Structural Changes in the German Travel Market – Part 1: Tour Operator

Major structural changes will challenge the tourism industry and its players within the next five years. In the context of the comprehensive market study “Who wins? Who loses? An in-depth analysis of structural changes in the German travel market, Dr. Fried & Partner examined the impact of structural changes in the industry on different market participants. The findings will be considered in the coming weeks, differentiated by market participants. This week starting with the focus on tour operators:

Thesis 1: Intensive competition hinders future investments

Thesis 2: Market growth skips classic tour operator

Thesis 3: Value chain logic of tour operators changes permanently

Thesis 4: Volatility in the tour operator market increases massively as a result of the shift in value

Thesis 1: Intensive competition hinders future investments

The tour operator market is subject to strong competitive pressure, which is mainly characterized by the following factors:

High price transparency

Limited perceived differentiation approaches on the supply side

Low market entry barriers for dynamic producers without risk taking

Fragmented market structure

International distribution platforms

These factors and the resulting competitive pressure have a negative impact on safeguarding the future return on sales. As a consequence, only those in the market who manage to avoid competition remain in the market. For example, the realization of differentiation approaches (for example in the form of an exclusive range of services) or the adaptation of business models (for example by value shifts) offer the chance to avoid comparability. Increased opportunities to further exist on the market have those participants who manage to optimally manage their costs, thereby increasing their return. Cost leadership can, for instance, be achieved with a high degree of digitalization or automation.

Conclusion:

Due to decreasing margins, traditional tour operators have less and less opportunity to invest in the future and to deliver long-term value-added products for their customers.

Thesis 2: Market growth skips the classic tour operator

A holistic view of the travel market makes this clear:

The absolute market share of TOP 3 tour operators is decreasing

The overall travel market is growing faster than the classic tour operator market

The growth of the travel market is mainly driven by investments in individual markets (cruise, flight, hotel only)

It is questionable whether the growth of the large owner-driven tour operators can continue to be based on lean cost structures (low investment in IT) and “below-average” return expectations.

If we assume a fundamentally stagnating German tour operator market, medium-to-long-term growth at the company level can be achieved through consolidation, as the developments in European market show. Thus, according to the English or Scandinavian example, German outbound tourism could be strengthened economically through mergers or build up capital. Strategic investments are most likely to be made by buying up medium-sized or specialized market participants.

Conclusion:

An improvement in tour operator profitability is urgently needed. Strategic consolidation of the major organizers is to be expected by acquisition of medium and specialized market participants.

Thesis 3: Value creation logic of tour operators changes permanently

High levels of competition, price transparency and low margins prompt tour operators to look for alternatives to shift value in the context of increasingly vertically integrated tour operator models:

Integrated Tour Operator Models

Conclusion:

It is questionable whether the classic tour operator will remain in the medium term regarding the pressure on margins. In any case, the future is determined by further developed tour operator models.

Thesis 4: Volatility in the market of tour operators increases massively due to relocation of value creation

Especially in the asset models, even “low” sales changes have an above-average positive or negative return effect, due to leverage.

While assets are generally a great way to realize growth potential, they are also associated with high risk. Asset models enable above-average high returns at high capacity utilization. Due to the prevailing cost structure, however, this translates directly into the opposite with poor utilization. Even small market losses in important source markets can therefore have an above-average impact on the total return if the demand decreases cannot be absorbed in other markets. In addition, a significant reversal of the business model generally requires a high level of design and management effort and is associated with high administrative costs. For the industry, the challenge is the accumulated risk of these volatile business models.

Conclusion:

With the current shift in value creation, the risk for the tour operator model is increasing.