Tour operators forced into heavy discounting as boom time ends

The Iraq war and the SARS scare, combined with more competition from airlines and internet companies, have taken a toll, writes Gretchen Friemann

The Iraq war and SARS crisis will take their toll on tour operators' profits this year as late bookings forced the industry into some of the heaviest discounting in four years.

Although package holiday sales have recovered for the months of July and August, greater competition from commercial airlines and Internet travel companies like Lastminute.com have helped to shrink the industry's growth figures to 3 per cent compared to over 10 per cent last year.

According to Mr Eamonn Quinn, marketing manager for Panorama and Air Tours Ireland, around 1.1 million people will have taken a package holiday this year compared to a million last year. He said: "This shows clearly that growth in the market is relatively stagnant. But since we've had phenomenal growth over the last five years, it's not surprising we're seeing a slowdown now. Since 1996 the market size has more than doubled and that level of high growth is unsustainable."

However, the combined impact of the Iraq war and the SARS scare forced many operators to slash prices by up to 20 per cent through February, March and April in a bid to fill flights.

Ms Niamh Hayes, marketing manger for Budget Travel, the Republic's largest package holiday company, described the discounting this year as "exceptional" and said that booking trends were significantly different from the last four years.

"Most people this year left it until quite late to book a holiday because of the Iraq war and SARS and so there was more discounting this year in terms of special offers than normal," she said.

She added that the reductions will hit profits but cautioned that the season end was not until the end of October. "We expect the strong sales experienced in the last few months to recover most of the ground that was lost earlier," she said.

Ms Hayes estimates Budget Travel's volumes will grow by 2 per cent this year compared to around 8 per cent last year. The company, which is owned by German travel giant TUI AG, claims to have 42 per cent of the summer packageholiday market and 37 per cent of the overall market.

But it's not just the large tour operators that have suffered fallout from the Iraq and SARS crises. Irish-owned Sunway Travel, which has a 5 per cent market share, anticipates its profits will also be marginally lower this year on the back of the seasonal discounting.

Managing director Ms Tanya Airey said the losses would have been larger if it had not increased this year's capacity. She said: "If we had sold the same number of seats at this year's discount prices then we would have taken a bigger hit, but because we have boosted our capacity we expect less of an impact on our profit margins."

As well as leaving holidays to the last minute, consumers are also reluctant to splash out on expensive accommodation. According to Ms Airey there was little evidence this year of the extravagant spending levels during the Celtic Tiger days.

She said: "We've really noticed that people don't want to spend as much on their holiday this year. Instead of paying out for luxury four or five-star hotels as they have done for the last three or four years, they're now booking three-star accommodation."

When the company accounts are finally tallied, many tour operators may remember 2003 as the end of an extraordinary era during which it became the norm for Irish families to enjoy at least two holidays a year.

But the continuing economic woes and increased competition means few companies will enjoy such a sustained period of growth.

Mr Damien Mooney, managing director of Falcon/JWT tours, which is owned by UK travel company First Choice and listed on the FTSE Mid 250, said family bookings were still "extremely strong" but he admitted the market "showed signs of pegging out".

The company, which claims around 30 per cent market share, is now looking to regional areas to boost growth with new operations out of Knock airport commencing next year.

Privately, many industry players admit the market has hit a ceiling and that the incursion of commercial airlines and discount internet travel companies like Lastminute.com, present a huge threat to the industry.

As more consumers use the internet to book holidays or flights rather than travel agents, tour operators are now in direct competition with commercial airlines like Ryanair and Aer Lingus.

Recently the State airline added the traditional package holiday destination of Tenerife to its schedule, a move that angered some tour operators.

One manger claimed the airline had turned its back on an industry that had once pulled it out of an economic hole.

He said: "We booked Aer Lingus planes when they were languishing on the runway and now they are putting themselves in direct competition with us. It's making our job harder but we'll have to respond aggressively and market our cheaper prices properly."

However, the Republic's more moderate growth levels in the package holiday market may also be part of a global malaise.

Parent companies of the Republic's three major tour operators are all in financial difficulty with TUI, the world's largest operator, culling staff and First Choice still struggling to post a profit.

Half-year losses at the embattled UK operator MyTravel, owner of Panorama and Air Tours, slumped to £282.7 million at the end of March, from £150.2 million a year earlier. Turnover was down 4.6 per cent to £1.6 billion. The company has agreed a refinancing deal with its banks extending £1.3 billion worth of credits until May 2006.