Cartel of 'Big Four' Tour Operators in UK - Essay Example

Tour operators combine two or more travel services (accommodation, transport, food, passage) and sell it to the consumers either directly or through a travel agent as a packaged product. The vast majority of British holiday makers use package tours. Due to bulk buying tour operators are able to offer packaged holidays at cheaper rates than the customer would otherwise get from the suppliers. The four mainstream tour operators in UK, namely TUI, MyTravel, First Choice and Thomas Cook, have made a link between mainstream destinations in developing countries that they offer. In 2000, the ‘Big Four’ controlled over 75% of all outbound package tours. As the travel industry undergoes a change, the Big Four show that one size does not fit all (PWC, 2006). This paper evaluates the way they have established a cartel within the package holiday market in the UK but changing trends have revolutionized the industry. The UK is the fourth most important generating market for holidays, after US, Germany and Japan (Meyer, 2003). As the British prefer to use the services of a tour operator for long-haul destinations, this sector had increasingly become mainstream with British tour operators. The main trends in the industry are economies of scale and vertical integration. These strategies give the tour operators tremendous buying power and control over the supply and distribution of their products. Vertical integration means investment into other suppliers which gives them control over quality, availability, access and price, and the ability to reach consumers. Besides, it helps to limit competition. The regulatory authorities have been challenging how the Big Four exercise control at several stages in the distribution chain. The Big Four are all vertically integrated. This vertical integration takes the form of control, normally through ownership by a single group, of a tour operator, an airline and a retail travel agent (R&M, 1999). The travel agent Lunn Poly, owned by TUI, UK had 800 shops in 2000. Going Places is owned by MyTravel, Thomas Cook has 700 travel agents and First Choice owns 361 shops under the name of Travel Choice and related brands (Meyer). If a customer walked into a Travel Choice office he would not know that he was buying a First Choice package. To reduce such misunderstandings, the Monopolies and Mergers Commission (MMC), ordered that the notice of ownership must be displayed outside the shop, in brochures, on official stationery and in advertisements. All the Big Four tour operators had some airline in its fold, owned resort properties or hotels, had ground handling agents and marketed their products under a different brand name as travel agents. Thus, they in essence, packaged their own airline, hotel rooms, and ground transport and sold it through another travel agency, which too was owned by them. However, the MMC did not find that they adopted any anti-competition measures. Five years ago, the Big Four had remarkably similar approaches to the market that it was difficult to discern the difference between their strategies (PWC). The mass market demand for overseas holidays was in boom in 1990s. The Big Four exploited this demand through vertical integration. They had branded outlets, fleets of aircraft and ships, hotels, and back office operations to manage the whole package. They even made down payments to reserve hotel rooms in advance which also fetched them a good bargain. The four operators also shared a common objective – to build market share. Their focus fetched them a premium price for their products and created a weave of consolidation in the industry. The Big Four captured the market by using fluid pricing – prices varied according to competitive pressures and promotional campaigns (Meyer). Undercutting started in the industry and there was a time when most large travel agents like Lunn Poly passed on all their overriding commissions to the customer, thriving merely on commission from insurance sales. The vertically integrated, having direct access to the client, were able to influence and shape the demand and buying behavior. Their integration made it difficult for customers to stumble over non-standardized products and the bulk of these products were sold through outlets owned by the Big Four on High Street. The independent travel agents do not have the financial means to have an outlet on High Street and are hence left out of competition (Meyer). Things started changing as technology advanced and the customer became educated through the increased use of internet. Brochures were available online, which even the smaller independent tour operators could afford and reached the masses. The Consumers’ Association in 2003 claimed that it was better to book through the smaller operators and avoid the Big Four (Mills, 2003). JMC, part of the Thomas Cook ranked the lowest in terms of customer satisfaction. Holidaymakers were encouraged to look beyond High Street. A customer who had booked a holiday through First Choice fought and received a compensation for £1,000 as the promised services were not provided. The Big Four dominated the package holiday market to such an extent that they took liberties with the refund and cancellation policies until they were forced to amend their cancellation rules as per intervention of Office of Fair Trading (OFT). They had not been following the guidelines and did not allow customer to take a replacement holiday. They even did not refund the insurance premium in case customer could show they are unable to transfer or re-use the policy. In October 2002, they had to change the contract terms to give the customers a fair deal in accordance with the terms laid down by OFT (OFT, 2002). According to the Civil Aviation Authority, which monitors the sale of package holidays, the Big Four now sell 50% of all packages compared to 70% two years ago (Skidmore, 2005). People are looking for greater choice and are more comfortable booking through the internet. They also do not want to be herded in mass groups. As trends have changed and people are looking for newer places, these Big Four operators are closing down units and reduced the number of packages they sell. UK holidaymakers are dissatisfied with big tour operators, reports BBC News (2003). The Consumers’ Association even claimed they were unaware they were booking with the Big Four. This just demonstrates how the Big Four have been marketing under different brands. The Big Four responded differently to the changed market conditions. Consequently, their respective offerings and market positioning have diverged (PWC). Strategies and approach to business changed and the Big Four continue to make their presence felt. First Choice was the first to respond as they expanded into higher-margin specialist and activity sectors. They now offer packages through three different divisions – Mainstream, Activity and Specialist. It continues to invest in aircraft fleet and their campaigns focus on in-flight comfort and long-haul destinations like Mexico and Kenya. In contrast, TUI is offering cheap short-haul flights from a wide range of UK airports. The basic strategy of both these operators remains the same – they are offering the facility to package their own holiday as they can book hotels and airline through the same website. The only difference is that TUI markets through its own website while First Choice uses EasyJet site. TUI sticks to its vertical integration strategy as it acquired the Coventry Airport so that no competing low-cost carriers could duplicate its routes from that hub. Thomas Cook too sticks to the vertically integrated model but they focus on rigorous capacity management. They maximize their margins by stroking a balance between supply and demand. Their biggest asset is a single name across the entire value chain. MyTravel were pioneers in the package holiday market but have been making losses for the past four years (The Observer, 2006). After restructuring they are now back with a strong balance sheet. Consumer tastes have changed and people now prefer elephant safaris in Thailand over hotel holidays in Spain. The package holiday market has been steadily declining over the years. In 2004, only 46% of the holidays taken were package holidays against 56% in 1994. As wealth has arisen in the growing economy, consumer tastes have changed and expectations have gone up. The low-cost carriers and the internet technology have also revolutionized the market. The business strategies of the Big Four have changed in UK, but in developing economies, they continue to have influence. The Moroccan National Tourist Office reports that Morocco received 6.5 million visitors in 2006 and they predict 10 million visitors a year by 2010 (TTG, 2006). They are in talks with the vertically integrated Big Four in UK to distribute responsible tourism guides to their frontline agents. Research suggests that the Big Four did dominate the package market in UK until five years ago but changing consumer needs and market trends forced each of them to take a different approach. Vertical integration contributed to controlling influence over every segment in the travel service. For several years they enjoyed premium rates, served the discerning clients and dotted the High Street under different names. The main objective of capturing the market share had to give way to different approach to survive in the market which was fast responding to low-cost carriers and independent holidays. They have been now forced to take brave decisions to survive in the emerging environment. The Big Four have proved that they are both versatile and resilient. People do not have the time and patience to book online holidays and their demand of the Big Four will continue to grow with a changed perspective. References: BBC News (2003), Small holiday firms are better, 28 Nov 2006 OFT (2002)< Thomas Cook and ABTA to give fairer terms, 28 Nov 2006 Meyer, D. (2003), The UK Outbound Tour Operating Industry and Implications for Pro- Poor Tourism, PPT Working Paper No. 17, 28 Nov 2006 Mills, M. (2003), Avoid big four travel firms, tourists told, The Guardian, 28 Nov 2006 PWC (2006), Hospitality Directions Europe Edition, 28 Nov 2006 R&M (1999), UK Overseas Package Holiday Market Market Assessment, 28 Nov 2006 Skidmore, J. (2000), HOLIDAYMAKERS TURN THEIR BACKS ON THE BIG FOUR, 28 Nov 2006 TTG (2006), Morocco in responsible tourism guide talks with big four , 28 Nov 2006 Read More