Impressed by his bargain week in Ibiza, Simon Calder discovered how these special deals are done
One month from today, join me in the queue for a pounds 99 holiday. The best guess inside the travel industry is that the summer 1996 brochures will appear on 29 August. I bet those plump brochures from Thomson, Airtours and First Choice bear the magic phrase "Holidays from pounds 99". Give or take the odd supplement, you really can get a week in the Med for under pounds 100.

The thesis I set out to prove last August was the non-existence of holidays at that elusive "from" price. Although the holiday market is often awash with last-minute bargains at pounds 99 or even lower, I suspected that booking a cheap holiday in named accommodation was a near-impossibility. But by 9.15am on 10 August, in my local branch of Thomas Cook, Dennis had proved me wrong.

He delved into TOPS, the Thomson reservation system, and hoisted out a holiday. Ibiza, May bank holiday, one week at the Portisol Apartments, pounds 99 including flights from Gatwick. If, that is, you bring your mates. If not: "That pounds 99 holiday will be pounds 113, sir." Unless I was prepared to share a one-bedroom apartment with three other adults, I had to pay an extra pounds 14.

The excess could have been eradicated by taking up the discount offer at Thomas Cook, knocking 12 per cent off the cost. But the price of this was to take out overpriced travel insurance. Like anyone who takes two or more foreign trips a year should do, I have an annual policy. (For details of the Independent's scheme, call 0800 551881.)

I signed up and looked ahead nine months to my place in the sun. This was not a "book late and we'll cram you into whatever space is available" cheapie; I knew exactly when I would be travelling and where I would be staying. But how can a week's holiday cost less than the average wage for two days' work, or BT's profit every second? I set out to discover where the money goes. The arithmetic below shows how profitable - for us - a loss-leader can be.

Thomson has been cagey about the costings below, but others say a loss of nearly pounds 50 seems likely. Loss-leadership is an expensive business. "All industries use marketing gimmicks to stimulate business", says Paul Chandler of the Travel Club of Upminster. "But while selling five per cent of capacity at a loss is bearable, I believe we're seeing up to 20 per cent of holidays being sold below cost." Thomson will argue that by taking people at bargain- basement prices, a company can spread its costs. "Not everyone wants to go away in May, so we have to induce them," says Martin Brackenbury of Thomson. "We all make our money in July and August." The same holiday next week, costs close to pounds 300. We off-season tourists are subsidised (thanks very much) by people obliged to travel during school holidays.

Except that this year, people are not behaving as they should. As I found at Gatwick this week (see panel), many people are waiting until the last minute. Alan Cornish, of the direct-sell company Corona Holidays, says the big operators have brought problems upon themselves: "It is the culmination of years of frenzied pursuit of market share at almost any price."

The frenzy is likely to be undiminished in 1996. You have a choice: be first in the travel agency on 29 August, when some or all of Thomson, Airtours and First Choice put next year's summer holidays on sale, or wait until the last minute to catch a bargain. Given the silly prices, you can probably afford to do both.

As the sun slipped into the sea beneath my balcony, I fretted a little about our view of the world. I chose a place in the sunset purely on the basis of price. Holidays these days are commodities: your pounds 99 buys the right to a week of sunbeds and cheap beer, without much reference to the location. Ibiza is a delightful island, and tourism is the cash crop that keeps it going. But if, in a month's time, the pounds 99 deal takes me to Portugal or a Greek island, I shall not hesitate to forsake Ibiza.

The trip was such good value I urged some friends to go there. Rob and Linda sent a postcard: "You're right, an excellent choice, especially for pounds 99." Then, the pay-off: "Of course, we sat next to the bastard who only paid pounds 49!"

When did passengers on Britannia Airways flight BY 281 to Rhodes book?






There was twelve per cent off when the brochures came out in August. That was why we booked so early. We paid pounds 650 each for a fortnight.

We booked in February; we were looking at Crete first, but then we discovered that we could save pounds 100 each by going to Rhodes.

We booked last Thursday. We initially wanted to go to Portugal, but there weren't any holidays flying out today. We paid about pounds 270 each.

I booked this morning in Reading, and got quite a good deal. Two travel agents came up with the offer of this Thomson holiday, price pounds 179.

Brochure: pounds 3.60

To lead us into holiday temptation, tour operators produce ever more colourful brochures showing implausibly blue skies and white sand. With all that ultramarine ink, the cost of printing the brochure I used was 60 pence - but by the time people have trawled through the travel agents' shelves, the industry reckons to get only one booking from every 10 brochures it gives away. Thomson says it sold 450,000 holidays from 2.7 million brochures, or one for every six glossy hand-outs.

Tax: pounds 5

The Government gets its cut from Air Passenger Duty. This is unabashed taxation - it is not spent on improving airport facilities. If I had chosen a non-EU destination such as Cyprus, Malta or Turkey, the tax would double.

VAT is levied on many package holidays, but is calculated in a curious manner. Operators pay tax on half their gross profit margin, which translates to about pounds 5 on the average pounds 400 holiday. On a real cheapie, where the profit potential is zero, the tax does not apply - indeed, Thomson qualifies for a rebate.

On New Year's Day 1996, VAT is set to double for some holidaymakers when new Tour Operators Margin Scheme rules come into effect. A "vertically integrated" company such as Thomson, which owns an airline, may escape; the Association of Independent Tour Operators says its members' prices will be unfairly raised.

Travel agent's commission: pounds 11.30

Thomson, Britain's biggest tour operator, has so much muscle that it does not need to give more than the standard 10 per cent mark-up to the travel agent. Discount offers of 10, 12 or 15 per cent are financed mainly from the travel agent selling overpriced insurance (a practice which the Office of Fair Trading is investigating). For its pounds 11.30, Thomas Cook has to send out invoices and tickets, pay wages and maintain expensive premises in London. The agency offered to sell me Spanish currency, for plenty of commission, but I opted to bargain for my pounds 100 spending money on the open market and gained an extra 1,000 pesetas.

Consumer protection bond: pounds 1

The number of holiday companies which have turned up their tour-operating toes is alarming: Clarkson, Laker and Intasun are merely the biggest names in a series of financial disasters going back to the Sixties. To ensure people get their money back in the event of a collapse, Thomson posts a bond with the CAA representing 10 per cent of the holiday price - about pounds 11 in my case. Most firms negotiate cover with insurance companies, and a market leader such as Thomson can probably keep the cost to below 1 per cent of the holiday price.

Airport charges: pounds 6.12

The precise amount an airport charges per passenger depends on location, date and time. For a Gatwick departure in summer, Thomson pays pounds 9.57 for a "day flight" (5.30am to 4pm) but only pounds 2.12 at night - the theory being that we will spend plenty in the shopping mall before the flight.

Flight: pounds 90 (estimated seat-only price, Gatwick-Ibiza in May)

Britannia Airwaysis wholly owned by Thomson, so precise pricings are hard to compute. But pounds 90 is a reasonable figure for a flight at the least social of times. One way the travel industry can get prices so low is by squeezing every last drop of use out of aircraft. By slotting in an extra flight leaving Gatwick at 11pm and arriving back at 4am, aircraft and crews can work at maximum efficiency. The consequences of mechanical problems are magnified - there is little slack to make up delays. The upside is that you can fly to the Mediterranean and back for less than the normal Manchester-London one-way fare.

The rep: pounds 2 (1 per cent of her estimated weekly wage of pounds 200)

If the idea of greeting 100 fractious holidaymakers at Ibiza airport at 2am does not appeal, do not apply for Fiona's job. She is a trained teacher, unable to find work in education, and so switched to a career more testing even than controlling a consignment of five-year-olds.

Fiona has to meet everyone upon arrival and then be available for emergencies 24 hours a day. She lives at the resort and earns poor wages. Her earnings can be bumped up with commission on the excursions she sells, which helps to explain why these trips feature so heavily at the welcome meeting. (The drinks at the welcome meeting, incidentally, are likely to be provided free by the apartment owner as part of his deal with Thomson.)

Bus transfers: pounds 3

You might imagine that skinflint tourists like me would have been banished to the nastiest location possible, just at the end of the airport runway. You would be wrong. I was billeted at the delightful resort of Portinatx - it is as far as you can get from the airport and still be in Ibiza.

Thomson negotiates a season-long agreement with coach operators for transfers, but a good comparison is with the local bus service on the 20-mile run - this seems to turn a profit by packing 50 people on and charging them pounds 1.50 each way.

Accommodation: pounds 40 (incremental cost of an extra week in May)

Rates at the Portisol were negotiated more than a year ago. If a tour operator wants to launch a brochure in August, all the deals need to be sewn up several months before. Everyone in the travel industry has to guess what capacity will be needed and what prices to charge, at least 12 months in advance. They frequently get it wrong, which is why transatlantic flights are painfully scarce this summer, yet you can get a cut-price Mediterranean holiday at a moment's notice.

A rock-bottom package need not consign you to the lowest-grade accommodation. The Portisol is the tallest of the cluster of low-rise apartment blocks in Portinatx, and the view is stunning: across the elegant arc of the bay, the brochure-blue sea is dotted with sailing boats. There are many worse ways to spend the day than splashing around and looking forward to twilight.

The apartment faces west, straight into a week of dreamily long sunsets. It has a perfectly adequate kitchen, which means you spend next to nothing on eating and drinking.

If pounds 40 per person strikes you as astoundingly low for a week's rent anywhere, it is. The owner makes little return on his investment. Any profits come from the bar and the on-site supermarket. Judging by the behaviour of the Brits so far, summer 1995 will not make him a wealthy man.

Total cost to Thomson: pounds 162.02, ie a loss of pounds 49.