The UK Foreign Holiday Market - Case Study Example

Microeconomics Essay- UK Foreign Holiday Market Tourism is fast becoming one of the most important industries in the modern world due to the high rate of globalization in recent times. It has grown to be the third-largest industry in the world after oil and vehicle-manufacture. This essay discusses the current scenario of the foreign holiday market in the UK. For the purpose of this discussion, 'holidays' would be defined to include all trips taken either to the UK by foreign nationals, or to overseas by UK locals. The UK market for package holiday travel abroad is estimated to be worth over 10bn per annum (Research and Markets 2007). In the past few years, this market has grown at a modest rate of over 4% annually, with the significant consumer-groups in the market being families, youth, and the over-50 age group. However, the effects of global recession on this market are now gradually becoming evident. The demand for foreign holidays fell by around 15% in January, 2009 alone as the credit crunch tightened its grip on the UK economy (Devine, D 2009). A lack of consumer confidence and rising fuel prices have also recently added in, further dampening the demand. In addition, the unpredictability of British weather due to global warming, and a failure on the part of UK holiday-resorts to match services in terms of price and quality with that of their foreign competitors (Research and Markets 2007) have lowered the demand for UK holidays by foreign tourists. The overall effect is that the demand-curve for the market has shifted leftwards. Other factors like the threat of terrorism, war, and natural disasters in current years have also contributed to the left-shift of the curve, thereby resulting in lesser quantity being demanded at a lesser price in the market. However, the economic gloom does have a bright side for this market. The airline industry has been badly hit by the crunch due to which almost all air-fares have been dramatically reduced. Consequently, consumers are able to book cheap flights to almost anywhere in the world, and the overall package cost of foreign holidays has decreased. There has been an increase in demand for trips to Spain and Mediterranean shores - which surveys have pointed out as favourite holiday destinations - by the British (Holiday Watchdog 2008). This reduction in total price of the product has resulted in a downward movement of the market equilibrium point along the demand-curve. Moreover, cheaper flights also mean that UK has become more available internationally to foreign tourists, since they can now afford air-travel for leisure purposes. The fierce competition between Airbus and Boeing has created an over-capacity of aircraft, and is expected to result in an explosion of discount carriers offering flights at affordable prices. Thus, there has been an increase in the quantity demanded. The ocean cruise market, which is a complement of the overseas holiday market, is expected to reach 1.5 million annual passengers by the year 2010 (Travel Weekly 2005). This high growth prediction means that its complements (like the foreign holiday market) will also consequently grow. Also, surveys by the Confederation of Public Transport have shown that a very high priority is attached by British to the annual holiday as an item of family expenditure due to changes in consumer attitude and lifestyle over modern times (Scottish Tourist Board, et al 2006). Thus, the economic downturn has not put off the British from taking foreign holidays. On the contrary, the current poor weather in the UK has helped the tourism industry by encouraging even more people to go abroad for the summer, particularly to places that "offer consistently good weather" (Property Wire 2008). Infact, psychologically speaking, the British are more eager than ever to go on a holiday in this potentially depressing situation since one way they believe "to escape the current economic gloom is to take a foreign holiday" (Property Wire 2008). Being now considered as an annual necessity rather than a luxury, the price elasticity of demand for foreign holidays has reduced. This translates to higher revenue for the producers with increasing prices. In recent years, independent leisure travel has become simpler to organise, much of which is due to the Internet, which provides the consumers to cut out intermediaries. Though this has threatened the existence of some sectors of the travel trade (like the travel agent) the Internet remains one reason for the continued boost in foreign holidays demand in the UK market. It not only facilitates the retrieval of relevant travel information, but also allows direct bookings online with tour operators, as well as with providers of transport and accommodation services. The main airlines themself have been encouraging direct sales to cut down on the costs of commission paid to retail travel agents. The newer low-cost carriers have been seeking to minimise their distribution costs by selling almost exclusively through the Internet (Research and Markets 2001). Again, this has led to a decrease in price, and going by the Law of Demand, a consequent increase in the quantity demanded. The demand has also become more price inelastic. However, the lowering of price with an inelastic demand-curve, ceteris paribus, means that the total revenue earned would decrease. This revenue is further lowered due to the leftward shift in demand. Hence, it is predicted that the overall revenue of the producers in this market is likely to fall. In the current scenario, the supply seems to far outstrip the demand, but the drop in sales (ignoring the effects of global recession) could just be the market shifting towards the next logical phase of the economic cycle- maturity. The market is also price inelastic in terms of supply since the UK holiday industry is dominated by only four major firms- Thomson, Airtours, First Choice and Thomas Cook. This has given the market an oligopolistic structure, with these four operators not only collectively accounting for a high proportion of supply the market, but also exercising control at several stages of the distribution process (Jones, C 2007). This vertical integration has given these firms more market power, and this price inelastic supply could help save the revenue of the suppliers since a lowering price for a price inelastic supply-curve would result in an increase in revenue. Thus, the overall effect of elasticity on revenue in market would be depend on which market curve - demand or supply - is relatively more inelastic. Since air remains the dominant mode of transport used by UK tourists to travel overseas - with over 80% travelling to their destinations by this means in 2008 (Research and Markets 2007) - any change in the airline market is expected to affect holiday market as well. The domestic holiday market is a supplement product to the foreign holiday market. Thus, whereas airlines going bust, increasing holiday costs due to oil prices and the poor exchange rate of the Pound Sterling are all good indications for the domestic holiday market in the UK, they indicate poor conditions for its foreign holiday market. The market remained more-or-less static as the problems in the economy got worse in 2008. And while last year, consumers could take advantage of the strength of the pound against the dollar, the same opportunities would not be available this year. The UK economy is expected to contract by 2.9% in 2009 (Yucca 2009), and this problem has been exacerbated by the media. Thus, it is likely that the 3% to 4% growth that the foreign holiday market traditionally will not be materialising this year. Though the consumer confidence has been constantly lowering, it must be noticed that the current scene indicates that this industry has not yet been hit by the turmoil of the car and banking sector, something which will adversely affect the demand-supply cases. Once hit, the recession and recovery of this market is expected to be U-shaped, rather than V-shaped, i.e., it may be at the bottom of the recession for a while and not rebound as quickly as it has in previous boom-and-bust cycles. The changing fashions and preferences in the industry can be difficult to predict, but one area where the UK travel industry can be innovative is in the development of new products to meet changing market needs. In a survey by the Confederation of Public Transport, it was seen that twice as many British are willing to take a holiday in 2009 than 2008 (Towergate 2009). Many people will continue to take their primary annual holiday, but will cut down on secondary trips. In summary, the typical UK foreign tourist is becoming much more experienced. The foreign holiday is now an annual event for many, and in the long-run, the industry should be optimistic since population changes and an oversupply of aircrafts are expected to fuel a travel boom in the next few years to come. Bibliography Research and Markets 2007, UK Overseas Package Holiday Market Assessment, Key Note, Middlesex. Research and Markets 2001, Holiday Purchasing Patterns Market Assessment, Key Note, Middlesex. 02 February 2008. Holiday Watchdog: Forum. Available from: [16 March 2009]. Scottish Tourist Board, Wales Tourist Board, Northern Ireland Tourist Board, and British Tourist Authority 2006, The British domestic holiday market. Prospects for the future, CABI, United Kingdom. Yucca 2009, Bristol. 05 February 2009, UK Tourism Travel Trends: Blog. Available from: < http://www.yucca.co.uk/blog_detail.aspitem=561> [16 March 2009]. Devine, D 2009, 'Economic gloom casts a cloud over foreign holiday trade', Western Mail, 17 January. Available from: Wales Online- News. [16 March 2009]. Jones, C 2007, Party time for holiday companies, Interactive Investor, Interactive Investor Trading Limited. Available from: [17 March 2009]. Research and Markets 2008, UK Travel Insurance, Datamonitor, London. Towergate 2009, Twice as many Britons to take a UK holiday in 2009, Towergate Connect, Kent. Property Wire 2008, 'Brits escaping wet UK boost holiday rental market', Property Wire News, 12 July. Available from: [17 March 2009]. Travel Weekly 2005, 'UK cruise market booming', 20 May, Reed Business Information. Read More