DOES VERTICAL INTEGRATION MATTER IN TRAVEL ANY MORE?

DOES VERTICAL INTEGRATION MATTER IN TRAVEL ANY MORE?

I was recently asked to compare the prospects for On the Beach vs TUI. It’s a very interesting question as both their share prices dived recently following the mini-budget and weakening of the Pound / strengthening of the Dollar and there have been lots of capacity announcement recently for 2023.

During my career I’ve worked at a senior executive at BA, TUI and Kuoni, which are all pretty mainstream operations. When I was first at TUI the orthodoxy was that being vertically integrated in travel agency, tour operating, airlines and hotels was a huge competitive advantage. Then along came the internet and low cost carriers and the fast growth travel companies were low cost airlines, and OTAs like Expedia who had few assets but great technology.

With the collapse of Thomas Cook Group just ahead of Covid, TUI is the last of the great legacy vertically integrated travel groups, and there is a new competitive array facing them. And the distinction between airline and tour operator is definitely blurring, as if you look at Jet2, easyJet, British Airways and Ryanair they all have major tour operations now offering flexible packages, so essentially much the same model as TUI.

TUI has invested over the years in exclusive resort complexes targeted to specific niches, and also in all-inclusives, so they have some differentiation in their hotel end. And it is hard for smaller companies to emulate these exclusive products as it takes scale and many years’ investment to refine and establish them. By contrast most of the beach operators are still dependent on commodity hotel stock, where the sole differentiator is price.

So what about the future of non-vertically integrated players like Kuoni, Expedia, OnTheBeach or Booking.com, who don’t control their own planes or hotels? Given that the big players have all invested in technology now, do they still have competitive advantages?

Well although its growth has been much slower in recent years, Expedia clearly does. Its technology investment is vast and its overall scale is also vast, so it is difficult to ignore them if they come knocking on the door wanting a deal. But even they are looking for new revenue models and examining membership as a source of income instead of pure transactions now, as essentially what they still have the same commodity flights and hotels as their competitors, and are competing with their own suppliers selling direct as well.

So how well the other non-integrated companies fare largely comes down to whether control of flying and hotels is a competitive advantage or a burden. That is largely an issue of supply and demand. In an over-supplied market, being nimble is great as you are not tied to anything and you can pick and choose the best deals, whereas vertically integrated groups are largely tied to specific suppliers and contracts, have lots of assets to service, and large debts to serve if there is a sudden downturn.

But if supply of air seats and hotel beds becomes tight – as indeed it did over the summer post Covid, then controlling your own flights and hotels is a massive advantage and people without secure supply can be left out in the cold.

We all anticipate an extended economic slowdown post Covid, especially with a war raging in Europe - although last year this was largely offset by pent-up demand from people who had been unable to travel for two years due to lockdown. So in the mass-market the real question is what will happen with supply and demand for 2023 onwards?

I see that easyJet, Jet2 and TUI are all modestly raising capacity for 2023. So whether the non-integrated players do well largely depends on whether they get their calculations right and keep supply and demand relatively tight, or whether they bring on too much capacity leaving plenty of room for nimble non-integrated players. That is something that’s hard to predict, except to say that during my career in travel people have very seldom got the supply/demand balance right for more than one year in a row…..

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