The Broken Wine Glass, Part II

Strategic positioning in the leisure travel industry

Part I attracted something of a cathartic outpouring of lengthy correspondence from a number of travel industry veterans.  Some of the points made were:

  • Tour operators were burdened with legacy cost structures while the LCC’s started with a blank sheet of paper.
  • Over- capacity in accommodation supply, especially in the short-haul segment, was also a key driver.
  • As was the consumer’s unwillingness to place value on bonding, together with ‘legal chaos’ over bonding requirements.
  • The tour operators lacked flexibility (to shift contracted beds and aircraft) in the face of a changing (and diverging)  political and economic environment.

All true.  As one correspondent beautifully put it:

Definitely makes me teary-eyed remembering how great charter once was…I am sure the dinosaurs felt the same

Questions were also posed, notably:

  • Will ‘the plaster saint’ of volume be the undoing of the LCCs, as it was of the tour operating giants? (Answer: possibly – volume will always be a vulnerability for any capacity-based model with a low cost positioning)
  • Are more ‘specialist’ tour operating models immune from these pressures, or will they head the same way over time?
  • Are the last remaining ‘tricks’ controlling key assets and shrinking capacity more quickly than demand?

So where, basically, did the wine go?

Although some value did filter through to consumers, much of it was leeched away from the tour operators by the bigger LCC’s, by accommodation owners and experience suppliers themselves, and by aggregation platforms.  Power moved away from the stalk of the wine glass, in one direction to new distribution models and in the opposite direction to suppliers, and in doing so it dispersed mightily.  The sector was hit by disruptive substitution (the LCC’s), by forward integration (suppliers accessing consumer distribution directly) and by backward integration (consumers manufacturing packages themselves) all at more or less the same time.  In terms of classical ‘five forces’ sector analysis, that’s pretty well a perfect storm.

Before we get too carried away though, it’s also worth noting that in no small part the wine stayed exactly where it was.  TUI Travel and Thomas Cook still take many millions of passengers on package holidays every year, still have large, dedicated aircraft fleets and still contract with hundreds of thousands of accommodation providers.  The sector’s volumes have been eroded, but they haven’t gone the way of Betamax.  Not yet at least.  And broadly speaking the strategic management of the ‘mainstream’ segment (mass market charter holidays) has made sense – the consolidation and careful reduction of capacity, systematic cost reduction, attempts to control key supply directly (such as TUI’s misleadingly-titled ‘differentiated’ product).  Arguably there have been mistakes.  The charter model should have remained dominant on routes without an LCC airlift alternative, but making seat-only product (i.e. seats on charter flights without the sale of a holiday package) available to distribution platforms fed bed-bank growth, in turn encouraging LCC encroachment, and may therefore have been short-sighted – optimising short-term capacity utilisation at the cost of longer term positioning.  All the same, there is still considerable intrinsic value in the mainstream segment.  What there isn’t, is growth.

Strategically, both TT and TC have been trying to play a fairly straightforward ‘Boston Box’ game – managing their declining business for cash and looking to invest for growth in new areas.

Have they been looking in the right place?  Where is the right place?

The then First Choice plc, now rolled into TUI, tackled this problem by defining a new category, ‘Specialist’, as distinct from ‘Mainstream’, and was very successful in convincing the City that this had meaning.  But specialising in and of itself didn’t address any issues.  A Spanish charter tour specialist, for example,  would be in no better position (actually, a much worse position) than a generalist.

In broad terms, effective positioning (in the sense of the potential to capture value or margin) shifted in two directions.  Upstream, towards ownership, control or gate-keeping of valued and not easily accessible assets and resources.  Downstream, towards new, online distribution platforms that achieved critical mass as two-sided networks.  Specialising in a particular area may or may not be of value depending on the degree to which it entrenches a distinctive position in one of these two profit pools.

Examples of the upstream models include cruise, destination management services and high value-added tour guiding, educational and activity-based travel (particularly where the key activities are owned), rich-content travel, complex itinerary manufacturing and unique accommodation propositions.  Let’s call these ‘valued asset models’.

Examples of the downstream models include the global OTA’s with enormous brand-building and technological capability, and the niche platforms with distinctive positioning (geographic, product or both).  It’s a little misleading at the edges, but let’s call these ‘online aggregators’.

Although margin tends to pool in these two positions, the ability to appropriate that margin in a given business model depends on how easily that model can be duplicated (or substituted).  For example, although the adventure travel segment has historically enjoyed both growth and profitability, low barriers to competition mean that demand has usually been shared out between weakly differentiated competitors.

The Devil, as always, is in the detail, and it is more than possible to shoot yourself in the foot with a fundamentally uncompetitive proposition.

By and large though, the quality and stability of a strategic position is usually easier to assess for valued asset models than for online aggregators.  In the latter case, the value of an aggregator lies in the two sides of its network, either of which can be subject to attack.  New platforms can often be trialled quickly and investors are often willing to risk capital almost recklessly in the hope of a big win.  The very qualities which make an online aggregator easy to scale quickly can also mean that both value added and defensibility are very thin.  And of course the 800 pound Google gorilla is stumbling around in the foreground with potentially hugely disruptive consequences.

The key point is that the fundamentals of strategy are not suddenly and miraculously suspended for an online business.  If clear competitive advantage cannot be identified and defended, then sooner or later the wheels will fall off.

Since 2008 of course the tectonic shifts in the European economic, political and social environments have also had a big impact on demand patterns and therefore on product mix. In Part III we’ll look at the key drivers of change for the European travel industry in the years to come, delve into positioning in more detail, and speculate on some fertile areas for strategic innovation.  In the mean time, your intrepid blogger will be travelling to Greece in the wake of the dramatic election re-run to report first hand on conditions on the ground…

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