CASE STUDY

European Tour Operators: confronting competition in the tourism industry

Eric Viardot

European tour operators have managed to achieve a strong position in the tourism industry. Most notably the twobiggest ones, TUI Travel and Thomas Cook have a large market share. However, in the latter part of the decade(2007–10) the industry has experienced a downturn because of the turbulent environment which has created newthreats and modified the competitive forces.

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Competition: a continuing consolidation in theEuropean tourism industry

Over the 10 years from 1998 to 2008, the competitivelandscape of the tour operator industry changed dramati-cally as the market experienced a continuing concentrationof the players.

The trend had been accelerated in 2007 with the acquisi-tion of MyTravel, the number 3 European Tour Operator by Thomas Cook, the number 2, on February 2007. Onemonth later TUI announced its acquisition and merger withFirst Choice, the fifth biggest tour operator and number 2 in the UK.

Those two moves radically decreased the number ofplayers and in 2008 the combined revenues of the twobiggest tour operators were three times higher than thethree following competitors, while in 2005 it was less thantwice as high (see Table 1).

TUI Travel Plc

In 2009, TUI Travel Plc was the biggest tour operator inEurope. A tour operator (also named tour wholesaler) offeredpackaged or ‘all inclusive’ prepaid and preplanned holidaysto its customers, usually through travel agents. It was apre-assembly of basic travel components sold for a fixed price.A standard package was composed of air transportation(outbound and return), hotel accommodation, transfersfrom the airport to the hotel and back, as well as optionalitems such as insurance, meals, excursions, etc.

The flights (usually charters) left and returned on given dates; the duration of the stay was fixed. This type of

The tourism industry since 2000

At the end of 2008, the tourism industry was a majorindustry. Worldwide it generated US$5474 billion (x4023bnor £3665bn) of economic activity, represented 9.4 per centof total world GDP and provided 219.8 million jobs (7.6 percent) of total employment.i

The second half of the twentieth century had seen a constant growth of the tourism industry. If the businesshad slowed in 2001–03 following terrorist attacks in NewYork, Djerba and Bali, it had bounced back. In 2007, for the first time ever, the number of international tourist arrivalsrecorded worldwide exceeded 900 million, according to the World Tourism Organisation (UNWTO), a specialisedagency of the United Nations (UN) for tourism policy, asillustrated in Figure 1.

However, the global economic crisis starting in Septem-ber 2008 and getting worse throughout 2009 had broughtthe business to a halt, with a general slowdown of activities,massive unemployment, and a major credit crunch for consumers.

This case was prepared by Eric Viardot, Professor of Strategy at the EADA Business School in Barcelona. It is intended as a basisfor class discussion and not as an illustration of good or bad practice. © Eric Viardot 2010. Not to be reproduced or quoted with-out permission.

Figure 1 International tourist arrivals

Source: UNWTO, June 2009.

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vacation offered security and good value for the vacationeras tour operators were able to get very good prices com-pared to a Do-It-Yourself holiday. Indeed, tour operatorshad managed to industrialise and standardise the process ofholiday-making, turning it into a mass-market business.

With more than 30 million customers representing aturnover of more than x16 billion, TUI Travel Plc was, in 2008, the market leader in tourism in Europe. The company, listed on the London Stock market, has achievedthis position through an aggressive acquisition strategy led originally by the TUI group, a German company whose top management decided to exit the mining industry in the mid-1990s and to enter the tourism business, a growthservice business.

In 2008, TUI Travel Plc had 50,000 employees withover US$11 billion in fixed assets. It owned about 4000travel agencies in 20 countries with a very strong presencein Germany, Great Britain and the Netherlands as well as inBelgium (under the various brands of TUI ReiseCenter,FIRST Reisebüro, Hapag-Lloyd Reisebüro, TUI TravelCenter,First Choice, 2wentys, Sunsstart, Lunn Poly, etc.).

TUI Travel Plc also owned 80 tour operators active in 20 European markets. Some of its most famous brandswere TUI, Nouvelles Frontières 1-2-Fly, Gebeco, Robinson,Thomson, Fritidsresor, Star Tour, Jetair, and Gulet. Thosetour operators were selling not only fully packaged toursbut also individual travel components (flights, car rental,hotel accommodation, etc.). In 2005, across Europe, callcentres and online bookings combined accounted for 25 per cent of sales. It had doubled to 30 per cent pureonline bookings in 2008.

In addition, TUI Travel Plc owned more than 160 aircraft with control of various airlines such as Arkefly,Britannia, Corsairfly Hapagfly, Jetairfly and Thomsonfly.TUI was also present in the low cost airline market withHapag-Lloyd-Express in Germany and Thomsonfly.com in the UK. The airlines ran as independent entities with

responsibility for results at a local level whilst the fleet operations, maintenance and purchasing were centralisedand managed by the TUI Airline Management team inHanover.

In 2008, TUI Travel Plc was Europe’s largest holidayhotelier with 297 hotels and some 83,728 beds. This made it number 12 in the rankings of the biggest hotelchains around the world.ii The group also owned 37 incoming agencies with more than 5000 staff and tourguides who were taking care of customers in more than 70 countries. They organised the transportation betweenairport and hotel, provided local excursions, offered assist-ance for car rentals, etc. TUI Travel Plc was also present in cruise activity with four cruise liners belonging toHapag-Lloyd Cruises.

The main shareholders were TUI AG (51.7 per cent),AllianceBernstein Investments LP (6.3 per cent), MarathonAsset Mgt (3.1 per cent), Legal & General Inv. Mgt (2.2 percent), Barclays Global Investors (2.2 per cent), StandardLife Investments (1.7 per cent).

Thomas Cook

The German company Thomas Cook AG was created in2002 when German retailer Karstadt Quelle and DeutscheLufthansa set up a 50–50 joint venture for the purchase ofThomas Cook Holdings, the famous British tour companyfounded in 1841.

In June 2007, following competition authority clearance,Thomas Cook merged with its British competitor MyTravel,another integrated international group. MyTravel Groupwas very strong in the UK where it made more than 66 per cent of its revenues. MyTravel Group was also anintegrated international group. It was selling travel andtour services (including air travel, hotels, retail travel services and tour operators, but no longer cruises) fromabout 1000 travel outlets in Europe, North America, and the UK under more than 100 brands. The company hadundergone reorganisation after experiencing a continuingdecrease in revenues.

The new group was called Thomas Cook Group Plc andwas listed on the London Stock Exchange. The new groupis 51 per cent owned by Arcandor (new name of Karstadt).In 2008, Thomas Cook bought out Canadian travel whole-saler IFS Voyages (including Fun Sun Vacations, Intair,Exotik Tours, and Boomerang Tours).

In 2008, Thomas Cook operated in 21 countries. It hada fleet of 93 aircraft, a network of more than 3400 ownedor franchised travel offices, and interests in 86 hotels andresort properties. It was selling travel tours and charterflights to more than 22.3 million customers and had about31,000 employees. It primarily operates under the ThomasCook Airtours, Condor, Direct Holidays, Neckermann,

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Table 1 Tour operators market share (MS) andrevenues in Europe in 2005 and 2008

MS Revenues MS Revenues 2008 2008 2005 2005(%) (ebn) (%) (ebn)

TUI 18.6 15.6 TUI 21 16.0Thomas Cook 13.9 11.7 Thomas Cook 13 7.8REWE 5.1 4.3 MyTravel 8 4.8Kuoni 3.4 2.8 REWE 8 4.8Club Med 2.1 1.7 First Choice 6 3.6

Kuoni 4 2.4Total market 84.0 Club Med 4 2.4

Iberostar 4 2.4Altour 2 1.2Hotelplan 2 1.2Total market 60.0

Sources: TUI LTC Annual Reports.

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Sunquest and Ving brands. In 2008 total sales amountedto £8.8 billion.

ReweTouristik, from Germany was the third largesttravel group. It was primarily offering package holidaysunder the brands ADAC Reisen, Dertour, ITS, Jahn Reisen,Meier’s Weltreisen and Tjaereborg. It was operating morethan 1300 travel agencies, and was claiming to have thebiggest managed travel distribution network in Germany.It was also running 54 hotel complexes, and had a stake inthe LTU holiday airline.

The indirect competition

Tour operators no longer compete exclusively amongthemselves but face competition from online channels aswell as some suppliers (notably airlines) providing both thetransportation and accommodation for holiday makers as a package. In 2008, 72 per cent of internet bookings inEurope were through supplier and tour operator websitesand 28 per cent through online agencies. In 2005, the split was 66 per cent to 34 per cent, and in 2002, it was 54 per cent to 46 per cent.

Though the European market was different, it seemedthat it was heading in the same direction as the US market.There the online market penetration was almost three timesbigger than in Europe with 32 per cent penetration rateagainst 11 per cent in Europe. Furthermore the majority ofthe online bookings were dominated by some major onlinetravel agencies (OLTAs) such as Expedia, Travelocity andPriceline.com. Over the past decade, these online operatorshad taken market share from traditional tour operatorswith a compound annual growth rate (CAGR) of more than50 per cent, while tour operators were going downhill witha CAGR of −5.3 per cent (see Figure 2).

Furthermore, the OLTAs had increased their packagebusiness from effectively zero in 1999 to more than US$6 billion in 2008, representing 17 per cent of their total gross bookings.

Naturally, the tour operator market was more developedin Europe than in the US. Actually, though, the two travelmarkets were more or less equal in size – the tour oper-ator market represented only 7 per cent of the market (US$18 billion) while it was estimated that in Europe it was about 25 per cent of the total market, including somecountries such as the UK where tour operators represented35 per cent of the total market (see Figure 3).

There were a number of structural reasons for this difference. First, Europeans take more vacations thanAmericans. Secondly, US travellers tend to be more inde-pendent and prefer booking individual components overpre-set packaged tours. Lastly, the climate of NorthernEurope makes for the success of 1–2 week winter breaks to sunnier destinations such as Southern Mediterraneancountries; this annual rite is very similar to the Canadianmarket.

Also the American tour operator market was less con-centrated than in Europe, as 90 per cent of tour operatorsdid less than US$100 million in total gross bookings, and74 per cent made under US$10 million. The small touroperators catered to the lower and middle segments of thevacation market. They were making their revenues withlow margins on the high volume of sales of relatively simplepackages to low cost vacation destinations (e.g. Florida, Las Vegas, the Caribbean, and Mexico).

The European tour operators were also directly compet-ing with some of the largest industry suppliers, mostly thetransportation companies (mainly airlines) and the lodgingindustry (mainly hotel groups).

Regarding the airline suppliers which transport holidaymakers, TUI was competing directly with some low cost airlines in Europe with its two brands ThomsonFly andHapag Lloyd Express while Thomas Cook was competingwith the charter airlines. The low cost airlines (LCA) are themost dynamic segment of the airline industry in Europe.

EUROPEAN TOUR OPERATORS 567

Figure 2 US packaged travel market by touroperators and online travel agency packages(OTA), 2000–10 ($bn)

Source: PhoCusWright, Inc., ‘The US Packaged Travel Landscape2006–2010’.

Figure 3 US and UK total travel market andpackaged travel share 2008 ($bn)

Source: adapted from PhoCusWright, Inc., ‘The US Packaged TravelLandscape 2006–2010’.

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During the last 10 years LCAs have constantly improvedtheir market share, gaining mostly on traditional airlines(e.g. Air France, Lufthansa, Iberia and BA) and also a littleon the charter airlines. In 2008, The LCA market share was18.4 per cent while traditional airlines still had 55.7 percent share and the charter airlines had 25.9 per cent.

The lodging industry is big in Europe but it is extremelyfragmented. In 2008, according to Eurostat, there were422,000 establishments including 200,000 hotels (repre-senting 45 per cent of the rooms in the world compared toonly 27 per cent in North America). Most of the hotels areowned by small companies and there are a limited numberof chains which are mostly American. TUI is competingdirectly with those chains and ranked number 11 in 2009(see Table 2).

Business perspective for the future

In November 2008, TUI Travel made the decision to cutsummer capacity by 27 per cent to British travellers in 2009as it anticipated a sharp decline in consumer confidence, anincrease of unemployment in the UK and a sustained weak-ness of the pound against the euro. A few weeks before, itsmain competitor, Thomas Cook, had announced it wouldtake out 15 per cent of its capacity. The reduction in capacitycould have been even more drastic if another competitor,XL Leisure Group, the third largest tour operator in the UK,had not collapsed in September 2008.

Overall a decline of 5 – 6 per cent of the tourism activitywas forecast for 2009 with different outcomes from oneregion to another. While Africa experienced a 3 per centgrowth and South America was flat (+0.2 per cent), therewas a strong decline in arrivals in the Middle East (−18 percent) and Europe (−10 per cent) at the same time as Asiaand Pacific were down by 6 per cent and North America byalmost 7 per cent. More details can be found in Table 3.

Once again the industry had to adapt. Nevertheless, inthe longer term, the expansion of tourism seemed to be amega-trend shaping the future of the world economy andactivity. UNWTO was still forecasting that the 1.0 billionarrivals mark would be passed in 2010 and by 2020 therewould be 1.6 billion international tourist arrivals.

References:i WTTC, www.wttc.org/eng/Tourism_Research/Tourism_Economic_

Research Tourism.ii Hotels Magazine, 25 June 2009,

www.hotelsmag.com/article/CA6667503.html.

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Table 2 The largest hotel chains in the world

Rank Corporate chain Rooms Hotels

1 InterContinental Hotels Group 556,246 3,7412 Wyndham Hotel Group 543,234 6,4733 Marriott International 513,832 2,8324 Hilton Hotels Corp. 501,478 2,9355 Accor 486,512 4,1216 Choice Hotels International 435,000 5,3767 Best Western International 315,401 4,1648 Starwood Hotels Worldwide 265,600 8719 Carlson Hospitality Worldwide 145,331 945

10 Global Hyatt Corp. 140,416 74911 TUI AG/TUI Hotels and Resorts 82,111 27912 Sol Meliá SA 80,856 407

Source: hotelsmag.com.

Table 3 International tourist arrivals by (sub) regions

Full year Share

2000 2005 2007 2008* 2008*

(million) (%)

World 684 804 904 922 100

Europe 392.5 441.6 487.3 487.9 52.9Northern Europe 43.7 52.8 58.1 57.0 6.2Western Europe 139.7 142.6 154.9 153.2 16.6Central/Eastern Europe 69.4 87.5 96.5 98.9 10.7Southern/Mediter. Eu. 139.8 158.7 177.9 178.9 19.4

Asia and the Pacific 110.1 153.6 191.9 154.1 20.0North-East Asia 58.3 85.9 100.9 101.0 11.0South-East Asia 36.1 48.5 59.7 61.6 6.7Oceania 9.6 11.0 11.2 11.1 1.2South Asia 6.1 8.1 10.1 10.4 1.1

Americas 128.2 133.3 142.9 147.2 16.0North America 91.5 89.9 95.3 97.8 10.6Caribbean 17.1 18.8 19.8 20.3 2.2Central America 4.3 6.3 7.8 8.3 0.9South America 15.3 18.3 20.0 20.8 2.3

Africa 27.9 37.3 45.1 47.0 5.1North Africa 10.2 13.9 15.3 17.2 1.9Subsaharan Africa 17.6 23.4 25.8 29.7 3.2

Middle East 24.9 37.9 47.0 55.6 6.0

Source: UNWTO, World Tourism Barometer, June 2009.

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