Merging in the UK Package Holiday Market - Essay Example

Merging in the UK Package Holiday Market – Case Study The package holiday industry in the United Kingdom dates back to 1841, when Thomas Cook invented the idea of accommodating for return trips from a particular destination (Thomas Cook n. d.). Since the inception of the company, Thomas Cook has been unfailingly serving its UK and overseas pool of travellers with integrated services at par with international standards. Similarly, MyTravel, a UK-based travel agency known erstwhile as Airtours, has also enjoyed a premium status in the global tourism arena courtesy of the competitive edge it provides over its rival organizations. Both Cook and MyTravel enjoy an oligopolistic stature in the UK travel market as there are very few big players competing with one another over branded tourism products and services (HighBeam Research 1998). By the time Thomas Cook and MyTravel merged with each other to form the Thomas Cook Group, the trend in the UK travel sector was beginning to change. The concept of franchising was getting popular among giant business houses. As a consolidating approach to this changing scenario, another acquisition was soon on the cards. TUI Travel tied up with First Choice in September, 2007, marking a milestone event in the UK travel industry. Following these two mergers, the entire travel sector assumed new looks in terms of operational mobility and packaged marketing initiatives. As the two major players in the global travel hunt, both operators took great care of their respective areas of interest, including hotels, cruises and charter airliners. Moreover, a seamless retail network involving major travel agencies was established to provide a convenient one-stop travel experience to vacationers. This paper is going to analyse in detail these two case studies and probe into a number of strategic issues that set off the mergers. Additionally the paper will also look into the post-merger economic challenges and how they are going to affect the future of the travel market over the next few years. To address these issues systematically, the paper will answer three questions. 1. Why did Thomas Cook and MyTravel, and TUI and First Choice merge? What benefits have been gained from the mergers? What problems have had to be overcome, and what challenges do they face in the light of the current global economic downturn? The Mediterranean coast has always been the most sought after tourist destination in Europe. Whether it is leisure travel for rejuvenating the mind and the body or high-priority business trips, the Mediterranean destinations provide value for money for the travellers throughout the year. Blessed with a congenial weather and an irresistible mix of the sun and the sea, the southern parts of Europe happen to be the busiest tourism hideout in the world. Apart from the geostrategic advantage this region has courtesy of its proximity to a necklace of popular islands, the Mediterranean region has its own charm as well, allowing travellers room to breathe fresh air. The potential of this region as a prospective tourist destination was first tapped by local residents after the WWII. Since then, a massive pool of international travellers has been steadily hitting the basin every year to bask in the sun and frolic in the waters of the Atlantic. Statistics for the year 2007 show that 23.8 million German vacationers opted to go for the Mediterranean holidays (Hazendonk et al. 2008:41). Needless to mention, handling such a huge inflow of traffic requires systematic operational procedures along with inclusive infrastructures. If one examines the prevailing trends in global tourism practices, it would be apparent that inclusive tour packages have been ruling over other types of segregated initiatives. According to Hazendonk et al. (2008), inclusive tours dominate the European travel sector. They identify five key players in this industry, each having a crucial role to play for the overall growth of the business. Producers, suppliers, tour operators, wholesalers, and retailers work together in the packaged holiday market and complement each other for the realisation and fulfillment of the potential marketing expansion across all offshoots (41). This observation can be substantiated furthermore by empirical evidences derived from the mergers of Thomas Cook with MyTravel and TUI with First Choice. If one studies the financial backdrop of the Thomas Cook-MyTravel merger in 2007, it would be clear that market integration at a cheaper and more affordable rate along with exploration of a contestable market, as coined by Page and Connell (2006), are at the very heart of such an acquisition. Regardless of the extent of business other travel agencies were doing at the time of the merger, it was imperative for the major operators to key out some common points of interest for the general holidaymakers. In a way, the concept of contestable market is oriented at pricing strategies for different areas of products and services. It gives the consumers a liberty to pick and choose from a wealth of services and products and at the same time, allows the operators to integrate customer specific requirements such as cruise packages, lodging, dining and more at a single go. Moreover, integrated tourism ventures are unrivalled when it comes to providing cheaper rates. This may be supported by the example of Thompson, which partnered the TUI Group before the merger in 2007. Thompson introduced low cost travel packages to outsmart its rivals in the Middle East. The phenomenon of low cost travelling was duly complemented by a business assemblage of products and services built on the latest innovations in information technology (94). Therefore, making profits within a globally competitive market was one of the basic reasons behind the mergers. However, an equally important factor that led to both the acquisitions was fragmentation of industries prior to the global economic downturn. A dynamic industry like travel and tourism had to restructure and retool their settled actors in order to adjust to the barriers imposed on them for cross-country economic disparities (Hill and Jones 2009:47). Albeit Hill and Jones apply this theory to circulation of commodities, one would not be far wrong in associating the same with the tourism sector. A hindsight analysis would reveal that capacity consumption during the initial phases of an economic boom inevitably leads to market saturation, but not before the big players make the best use of their products. What is implied by making best use is that reduction in prices can be afforded only by integrated ventures when the market is characterised by increasing demands for a compilation of services. Hence, the onus lies on the big players to capitalise on the compatibility metrics of the target market(s). According to empirical evidences, similarities in brand identities and stature played a decisive role for both Thomas Cook-MyTravel and TUI-First Choice mergers in 2007. Prior to the merger, Thomas Cook was equipped with 33 tour-operating brands, 2400 travel agencies, a fleet of 66 aircraft, and an estimated 20000 workers. Similarly, MyTravel had in their repertoire 17 tour-operating brands, 31 aircraft, and 13000 officials. Again, the merger of TUI Travel and First Choice echoed its preceding acquisition in terms of quantitative illustration of strength. TUI and First Choice had jointly owned an ominous fleet of 161 aircraft (Robinson 2009:129-30). So the combined force presented a daunting figure to be challenged by any other tour operator working in Europe or elsewhere in the world. What Adams notes regarding the amalgamation of technology with business for economising travel itineraries, lodging expenses and other revenue generating sources for tour operators provides a cue as to why the two mergers occurred. Adams takes an analytical look at the correlation between airliners operating only for the sake of transportation and those offering both transportation and accommodation (16). Now before Thomas Cook and MyTravel merger, their respective stakes as all-inclusive tour operators were considerably lower than the post-merging scenario. The merging allowed both companies to overhaul the oligopolistic flight carriers operating in the UK travel sector, thus establishing themselves as leading players with comprehensive portfolios. Evans et al. (2003) study this dominance from the business perspective of the suppliers (183). It goes unsaid that the impact of this oligopolistic trend on the travel and tourism business at large is as detrimental to the cause of the travellers as it is to that of the operators. 2. Why did the European Commission block the proposed acquisition of First Choice by Airtours (now MyTravel) in September 1999, but approve the recent two mergers? In order to deal with this question, it is imperative that we should first of all examine the European Commission’s interpretation of collective dominance by oligopolistic market sharers. A close scrutiny would reveal that the Commission had laid a paradigm for regulating the keenly contested market in the UK package holiday industries. Airtours’ attempted acquisition of First Choice was foiled by the EU on the basis of what they perceived as a likely polarisation of the market. This logic can be further understood by the aforementioned concepts of capacity consumption and generation of competitive ebb among the leading operators. If the EC had allowed the merger in 1997, it would create a market imbalance in terms of lack of competitive rivalry. When the driving coordinates of a given market become condensed due to merging, firms should strive at generating greater incentives by means of maximum capacity usage. But this was not endorsed by the EC as such an approach threatened to introduce structural as well as operational singularities within the marketplace – a proposition that was not very promising for the smaller firms. Moreover, the Commission also took into consideration the amount of market share the mergers would generate. The estimation amounted to 79% of the total market share for short-haul overseas package holidays, which was indicative of a cohesive post-merger situation involving only the major players. Again, the vertical integration of the market was assessed by the Commission as a non-discriminative and homogeneous, which was characterised by a uniform cost structure. This meant that the supply-side acted below par to deny entry of goods required for competitive business (Stroux 2004:217-8). But the Commission’s approval of the 2007 mergers was based on the change in economic integration at a broader scale. The First Choice-TUI merger and the following one of Thomas Cook and MyTravel had different characteristic aspects from those occurred earlier in 1999. The Commission observed that the travel industry in the UK had undergone radical changes in areas that influenced the Commission’s decision to foreclose the proposed merger between First Choice and Airtours in 1999. In 1999, the main point of concern for the Commission was the future of the independent operators. Business integration within a closely-knit travel sector in the UK and Ireland implied that smaller agencies or operators would not get an opportunity to conduct their respective businesses at regular pricing. The all-inclusive facilities provided by the merged entities presented a problematic scenario for the smaller ventures. While the merged entities could afford to lower than operational costs as there were plenty of business areas from where they could make up for loss in particular services/operations, the smaller firms did not have that luxury. However, the changing situation in 2007 compelled the EC to reconsider their decision not to allow anymore merger. As the number of independent operators increased, financial transactions did not pose too much problem for short-haul or long-haul package holidays in the UK. The price too was kept uniform across both merged units and independent ones. Hence, chances of entry barriers and other damaging industry practices were minimised (Subiotto and Snelders 2007:41). 3. What have been the impacts these two mergers had on the UK package holiday market since 2007, and what do you see as emerging trends in this market over the next few years? Both mergers had substantial impact on the UK package holiday market. Firstly, the concept of cultural integration of services under a single roof was a new one in the package holiday system. The earlier trends used to focus on independent services such as travelling, lodging, cruise holidaymaking and so on. But the merged units accommodated for an all-inclusive range of services at a cheaper rate. This brought about a sea change in the business approach of the smaller firms too. Baum (2006) differentiates between consumer cultures in terms of ‘low-context’ people and ‘high-context’ people. The former category treats time in a manner different than what the latter category does. Be it railroad traveling or airborne one, the latter category allows for certain degree of leniency in matters of timely deliveries of services (167). Secondly, the modern concept of resort vacation is indebted to the package holiday phenomenon. The oligopolistic business model of merged enterprises favours the development of self-contained resorts with competitive edge over other means of segregated packages (Swarbrooke 1999:330). Thirdly, the mergers had a colossal impact on the quantitative growth of travel industries not just in Europe, but also in other parts of the globe. The Thomas Cook Group right now has an integrated chain of leisure and business upfront operating in more than 2000 tourist spots worldwide. Cook enjoys an apex position in Germany and North America as well. As far as the future of this emerging sector is concerned, retail travels, cruises, foreign exchange programmes, and winter holidays can be cited as among the most prospective avenues of expansion and growth (Plunkett 2005). List of References Adams, D. (2006) Management accounting for the hospitality, tourism and leisure industries: a strategic approach. Andover: Cengage Learning EMEA Baum, T. (2006) Human resource management for tourism, hospitality and leisure: an international perspective. Andover: Cengage Learning EMEA Evans, N., Campbell, D., and Stonehouse, G. (2003) Strategic management for travel and tourism. Jordan Hill, Oxford: Butterworth-Heinemann Hazendonk, N., Hendriks, M., and Venema, H. (2008) Greetings from Europe landscape & leisure. Rotterdam: 010 Publishers HighBeam Research (1998) The UK package holiday industry [online] available from [8 March 2010] Hill, C., and Jones, G. (2009) Strategic Management Theory: An Integrated Approach. Mason, Ohio: Cengage Learning Page, S., and Connell, J. (2006) Tourism: a modern synthesis. Andover: Cengage Learning EMEA Plunkett, J. W. (2005) Plunkett’s biotech & genetics industry almanac 2006. Houston, Texas: Plunkett Research, Ltd. Robinson, P. (2009) Operations Management in the Travel Industry. Oxfordshire: CABI Stroux, S. (2004) US and EC oligopoly control. Hague, the Netherlands: Kluwer Law International Subiotto, R., and Snelders, R. (2008) Antitrust Developments in Europe 2007. Hague, the Netherlands: Kluwer Law International Swarbrooke, J. (1999) Sustainable tourism management. Oxfordshire: CABI Thomas Cook (n. d.) Thomas Cook History [online] available from [8 March 2010] Read More