Holiday firms can't escape price wars

Pressures to discount will keep margins tight for tour operators, writes Patrick Tooher

IT IS the first day of August. The N-registered Mercedes of your dreams sits in the window of a car showroom, tantalisingly out of reach and apparently out of your price range. On further inquiry, however, the dealer makes you an irresistible offer. Instead of asking for the full list price, the Merc is yours, on the road, at 20 per cent off.

Even for August, the height of the silly season, such a proposition would sound too good to be true. Yet this bizarre practice of flogging off new stock at substantial discounts, during peak selling periods, is rife within the package holiday industry as tour operators - desperate to grab as large a share of the summer market as possible - bring out their holiday brochures earlier and earlier.

In the past, brochures for the next summer were launched in the autumn. Now they appear as early as July, forcing travel agents to cope with selling three seasons simultaneously - summer, winter and the following summer.

Price cutting begins almost as soon as the brochures arrive. By January, the busiest month for holiday bookings, discounts had reached up to 20 per cent, yet the number of holidays sold that month fell by 7 per cent. The price war hotted up again last week when Thomas Cook, one of the leading travel agents, offered up to 40 per cent off trips to five European sun spots.

Defying normal business rules is not unusual for the holiday industry. In sharp contrast to the rest of the retail sector, UK sales of package holidays have grown by 15 per cent in the past six years as consumers escaped recession for sun, sea and sand.

But the pressures on discretionary spending are finally beginning to tell, as holiday-makers feel the full impact of rising interest rates, higher levels of taxation and growing concerns about job security.

Lunn Poly, Britain's biggest travel agent and part of the Thomson group, forecasts the volume of overseas package holidays sold in the UK this year will be "a record" 10 million, but that represents an increase of just 1 per cent on last year's 9.9 million, while the average cost of a package holiday this year will rise by pounds 10 to pounds 420. Revamped tour operator First Choice, the former Owners Abroad group, is more pessimistic, predicting a flat summer holiday market.

And last week, Eurocamp, the tour operator specialising in camping holidays, warned that customers were deferring their bookings until later in the season. Its share price fell by 18 per cent in response.

A recent report by Mintel, the market research group, into British lifestyles found that the main annual holiday was the most postponed purchase last year. Worst hit by future personal economic uncertainty were families with children and young, single pre-family groups, according to the report. The more affluent "empty nest" households (double income, no kids) and older post-family groups tended to defer the purchase of the second holiday.

Mintel argued that, despite growth in the economy, fears of unemployment and an increase in part-time work as employers demanded more flexible work patterns, including a shorter working week and short-term contracts, had made people less willing to enter into long-term financial commitments.

Few in the holiday industry argue with these trends. "People do not have the security of tenure they thought they had," admits a well-placed source at one of Britain's leading tour operators. "Customers are drawing in their horns. We are fraught with a number of challenges, and there are no easy answers."

Another such challenge is increasing customer sophistication. Why book a holiday in August or January when you can get it cheaper in June?

But selling holidays well past their sell-by date is bad news for the holiday industry. Early pre-payment of holidays ensures strong cash flow for tour operators. But the later the bookings, the less interest can be earned on deposits and the less predictable the revenue stream. "Margins on holidays are thin at the best of times," says the industry source. "But with late sales, they are nil or negative."

Getting away from it all remains the second most important spending priority, after increasing short-term savings, and Mintel forecasts total spending on holidays will rise by 2 per cent in real terms between 1994 and 1999. But discounting will remain the big tactic to encourage early bookings and clear the unsold holiday stock.