Challenges circle overhead for tour operator

When Eugene Corcoran took a summer job in the post room of Sunbound Holidays in 1973, all that was on his mind was earning a few bob. Little did he realise that, more than 30 years later, he would still be working in the travel business.

It's been a long and not always regular progression from the post room to the executive suite but Mr Corcoran now heads Budget Travel, Ireland's largest tour operator.

Boasting a 40 per cent share, the company founded by Gillian Bowler sold around 400,000 holidays to Irish travellers last year.

Now part of the German tourism giant TUI Budget's boss sees a strong future for the travel industry as long as it can overcome a new generation of challenges.

Chief among these is the emergence of low-cost airlines as mainstream competitors. "The challenges are really brought about by technology - the internet and the use of this technology by Aer Lingus and Ryanair," he says in his office at the company's bustling Baggot Street office.

"They are encroaching on what previously was our space. Three years ago, Aer Lingus would never have flown to Malaga, Palma or similar destinations. Now, between Ryanair and Aer Lingus, there are probably somewhere in the region of 700,000 seats available from Dublin and Cork to these traditional holiday airports."

When measured against an existing package holiday market of around one million, that gives some indication of the scale of the challenge from the airlines. "When you get what are effectively two new operators coming in and providing services to traditional holiday destinations and adding three-quarters to capacity again, then something has to give."

What has given has been profit margins. Results from Budget's parent group show that operating margins in the Irish operation fell almost 24 per cent in 2003. That led to a fall in pre-tax profits from TUI's Irish business, of which Budget is the main element, despite a rise in sales.

Word around the industry indicates that 2004 was little better.

One of the secrets of the success of the airlines has been the focus on costs - including commission. Travel agents receive little or nothing in the way of commission for selling flights; tour operators, on the other hand, have been paying 10 per cent on every holiday sold.

"The choice available to the consumer is improving all the time but the price the consumer can get and is willing to pay has dropped somewhat as their options increase," says Mr Corcoran. "We decided we had to take action."

A key element of that action has been to halve the commission paid to travel agents from the start of this month.

The move, announced last October, provoked a stream of protest from travel agents who accused Budget of undermining their livelihoods.

Mr Corcoran insists that is not so. "We have had to look at all our costs, from paper clips to aeroplanes. Obviously, commission is a big chunk of our costs, you can't get away from that.

"It's not just that the agents are an easy target and we don't care about them. We didn't just reduce commission to put the money into our pocket. It was to change the product to make it more attractive pricewise to the consumer and compete with the airlines who are paying 0 or 1 per cent commission."

Rival operators have refused to follow Budget's lead, though Mr Corcoran remains confident that it is simply a matter of time before they, too, restructure payments to agents.

In the meantime, threatened with a boycott by some agents in the crucial January period when up to half of all package holidays will be sold, Budget has gone on the offensive. It is investing €1 million in a multimedia campaign to urge people to consider the Budget option where travel agents ignore it or even refuse to stock the company's brochures

"For 2005, we have simply brought our prices down without affecting the quality of our product," Mr Corcoran says. "We have passed on all the benefits of all our cost-saving activity - and not just the commission cuts.

"There is no growth in margins so it is a good news story for the consumer."

Mr Corcoran is pinning his hopes that those prices and consumer demand will prevent agents from ignoring the market's leading player.

He says that while the move on commissions will hurt, well-managed travel agencies will be able to live with it. "The good guys can, the slick guys who have invested in their business, trained their staff and got the technology right, I think they can survive."

However, he acknowledges that this may mean the increasing prevalence of professional fees or service charges from agents to travellers looking for advice.

Despite the rise of the self-packaged holiday driven by the the internet and the availability of low-cost flights, Mr Corcoran is bullish about the prospects for the tour operators.

"I think tour operators offer good quality, very good service and extremely good value," he says.

"My honest belief is that by the time you have spent hours surfing through websites, booking accommodation, getting there and paying for things like taxi transfers, you are not going to save much money, if any at all, and you have spent a long time doing it."

He also points to the customer support from reps on site when things go wrong on holiday or the prospect of fending for yourself if your airline goes bust, as several have done recently.

Budget has taken to the air in its battle with the airlines, setting up a charter operation, Budget Air, offering the flexibility of a low-cost carrier and operating to Malaga, Alicante, Farò, Barcelona, Paris and Nice. As part of the new attention to costs, bookings can be made only through the internet.

The internet forms a fast-growing sales channel for the company and has recently been upgraded. However, Budget has not given up on traditional sales channels. It operates 28 stores around the State and still sees some limited room for expansion there. It also runs a telephone sales operation though half of all sales still come from travel agents.

One challenge the company will not have to face is the backlash from the tsunami that has ravaged large parts of south-east Asia. While Budget was the first Irish operator to run charters to Thailand, it no longer does so and may even benefit as travellers shy away from exotic long-haul destinations and stick with Mediterranean sun, sand and sea - the bread and butter of what Mr Corcoran sees as a vibrant Budget business.