War and recession have hit the UK's four giant travel firms hard - yet the minnows in the industry are thriving. Stephen Cook reports on how the big boys are acquiring, and aping, their tiny rivals to retain their market share.
At one extreme you have MyTravel, the country's second-largest package holiday operator, struggling to re-schedule debts of pounds 500 million and reduce fixed assets such as planes and hotels. It had problems even before 9/11, followed all too soon by the Bali bombing last year, the war in Iraq and Sars. All the mass travel industry needs now is a plague of frogs.
At the other extreme, you have Cedarberg, a small company founded eight years ago that specialises in tailor-made touring holidays in South Africa.
Boosted by the devaluation of the rand, it has sailed through the difficulties of the past couple of years. Until the Iraq war began, the value of its 2003 bookings was up by 90% on the previous year. 'We are now keeping pace with last year, and I'm happy with that,' says Ginny Fenton, Cedarberg's managing director.
So it's a tale of two sectors in the British travel industry. MyTravel (formerly Airtours), Tui UK (formerly Thomson), Thomas Cook and First Choice, the so-called big four that 10 years ago seemed set to sweep all before them, now look like lumbering, wounded giants. Dozens of small companies such as Cedarberg, Greek specialist Laskarina, Explore Worldwide and Inntravel are the fleet-footed gazelles: flexible, enterprising, customer-focused. Once again, it seems, small is beautiful.
Phil Davies, editor of Travel Trade Gazette, says the model used by the big companies, with their own travel agents, aircraft and hotel interests, has not changed much over the past 20 years: one- or two-week package holidays biased heavily towards the Mediterranean, the Caribbean or Florida.
'But consumers have moved on,' he says. 'They're not so interested in fly-and-flop holidays, staying in tower-block hotels and sitting on the beach.
'Smaller companies have been able to react to that change in demand because they're lighter on their feet and they're not encumbered by their own aircraft or the need to sell on volume. They use scheduled flights and small hotels. They're more imaginative, more bespoke, and can sell at a higher margin - adventure holidays, riding holidays, walking holidays, opera holidays.
'And while all this was developing, the no-frills airlines arrived out of left field, offering low-cost flights to the places that the traditional tour operators regarded as their bread and butter. Increasingly, people can book their own flights and create their own packages with hotels and car hire. So the low-cost airlines have also made the big companies take notice and start to become more flexible.'
Davies compares the situation in the travel industry to the relationship in food shopping between the big out-of-town supermarkets and the small high street specialist bakers or delicatessens that have enjoyed a renaissance recently. The superstores aren't going to disappear - not least because they're cheaper - but they're having to watch and sometimes emulate the specialists in order to protect their market share.
In the same way, the mass travel operators aren't going to go away. But their share in the market is sliding, and they're being forced to take a leaf out of the independents' book: offering more flexible travel arrangements, more activities and entertainment during the holiday, and upgrading hotel rooms. These touches help create the brand loyalty that they tend to lack but which the independents manage to create by the bucketful.
One way the giants have tried to change is by buying up small firms that serve niche markets. The Mediterranean villas specialist Simply Travel has been bought by Thomson, along with walking-holiday outfit Headwater; the long-haul specialist Hayes & Jarvis was taken over by First Choice; and Flying Colours, operator of Club 18-30, was acquired by Thomas Cook.
Some of the big four have also been working hard at diversifying their existing brands. The shift towards catering for niche markets has been pronounced in the case of First Choice, which reported at its annual meeting earlier this year that more than half of its pounds 76 million operating profit came from higher-margin specialist holidays such as sailing, trekking and golfing. It also reported that it had shelved some of its more traditional holidays and was keeping several aircraft in mothballs this year.
The success of such diversification is a moot point. In a customer satisfaction survey of 70 holiday companies this year, Holiday Which? found that Simply Travel had nosedived from 91% to 69% in the three years since it was taken over by Tui UK. Other former independents, such as Magic Travel Group (also Tui) and Panorama (MyTravel), had also scored less after what the survey called 'the kiss of death' from the titans.
Holiday Which? was merciless in its conclusions, which put small, independent companies in the top seven places. 'You have a far better chance of a happy holiday with the the small, independent tour operators than with the big companies. Once again, the big four operators' performance plumbs the depths.'
The titans retorted that the survey was comparing apples to pears: many of the small companies getting high-satisfaction scores were more exclusive and expensive than the mass brands - so what would you expect? Thomas Cook pointed out that the top-rated Laskarina carried only 10,000 passengers a year, whereas it carried 3.5 million.
The idea that everyone is going to turn to the chic independents is a non-starter, for cost reasons alone. From the upmarket to the cheap-and-cheerful, about 21 million packet holidays with a value of about pounds 13 billion are sold in the UK each year. About three-quarters of them are sold by companies in the big four travel groups, which brings them 51% of that pounds 13 billion. Even so, that percentage is something like two points down on a year ago, which represents a substantial slice of business.
So most people in the mass travel industry seem to be gritting their teeth, hoping to make the best of meagre pickings this year, trusting that the plague of frogs won't happen and looking forward to better times.
A booking slump of more than 20% in the months before the war in Iraq led to price cuts that had the whiff of panic about them: seven nights in Ibiza for pounds 99, for example.
For the Cassandras of the industry, it's got to get worse before it gets better. Noel Josephides, managing director of the independent operator Sunvil, believes there are just too many holidays on the market and everything is being sold too cheaply. 'It has conditioned consumers into expecting something for nothing, and it will be difficult to wean them from that until the supply is reduced and they're forced to pay more.
'The only way balance will be restored is by a major collapse, or several medium-sized ones,' he adds. 'You need to take three to four million airline seats out of the market, and sooner or later it will happen. We need to clear the decks, or the industry will lurch from one cash crisis to another. Only something drastic will do it.'
But he isn't talking about the likes of Sunvil and Cedarberg, of course.
'The smaller independents live in a kind of cocoon,' he says. 'They're mostly high-margin, low-volume operations. They don't have to fly planes or honour charter contracts. Their formula is very attractive, but in the overall scale of things, you can't really call them a significant part of the market.' l
DOWNSIZING TO EARTH
A couple of years ago, Glen Donovan had an unusual business idea: He dumped 80% of his clients. Then, last year, he took his telephone number out of the directory. The results have been spectacular: Turnover has doubled to pounds 3 million, and business has never been better. Welcome to Earth, set up 12 years ago, and now one of the world's most exclusive travel agencies. Think of 10 rich and famous people, and Donovan says about half will have used his company:
'80% of our turnover is generated by about 50 people. We have 150 regular clients, and a database of 250. We sell places we like to people we like. They're wealthy, intelligent people, and we know their tastes. It's a rarefied world - we don't really have competitors.'
So extremely small is beautiful - so long as your customers are extremely rich. Earth's secret, reveals Donovan, is up-to-date, definite and reliable information about the newest, best, most exclusive destinations. Ok, so what's his best hotel? 'The Perivolas (Traditional Houses) on the Greek Island of Santorini. Only 16 rooms. Best view in Europe.'