann Touristik AG > Thomas Cook
C & N Touristik AG was founded in 1998 when Germany company Karstadt Quelle
decided to create a major tour operator by merging its travel division, NUR
Touristik GmbH (Germanys number two tour operator), with Condor Flugdienst
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GmbH, Lufthansas charter airline. Each founding company holds a 50% share in
the new group. Karstadt Quelle is Europes largest retail and mail-order corporation.
Its new business activities include travel services, ecommerce and over-the-counter
business.
C & N Touristik AG has made several successful acquisitions in France, notably
Aquatour, Albatros and the leisure travel activities of Havas Tourisme, in April 2000
(American Express acquired Havas Voyage Affaires, the business travel side).
However, C & Ns efforts in Great Britain have not been as successful: failed take-
overs of both Thomson Travel and Airtours.
In December 2000, it did acquire Thomas Cook for 885 million euros when Preussag
was forced to divest itself of this tour operator as a condition of acquiring Thomson
Travel (see above).
In other developments, in early May 2001, the number two German tour operator
abandoned the off-putting name of C & N to adopt the name of Thomas Cook, a
brand within the group that enjoys a higher international profile (see end of
document).
Its acquisition of the French travel group Havas Voyages in July 2000 and its take-
over of the British travel group Thomas Cook Holdings Ltd. in April 2001 have
made the company Europe's second-largest leisure group.
In Germany, the business priorities of the company focus on its tour operators
with the brands Neckermann Reisen, Air Marin, Aldiana, Bucher Reisen, Condor
Individuell, Kreutzer Touristik and Terramar, its own retail business with some
700 travel agencies (Thomas Cook and Holiday Land) and the world's leading
holiday airline Condor. With more than five million customers, Neckermann
Reisen is not only the group's biggest brand but also the strongest tour
operator brand in the European travel market. Terramar is the specialist for
four and five star vacations. Aldiana offers premium club holidays. Kreutzer
Touristik addresses quality-conscious customers in the mid to up-market segment
while Air Marin operates in the low budget segment. Bucher Reisen is the
group's successful last minute specialist. The Condor Individuell program
allows customers to build their own holiday package from a selection of
flights, hotels, car rentals and other travel-related services.
KarstadtQuelle took full control of Thomas Cook AG on 9 February 2007, paying
800m for the halfshare owned by Lufthansa. Lufthansa will, however, maintain a
24.9% stake in Condor, the German charter airline division.
Condor, the leading leisure airline in the world, carriers more than eight
million passengers per year and serves on average more than 60 international
destinations in Europe, Asia, Africa and America. Aside from operating an
extensive route network with flights from 21 airports in Germany, Belgium, the
Netherlands and Switzerland, the 'sunshine carrier' is noted for its superior
service and quality standards as well as its modern fleet of 50 aircraft.
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Rewe
Based in Cologne, German conglomerate Rewe owns a chain of supermarkets
(Selgros, Fegro, Penny, MiniMal etc.). In the past years, this group has developed an
interest in travel. In 1999, it created Rewe Touristik, its travel subsidiary, by
purchasing German tour operator DER for approximately US$400 million. The
group acquired a 51% interest in LTU Touristik, the third largest German tour
operator, in August 2000 when LTUs primary shareholder, Swissair, was
experiencing financial difficulties. Several years ago it had no interest in the travel
sector and now Rewe ranks third among German tour operators with an impressive
distribution network throughout the country.
The REWE Travel and Tourism division is becoming increasingly important. It
includes more then 695 travel agencies (ATLAS REISEN, DER or DERPART) as
well as tour operators (DERTOUR, ITS Reisen, JAHN REISEN, TJAEREBORG,
smile&fly, ADAC Reisen, Meiers Weltreisen, ITS BILLA).
With AVIGO, the cross-brand travel portal, REWE Travel and Tourism is
committing itself to the future market in new media.
The U.S. market
The U.S. distribution network differs from the European network in a number of
ways. Unlike Europe, the United States has very few vertically integrated groups.
Carlson Companies is one exception, offering a complete array of travel services:
restaurants, hotels, cruises and branded travel agencies.
The U.S. network is also characterized by the dominance of the airlines. Given the
high volume of domestic air traffic, the airlines are constantly deploying various
strategies to maintain or increase their market shares. The major U.S. airlines are
represented by giant corporations capable of exerting pressure on the entire
distribution network. This is why the American Society of Travel Agents (ASTA) is
wary of certain airline initiatives, such as the creation of Orbitz, an e-commerce
travel site controlled by several airline companies.
Strategies involving the electronic distribution network are of crucial importance in
the United States where this market has reached maturity faster than anywhere
else in the world. These conditions helped favor strong market entries of exclusively
electronic distributors such as Travelocity.com and Expedia. The following table
illustrates their rapid ascent to the heights of the U.S. distribution market.
The U.S. market is also noteworthy because of the importance of specialized services
for small businesses and business travelers. Companies like American Express,
Carlson and Rosenbluth devote a considerable portion of their activities to
developing this lucrative market, which explains why they are among the top
American travel services groups. Industry associations like the American Society of
Travel Agents (ASTA) and the American Bus Association also play a key role, acting
as powerful lobbies for their members, much like the influence wielded by
associations of franchisees.
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Largest US distributors of travel services
Although existing companies have not yet adopted vertical integration to the extent
seen in Europe, the situation seems to be changing. In the last years, several major
European tour operators have attempted to penetrate the U.S. market. British
company Airtours is one such example, strengthening its North American presence
with the acquisition of Travel Services International (TSI) in May 2000. This merger
enabled Airtours to unite its cruise, air transportation, car rental, travel agency and
resort services under a single brand. At the time of the transaction, TSIs estimated
sales were approximately US$1.1 billion. Airtours began its assault on the U.S.
market in 1997 by acquiring Suntrip. It then took over Vacation Express in a 1998
deal carried out by its Canadian subsidiary, North American Leisure Group (NALG).
In other developments, in October 2000 Navigant International, the fourth largest
U.S. travel solutions company, acquired Toronto-based GTS Global Travel Solutions,
which had estimated sales of nearly C$145 million. The deal helped Navigant
strengthen its presence in Canada and position itself as one of the top distributors of
plane tickets. It sells more than US$3 billion in plane tickets yearly through its 635
travel bureaus in the United States, Canada, the United Kingdom and South
America.
Many experts wonder whether deals such as these signal the beginning of a North
American wave of consolidation like that seen in Europe. However, no one seems
certain as yet.
The Asia-Pacific market
The distribution network is extremely fragmented in the Asia-Pacific region, which
has approximately 20,000 travel agencies. Of these, some 9,000 are members of the
IATA. The recent surge in tourists from China, which opened its first travel agency
in 1995, is largely responsible for the explosion in the number of independent
agencies in this part of the world.
It would seem that the Asia-Pacific region is not yet ripe for consolidation, although
the number of new travel agencies has stagnated in most countries in the area, with
the exception of China. While China is the primary source of the overall increase in
agencies in the area, Japan has the most concentrated market: the top three tour
24
operators share over 60% of the market held by the eight largest tour operators in
the country.
3. Alliances, mergers and acquisitions in the distribution network
Although the distribution network was the last tourism sector to move towards
alliances, mergers and acquisitions, it is now undeniably a very concentrated sector
where the primary players hold major market shares. Many corporate entities have
changed and managerial structures themselves have evolved, creating a trend
towards brand-name products.
Vertical integration: Necessary for profitability
Despite sales growth, travel wholesalers are having a hard time increasing their
profit margin, which tends to hover somewhere under 5% and, in certain cases,
under 1%
Tour operators seeking to ensure profits are using vertical integration to better
control the various links in the chain of distribution. An operator can more easily
produce and distribute its vacation packages when it exercises some control over a
fleet of planes (like Airtours, the largest British tour operator), a network of
agencies, cruise lines or an impressive number of hotels. World leaders like German
tour operators Preussag and Condor & Neckermann Touristik control elements
throughout the entire chain of distribution and are constantly increasing their
market share.
Independent operators still offering vacation packages with no specific niche are
finding the major players provide stiff competition. It is nearly impossible to
compete in price while there is no comparison at all in marketing efforts. Even
though consumers remain attached to and appreciate the services of independent
travel agencies, they do look primarily for the low prices offered by major operators.
The domination of Germany and the United Kingdom - the race to
consolidate continues
Efforts to expand and take over the entire chain of distribution really took off in
Europe where almost all the major markets are now controlled by a handful of tour
operators. The five largest European groups account for more than 67% of total tour
operator sales, estimated at US$30 billion. The industry is largely dominated by
colossal German and British companies.
In Germany, five wholesalers control 76% of the market, while in Britain, the four
largest companies generate nearly 80% of travel package sales. By using charter
flights, these tour operators rack up significant profits because they are not subject
to the pricing policies of regular carriers.
The push towards acquisitions should continue as the British market has achieved
maturity and consolidation has reached a peak in Germany. The major tour
operators, in particular the British and German conglomerates, are absorbing major
25
losses in the pursuit of an intensive market penetration strategy to solidify their
future hold on Europe. Integration is also taking place in other European countries
such as France where the industry is less structured.
France has no large conglomerates and the companies there make few foreign
acquisitions.
French tour operators are not truly powerful and are more likely to be bought out by
other companies. Family-run firms are often targeted first by large integrated
foreign groups looking to expand.
For the time being, the United States and Japan are seeing fewer acquisitions
because vacation packages are less popular among consumers there than they are in
Europe.
However, these countries are likely to be targeted by the expansionist designs of a
few major players, notably the German companies TUI the leading European
service provider and Thomas Cook.
The following chart illustrates the market shares of the top five tour operators in the
primary European tourist-generating countries.
In fact, acquiring companies are often willing to pay an inflated share price rather
than see a company go to a competitor. This is exactly what happened when
Preussag purchased Thomson Travel. Since Preussag wanted at all cost to prevent
Thomson from becoming part of Karstadt Quelle (Condor & Neckermann Touristik
A.G.), the price negotiated was equal to twice the earnings per share traditionally
found in the travel sector.
It is difficult to accurately predict who will come out on top in this frantic rush to
consolidate.
For the time being, consumers should enjoy some benefits due to an emerging price
war that could well persist. One thing is certain: the main winners at the moment
are the shareholders of the companies purchased who are seeing their stock values
skyrocket.
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4. Impacts of consolidation in the distribution network
4.1. Large integrated groups: the goals of consolidation
Economies of scale
Grappling with incredibly slim profit margins and increasing pressure from the
expanding Internet which threatens to cut these margins even further, large travel
groups see economies of scale as the best way to protect themselves against future
upsets. For example, the ability to negotiate a better price for airplane fuel gives one
a major competitive edge when setting prices for ones services. For travel agencies,
being part of a large group means taking advantage of the stronger buying power of
the parent company, which can use the groups size to negotiate exclusive
agreements with clients such as airlines and global distribution systems.
Increased visibility
Consolidation can help companies improve efficiency in activities such as
reservations, accounting, marketing and advertising; it also helps attract many
potential investors to this sector. Large groups can more easily carry out the major
marketing efforts required to increase product recognition among consumers, which,
in turn, contributes to the overall growth of the industry.
Market presence
Many tour operators opt to set up shop in a large number of countries to
significantly minimize the risk of industry upheavals, since structural changes do
not occur at the same rate everywhere. By concentrating their activities within a
single conglomerate, partners have an advantage when it comes to distribution,
which offers a wide variety of channels (travel agencies, the Internet, call centers,
interactive TV, etc.). By integrating the Internet into their operations, tour
operators find they can save time and money even if they continue to make most of
their sales through traditional channels.
Controlling distribution and monitoring the competition
Companies working within a single corporate structure enjoy more flexible payment
terms and better guarantees when it comes to making air travel arrangements. It is
also much easier for an integrated group to follow its clients needs because it
controls each segment in the chain of distribution. It is easy to set up an efficient
process for monitoring the competition by rigorously following up on sales, which is a
major advantage over competitors who are not vertically integrated. By setting up
yield management tools, a company can foresee the capacities required and quickly
produce the relevant brochures.
4.2 impacts on independent agencies
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Differentiation strategies
Players in the distribution network who are not yet under the thumb of large
conglomerates work to adopt individual differentiation strategies to enable them to
compete where they can.
Personalized service has always been very important in the travel industry. Small
tour operators must therefore focus on specific niches and build on their firms
strengths. They also have the advantage of being able to quickly adapt to change,
especially when it comes to consumer needs.
Price wars
However, small tour operators must deal with barriers that increase with industry
consolidation, in particular price wars. Since they do not belong to an integrated
group with its own fleet of planes, independent operators can be shut out of the
market because of their inability to find cheap chartered seats. Since they are often
obliged to resort to the regular airlines, they have to charge their clients more. Even
worse, in addition to increasing their own sales, integrated groups can control, and
indeed block, the distribution of certain competitive products because their agency
networks also sell packages for other tour operators.
Be that as it may, direct sales are never enough, even for the largest groups.
Thomson makes approximately 68% of its sales through its distribution agency,
Lunn Poly. Tour operators must turn to independent agencies and other competing
networks to sell all their products. Competing tour operators must reach a certain
market balance that enables them to sell all of each others excess inventory.
5. Opportunities for the distribution network
The threat posed by a consolidated distribution network is very real to small
independent businesses. These companies must exhibit ingenuity and adaptability if
they want to hold their own against major industry players and the airlines who
have steadily lowered travel agent commissions and reduced the cost of issuing
tickets by relying increasingly on electronic ticketing. The travel agencies who are
increasing revenues and surviving are those who are diversifying their products and
services while charging consumers service fees to issue plane tickets. The waves of
consolidation have also created new opportunities for operators in the form of new
market niches.
5. 1 Diversification of products and services
To offset the impact of consolidation, networks of independent agencies must develop
effective strategies for exploiting the inherent weaknesses of large conglomerates.
After all, since larger companies have trouble attracting niche markets or
specialized products like ecotourism, educational tours or exotic locales, they must
focus their efforts on creating packages for the mass market. Wholesalers who
carefully select a well-defined niche market can compete with the major players by
fulfilling the specific requirements of the target clientele.
Another option is to target a specific market segment, such as young people,
business travelers or senior citizens. To more effectively deploy its strategy for
28
penetrating these market niches, an agency or wholesaler must seek out partners
who can enhance the product. The added value will create the profitability needed
for the agency to survive, despite a much lower sales volume. Savvy consumers are,
in fact, prepared to pay more for high quality experiences that better meet their
needs.
5.2 Networking
Agencies who make alliances with local businesses can very effectively improve the
products they offer and even develop theme tours. For example, a tour operator
specialized in adventure tourism could create a varied and satisfying tourist
experience by joining forces with a sled dog breeder, a restaurant serving local
gourmet cuisine, an outfitter and a few other regional businesses. This type of
complementary alliance among players in a given region or between neighboring
regions could produce a synergy effect that could even exceed the expectations of the
target clientele. Some examples of high-potential niches are health tourism, eco-
tourism, religious tourism, agricultural tourism, sports tourism, native tourism and
adventure tourism.
Summary
Wholesaler
travel firm which assembles various travel services
producer of all inclusive package tour
contracts with service suppliers aircraft seats, hotel beds, ground services
buys services in bulk, thus receiving reduced rates
prepares prearranged tour packages according to expected demand
pays in advance to service suppliers
has stocks before the actual demand arises
its earning - profit
Tour Operator (local, ground TO):
prepares land arrangements;
provides destination tourism services as a package to the TO;
handles the tourists from arrival to departure;
operates the local services;
organizes familiarization and information tours;
gives advice to FTO on locally available services;
controls the services;
contracts to buy local services.
Travel agency
operates on behalf of the travel service supplier
sells tourism services under an agency contract
its revenue commission
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an intermediary a subcontractor
provides services when a demand arises
retailer does not have stocks
do not work with profit margin can occasionally charge a handling fee
a travel agent stock information and brochures
30