Recession in the UK Travel and Tourism Sectors - Essay Example

Recession in the UK Travel and Tourism Sectors The purpose of this essay is to provide a critical examination to the theory that high performing companies continue to introduce new products and provide focus to growing revenue and market share during a recession. The format that this paper will take is to first provide examples of how a recession typically affects consumer expenditures overall. Secondly this paper will provide an analysis of how consumer expenditures on travel and vacations may be affected by a recession specifically in relation to how expenditures may be increased or decreased as a result of a recession. After this point the paper will give some insight as to the overall trends in the international community specifically in the United States. Next an in depth analysis will be conducted as to how the UK travel industry has been affected by the recession and provide insight as to what strategies some organizations have opted to utilize in effort to combat the recession specifically focusing on strategies such as offering new low cost options or increased advertising. Building on these points this paper will argue that many of these changes may simply be short term strategies designed to adjust to temporary changes in consumer preferences and how some strategies are designed to be coherent long term strategies. In an article published by the Suffolk City Council (2008) a number of different groups were identified as being the most likely to be affected by the current recession. Primarily identified were in terms of individuals were people with low incomes such as those people with fixed incomes, and those people unable to cope with rising costs such as those heavily in debt. In regards to manufacturers and service providers the research summary identified that companies manufacturing durable consumer goods such as washing machines or cars will be severely negatively affected by the recession owing to the fact that consumers are reluctant to make big purchases in times of economic uncertainty. More importantly to this topic the Suffolk City Council (2008) identifies that the service sector will be the most negatively affected sector insofar as retail, financial services leisure has already seen some of its biggest decrease in output levels since the mid nineties. The reasoning behind this decrease in the service sector (Specifically the leisure sector) is because of the falling consumer confidence in the overall economy. According to Barbaro and Uchitelle (2008) it is the case that in the American context consumer confidence in the strength of an economy is an important measure of the overall economic health of a nation. Furthermore, consumer expenditures have a direct correlation with consumer confidence and as such it is the case that people are far less likely to spend out large amounts of money in circumstances where economic uncertainty is at an all time low. According to the Telegraph (2008) there is an economic principle called the ‘Lipstick Effect’ which postulates that during times of economic uncertainty the sales of luxury goods such as cosmetics actually increase. For example a person may not be willing to purchase a new automobile for £15,000 but they may be willing to spend £1,000 on a vacation. The next focus of this paper is to examine how the travel industry has been affected by the recession. According to Solnik (2008) it is the case that travel industry that have survived a recessionary environment in past years are able to cope quite well during a recession. It is the case that the travel environment has changed drastically in the last decade owing to increased consolidation which has arguable brought down the overall costs of travel. It is because of this increased vertical integration that has brought the relative cost of vacations and travel down and as such many consumers who are used to having yearly vacations may see a reduced cost of travel as being a great way to keep status quo whilst still recognizing some cost savings. The other school of thought is that many different travel providers will be strongly negatively affected by the recessionary environment. According to ArticleBase.com (2009) it is the case that the recessionary environment will have long term negative consequences for the travel industry in specific relation to the luxury travel segment in New Zealand. As the article postulated it is the case that travel require two important factors which are the means to travel and the will to travel. Arguably it is the case that both of these factors will be negatively affected during a recession as peoples means to travel are compromised by lost jobs or devaluated investment portfolios, secondly as job security may be compromised people are more reluctant to take time off for a vacation and opt to simply work harder. The last point about the effect of the recessionary environment on the travel sector is the fact that some components may be negatively affected, whilst some may remain unchanged or even see an improvement in their usage. As argued by Milmo (Feb, 2008) it is the case that RyanAir the Ireland based low cost air carrier often looks forward to a recession. As many people are still looking to travel they many not be so inclined to spend a significant portion of their budgets on more luxurious air carriers and as such some travelers may simply look to “Trade-Down” their overall budget and as such look to cheaper alternatives. By having a firm control of the low cost air carrier market, RyanAir is poised to see an increase of traffic on their website by people looking for cheaper travel alternatives, which generates additional income by internet advertisers, furthermore the article postulated that RyanAir expects an increase in overall passengers on many of their flights. However it should be noted that as where RyanAir may gain it is the case that many traditional air carriers may see a decrease in passenger revenues. Traditional air carriers such as British Airways according to Milmo (Nov, 2008) are expected to see an overall 9.2% decrease in their more profitable premium class traffic, owing to the fact that people may opt not to utilize higher priced options on more popular routes. Furthermore the article postulated that much of their traffic relies heavily on executives in the banking sector who fly popular routes like London-Heathrow to New York-JFK, and as the banking sector takes a very heavy toll during the recessionary period it is likely that this will bring with is a strong decrease in traffic, as executives opt to enforce cost saving measures such as e-conferencing. Now that it has been established what effect the recession has had on the travel industry as a whole one should question what the near future will hold for the British travel industry. According to The Independent (2009) some of the trends in the travel sector for 2010 are going to be cheap holiday houses in which individuals cater to the selves, Latin vacations, mixing business with pleasure trips, ‘traincations’ and eco vacations. One could argue that one of the major benefits from most of these vacation styles is an added cost savings benefit. By renting a holiday house in which the individuals cater for themselves they may recognize cost savings associated with attending restaurants in resorts, furthermore by visiting Latin American countries there may be more “Bang for your buck” insofar as individuals may capitalize on the strong British Pound over various Central and South American denominations. If an individual chooses to take their holidays right after completing some component of a business trip they may be able to recognize cost savings associated with having the employer pay for much of the flight costs, and by taking a trip on a train individuals may be able to travel for cheaper that renting a car or possibly some flights. Lastly there is the case of eco tourism which suggests that consumers are becoming more interested in traveling in eco friendly locations. According to Blacksmith (2008) it is the case that ecotourism as a trend is expected to grow over the coming years owing to increased interest and awareness of environmental issues by consumers. According to the office of National Statistics (2009) it is the case that there is some stagnation in the amount of people from the UK visiting locations abroad, and people from abroad visiting he United Kingdom (See chart below) However it should be noted that despite this stagnation (Or possible decline) people from foreign nations spent approximately £16 billion in 2008 which represents an increase of over 2% over the previous year, and spending by UK Residents also rose over 5% to a total of over £36.8 billion. If viewed from a mercantilist standpoint one would see that more money leave the country than comes in the travel sector. Now that we have established what the future trends are for the British Travel industry a discussion can be conducted as to the response that firms in the United Kingdom employ in order to capitalize on trends and react to the recessionary environment. A major player in the UK based tourism sector is the company Trailfinders. According to their corporate website (2010) is the United Kingdom’s largest independent travel company which puts their primary focus on booking flights and rail tickets, providing hotel options, package tours both domestically and abroad as well as selling various insurance options. There is little question that there has been a strong presence of internet based travel booking however it is arguable the case that Trailfinders has not made drastic changes to their business model in the wake of the latest recession. In an interview with the company president Mike Gooley (Barrett, 2008) it is the case that the company has seen a drastic downturn in the booking of simple flights such as London to Amsterdam in the wake of increased transparency owing to the emergence of many online based travel brokers. However in a response to this changing market it could be argued that company has simply shifted away from this type of booking and placed more emphasis on booking more complicated package tours. However it should be noted that nowhere on the Trailfinders company website can somebody book a flight or vacation, on can only be simply referred to one of their actual physical agents who will walk the client through the company’s product offerings either in person or on the phone. The reasoning behind this is that it would appear that the company somewhat self-identifies as a sales service organization and it is only through this personal interaction that the company gets the opportunity to provide extra value to customers. In this case it could argue that Trailfinders represents a company that has reacted to the recession by implementing a long term coherent change to their operational strategies as they have moved their focus away from less profitable and increasingly transparent simple trips and redirected their energies to more complicated travel and business packages. As it is the case that Trailfinders has mad long term operational changes to their business model one must question if there are firms that have made short term capacity adjustments. In an article by Milmo (Aug, 2008) it is the case that the national Air carrier, British Airways had dropped six short distance routes and even reduced the frequency of flights from London to New York. According to Teather (2009) it is the case that British Airways had proposed massive cost saving ideas within their company such as pay freezes, unpaid leave, reduced work hours etc. which were almost universally rejected by their employees union. Without the ability to make drastic cost saving measures to their business model it could be argued that in the wake of decreasing demand for some of the less profitable routes the company simply had to drop some of their less profitable routes. In this respect one could argue that the firm simply took a reactionary approach to the market conditions and should there be an increase in demand they would almost certainly increase the frequency and availability of these routes. As such one could further argue that the company is not making long term changes to their business model. In the uncertain economic times one must question what effect increase advertising and promotions has on the business model of the travel industry in the UK. According to Blackden (2007) it is the case that Easyjet.com was facing uncertain economic conditions even when the economy was more stable in order to attract new customers and bring back customers that the company had lost in recent years the company tried a promotional strategy which incorporated a wave of price cuts and increased internet advertising which ultimately brought back a strong increase of customers to almost 10 million annually. Upon examination of the company website (2010) suggests that this a trend that continues to this day, with frequent ski trips and airport lounge ‘buy one get one free promotion’. As such one could argue that in the wake of decreased passenger travel by adopting a more aggressive promotional strategy the company was able to retain marketshare in a time when many airlines are experiencing drastic declines in passenger volume. As such one could argue that this represents a strong long term change to the company business model and not just a reactionary method. One final case to changes in the travel industry is best exemplified by Ryanair. It is the case that according to the Daily Mail Reporter (2009) it is the case that the company is changing around the layout of their seating arrangements to have passengers see each other face to face. What this does is create the potential to increase the amount of passangers on a typical airplane by 50% and ultimately bring increased savings to the consumer (See image below) What this represents is only the latest in a long standing tradition in Ryanair of business model innovation. As the strategy of Ryanair has always been to be the cheapest air carrier this innovation simply represents a new means of achieving this goal. So it could be argued that this change is not a drastic change on their business model or even a reactionary change to market conditions it is simply a new means of achieving the company’s primary focus of offering flights at he cheapest possible price. In conclusion, the downturn in the economy does represent a serious challenge to the travel industry. Different segments of different firms have responded to these challenges in a variety of different ways. Some companies such as Trailfinders have made long term changes to their product offerings to accommodate the changing market, some firms such as British Airways simply responded to the market by dropping routes in order to save money. Lastly some firms such as Ryanair have made changes to their business practice by adding more seats to planes but the fundamental objectives of the firm stays the same. As data highlighted there is stagnation in the British travel industry with fewer people expected to take trips abroad and fewer people visiting the UK, furthermore the types of vacations taken by people may be shifting to lower cost vacations and ecotourism. References Articalbase.com (Jun, 2009) New Zealand Luxury Travel – The Effects of the Recession and the Boom Bust Cycle. ArticleBase.com. [online] Available at http://www.articlesbase.com/destinations-articles/new-zealand-luxury-travel-the-effects-of-the-recession-and-the-boom-bust-cycle-962422.html Accessed on January 31st 2010. Barbaro, M.&Uchitelle, L. (Jan, 2008) Americans Cut Back Sharply on Spending. The New York Times. [online] Available at http://www.nytimes.com/2008/01/14/business/14spend.html Accessed on January 31st 2010. Barrett, F. (January, 2008) Interview with Mike Gooley. DailyMail.co.uk [online] Full interview available at http://www.youtube.com/watch?v=x5hm8UtvvOk Accessed on January 31st, 2010. Blackden, R. (Aug, 2007) Easyjet Promotions Paying Off. Telegraph.co.uk. [online] Available at http://www.telegraph.co.uk/finance/markets/2813632/easyJet-promotions-paying-off.html Accessed on January 31st, 2010. Blacksmith, J. (March, 2008) Ecotourism Location Numbers Growing Rapidly. Ezine Articles. [online] Available at http://ezinearticles.com/?Ecotourism-Location-Numbers-Growing-Rapidly&id=1047526 Accessed on January 31st 2010. Daily Mail Travel Reporter (Sept, 2009) Think Flying Economy is Bad Now? New Aircraft Design Puts Passengers Face-to-Face in Rows for Budget Travel. The Daily Mail. [online] Available at http://www.dailymail.co.uk/news/article-1215081/Packed-like-sardines-New-aircraft-design-plans-seat-passengers-face-face.html Accessed on January 31st 2010. Easy Jet Company Website (2010) [online] Available at http://www.easyjet.com/asp/en/book/index.asp Accessed on January 31st 2010. Milmo, D. (Aug, 2008) Airlines: BA cuts winter flights and raises fares as surging oil price sends profit into tailspin . Guardian.co.uk [online] Available at http://www.guardian.co.uk/business/2008/aug/02/britishairwaysbusiness.theairlineindustry Accessed on January 31st 2010. Milmo, D. (Feb,2008) Ryanair Boss Looks Forward to Recession. Guardian.co.uk. [online] Available at http://www.guardian.co.uk/business/2008/feb/05/airlineindustry Accessed on January 31st 2010. Milmo, D. (Nov, 2008) Tui Travel Cuts Capacity. Guardian.co.uk [online] Available at http://www.guardian.co.uk/business/2008/nov/14/tuitravel-thomascookgroup Accessed on January 31st 2010. Office For National Statistics (2009) International Travel: Visits to the UK Fell in 2008. [online] Available at http://www.statistics.gov.uk/cci/nugget.asp?id=178 Accessed on January 31st 2010. Solnik, C. (May, 2008) Recession Misses Travel Agencies. Long Island Business News. [online] Available at http://www.allbusiness.com/management/personal-business-support-services/10593934-1.html Accessed on January 31st 2010. Suffolk City Council (2008) The Effects of the Recession and Those Most At Risk: Research Summary. [online] Available at http://www.suffolk.gov.uk/NR/rdonlyres/320E5D8B-E2DE-49E8-976A-95C87541D97F/0/EffectsoftheRecessionandThosemostatRisk.pdf. Accessed on January 31st 2010. Teather, D. (July, 2009) British Airways Staff Reject Cost-Cutting Proposals. Guardian.co.uk. [online] Available at http://www.guardian.co.uk/business/2009/jul/06/british-airways-jobs-pay-unions Accessed on January 31st 2010. Telegraph Reporter (Dec, 2008) ‘Lipstick Effect’ in Full Swing, Economists Say. Telegraph.co.uk. [online] Available at http://www.telegraph.co.uk/finance/financetopics/recession/3899999/Lipstick-effect-in-full-swing-economists-say.html Accessed on January 31st, 2010. Trailfinders Company Website (2010) Homepage. [online] Available at http://www.trailfinders.com/ Accessed on January 31st, 2010. Read More