AQA A2Business Studies

BUSS3 - Strategies for SuccessRevision Workshop

SunTravel

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SunTravel plc is the UK’s second-

largest tour operator having sold

traditional mass-market packaged

holidays for decades. It has a very

well-known brand name and, until recently, enjoyed high

customer loyalty. However, that loyalty has been tested by

financial problems after a series of profit warnings issued by

the Board during 2010 and 2011 and a collapse in the firm’s

share price.

Key Features of the UK Tour Operating MarketSunTravel operates in a very large market. In the UK alone, consumer spending on overseasholidays is around £30bn.

SunTravel is a vertically-integrated business. In addition to the SunTravel holiday brand, itowns and operates a large fleet of aircraft and sells many of its own holidays via SunTravelHoliday Shop - (the UK’s largest chain of travel agents), SunTravel Direct and SunTravel.com

Tour operating is a high risk and capital intensive business. To earn profits, operators needeconomies of scale to minimise unit costs and earn a good profit margin. Tour operators usually commit to their capacity (hotel rooms & flights) well in advance by estimating whatthe likely demand will be. As a result, fixed costs are high and losses can be heavy if demanddoes not meet supply. The industry has a long history of low profit margins and business failure; since 2011 over 20 operators have gone bust leaving thousands of holidaymakersstranded or without a holiday.

In November 2011, as part of a refinancing led by SunTravel’s banks, holiday industry veteran Marcus Klose was appointed Chairman. Marcus’s main objective is to improve SunTravel’s profit quality and significantly increase the share price over the next 3 years by achieving marketleadership in the overseas holiday market. SunTravel’s bankers and major shareholders haveserious concerns about the high level of gearing and financial under-performance comparedwith the market leader – GOSTAY Travel plc.

In May 2012 the Board appointed Hazel Blair as CEO. Hazel has no travel industry experience but she has a reputation for effective cost-cutting in a range of industries. Hazelhas spent the first few months in her role assessing the scope for significant cost reductionsand ways to reduce SunTravel's large debts.

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SunTravel’s core market appears to be in long-term decline. Since 1999, the number of overseas packaged holidays taken by UK travellers has fallen consistently and now stands at 36million p.a. Holidays of the kind offered by SunTravel and its competitors have sufferedduring the economic downturn, with a 20% decline in holidays taken between 2008 and 2011.

The mainstream (mass market) packaged holiday industry is not just affected by the state of the economy. The behaviour of holidaymakers is changing too, both in the type of holidays soughtand their approach to booking. These key changes in customer behaviour include:

• Less likely to book a traditional flight and accommodation package, with more customershappy to book the components of a holiday separately from online distributors andlow-cost airlines;

• A tendency to book much later (closer to departure) and to be more price-sensitive;• Research and book holidays online rather than relying on the service of travel agents. In

the last 5 years, the number of overseas holidays booked through travel agents has fallenby 20%;

• Increasing success of niche operators who offer more specialised holidays and have moreflexibility over their flight and accommodation arrangements.

The packaged holiday market has increasingly been split into two main segments:

Classic package of charter flight and hotel accommodation (half-board) topopular destinations in the Mediterranean. Still popular with older customersand those in the C1C2D socio-economic groups. Key to success in thismarket is to operate at low-cost.

More specialised holidays which add more value by addressing specificcustomer needs – e.g. all-inclusive, activity-based, experiences. Appeals toa more affluent consumer who expects a differentiated experience.

Mainstream Holidays

DifferentiatedHolidays

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Marcus expresses his reservations...His view is that the plan may not be enough to ensure SunTravel's long-term success. Marcus would prefer to reposition SunTravel as a provider of differentiated holiday products and also invest much more indeveloping online sales.

"The reservation I have with your plan Hazel", says Marcus before a crucial Board Meeting, "is thatsignificant cost-cutting in the short-term will damage our ability to regain market leadership inthe long-term".

Hazel recognises that SunTravel might benefit from a portfolio of holiday brands that are focused on thefaster-growing and more profitable differentiated holiday market segments. However this would involve asignificant investment in innovation, improved staff training and enhancements to the customer experience

throughout their holidays. In her view, SunTravel simply can't affordproduct development of this kind until the fundamental problems of the business are solved.

Hazel’s Cost Minimisation StrategyHazel believes that the most important short-term objective is to reduce operating costs in order to improve cash flow and reduce the risk of business failure.Working with a firm of external consultants, Hazel has developed a plan named “Project Take-off” which aims to make SunTravel the lowest-cost operator in the market. Hazel proposes that the business:

• Close up to 250 of SunTravel’s portfolio of 660 travel agencies, some of which are loss-making; the remaining leases will be renegotiated with landlords;

• Implement delayering amongst senior and middle management throughout the Group, including at Head Office;

• Outsource 50% of SunTravel’s holiday flying to a low-cost airline (JetSky) and sell up to 20 of SunTravel’s ageing aircraft fleet;

• End a popular benefit traditionally offered to all staff – heavily discounted holidays for staff, their familyand friends.

Hazel estimates that the total cost of the plan is £150million which will deliver annual cost savings of£100millon within three years. Hazel anticipates significant resistance to her proposals from the workforceat SunTravel which is heavily unionised and has been through a period of great upheaval and uncertainty in recent years. The proposal to end staff discounts is likely to be particularly unpopular.

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Appendices

Appendix 2: Key Operations Data

Revenues Operating Profit Market Share Market Growth2011 (£bn) 2011 (£bn) Rate p.a. (%)

UK market 6,900 40 26% -3%

Other Europe 1,500 10 7% +2%

Appendix 1: Financial Summary

£millions SunTravel plc GOSTAY Travel plc2011 2010 2011 2010

Revenue 8,400 8,900 12,700 13,520

Operating Profit 50 255 495 530

Dividend per share (pence) 2.8 10.7 10.7 11.0

Non current liabilities 8,280 6,525 4,420 4,288

Net cash inflow / (outflow) in year (260) (85) 170 215

Capital Employed 4,600 4,500 6,500 6,700

Financial highlights for SunTravel plc & the market leader GoStay Travel plc

Airline Fleet Capacity & Performance (2012)

* Load factor is a measure of capacity utilisation in the airline industry. It is calculated by dividing thenumber of seats sold by the total number of seats available

Revenues, Operating Profit and Market Share by Customer Location for Sun Travel

SunTravel Air Holiday Industry AverageLoad Factor * in 2012 83% 92%

% on-time arrivals 89% 84%

Number of aircraft 33 14

Average Cost per Passenger Flown £93 £77

Holiday Rating & Customer Service Performance

# % of customers rating their holiday good or excellent in post-holiday customer service questionnaire

Average Holiday Ratings 2012 # SunTravel GOSTAY Travel Industry AverageMainstream Product 61% 59% 55%

Differentiated Product 65% 87% 83%

Customer Complaints (% of bookings) 6% 3% 6%

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Appendix 3: UK Marketing Data

Marketing data for SunTravel plc compared with the competition

Recent results of SunTravel Employee Satisfaction Survey (Summer 2012):

Appendix 4: HRM Data and Performance Summary

SunTravel GOSTAY Rest of UK Market

Number of travel agent outlets 660 435 4,180

% of bookings made online 22% 41% 17%

Customer loyalty - & repeat bookings p.a. 35% 51% 22%

Average revenue per booking:Mainstream product £1,260 £1,370 £950

Differentiated product £2,100 £3,185 £2,030

SunTravel Holiday Industry AverageStaff Turnover: Travel Agencies 24% 34%

Staff Turnover: Tour Reps 68% 81%

Percentage Unionisation 78% 79%

% Respondents % Respondents2012 2011

I am happy to work for SunTravel 56 64

SunTravel offer a competitive remuneration package 35 45

I have a clear understanding of SunTravel’s business objectives 15 12

Appendix 5: Summary of Project Takeoff Costs and Returns

The estimated investment and returns of Project Takeoff are:

Total Cost £m Annual Benefit £mOutsource flying to JetSky 60.0 50.0

Rationalise travel agency portfolio 48.0 15.0

Remove staff travel concessions 2.0 15.0

Delayer organisation structure 40.0 20.0

Total for Project 150.0 100.0