lecture notes 9

LECTURE NOTES 9

THE TRAVEL TRADE

A. THE TOURISM PRODUCT MARKET

The tourism product market is composed of goods and services combined into diverse tourism packages.

A.1 Definition of tourism/travel packagesTravel packages are organized trips following predetermined and detailed programs involving several tourism services. The packages are sold in advance at a fixed price.

Preliminary organizationTourism products are developed and established well before client demand is actually expressed. The tour operator will choose the destination, the means of transport, the accommodation, catering services, the level of escorting and guidance included in the package before offering the product to the public.

Variety of services providedAt the most basic level, the services provided may just consist of the holiday stay. Most complete products offer several other services. These include return transport, escorting, transfers, accommodation, provision of meals, entertainment and insurance. Certain companies offering holidays with a particular focus also provide specific services.

Fixed pricesThe price of the product is set in advance and usually payment is settled before the journey begins. For certain products (holiday clubs, mixed formulas in which only parts of the tourism components are provided) credit payment is becoming increasingly frequent.

A.2 Classification of tourism packagesThere are two basic types of tourism packages: “all-inclusive” and the “mixed formula”:1. The all inclusive package This is the traditional package in which the operator provides all the services. Products in this category include full-board holidays, organized tours and cruises.

Full-board holidays. “Full-board” holidays involve return travel arrangements and transfers, accommodation and all meals. This type of holiday has mainly been offered by hotels and resorts, although recently holiday clubs are providing similar services, including entertainment and sport facilities.

There are several variations on this type of holiday. Products are being developed offering half-board, breakfast only or the increasingly popular self-catering holidays in apartment hotels. Organized tours. Organized tours usually combine accommodation with

excursions. They can be on a FB, HB or BB basis. Certain tours are fully escorted by tour managers, while others may just include travel and

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entrance fees. Transportation during the tours is either by coach, plane or train.

Cruises. Cruises are all inclusive packages. The development of this type of tourism products is compensating for the decline in the number of sea-traveling passengers. They can cruise all year round, as the tourist season in the two major zones (Caribbean and the Mediterranean) falls at different times.

2. The mixed formula These are packages which offer transport to and from destination with other services. “Fly and drives” combine flights and hire-car at the destination. Flight + hotel packages include flights to the destination and hotel vouchers which can be used at a number of tourist resorts and sites. Many innovative products are being developed offering travel and accommodation with specialized services for special interest groups: sport holidays, cultural tours, health and spa holidays, adventure travel, incentive and conference travel etc.

A.3 Economic characteristics of tourism productsTourism products have three main economic features: inelasticity, complementarity and heterogeneity

InelasticityTourism products are inelastic because they do not adapt well to changes in short and long term demand. There cannot be stocked, meaning they are perishable. Short-term increases and falls in demand for a product will have little influence on its price. It is the long term fluctuations that affect the composition of the product and its selling price. Tourism products are dependent on existing superstructures at destinations such as hospitality facilities, transport and accommodation.

ComplementarityThe tourism product is not just one single service. It is composed of several complementary sub-products. Production of the overall service and the quality of the service is dependant on the components complementing each other. A shortcoming in one of the sub-products will undermine the final product. This remains one of the major difficulties in tourism production.

HeterogeneityThe tourism product is said to be heterogeneous because it is virtually impossible to produce two identical tourism services. There will always be a difference in quality, even if the nature of the proposed service remains constant. The heterogeneity allows the possibility of a certain amount of substitution within the different sub-products. However, the resulting product will never be exactly the same. Substituting one hotel for another, even if they are of the same category, will create a different experience and produce a different final product.

B. TRAVEL INTERMEDIARIES

B.1 Tour Wholesalers

The tour wholesaler functions as an intermediary between the supplier, also known as principal, of the tourist product and the travel agent who acts

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as the retailer. The tour wholesaler designs, prepares, promotes, and executes the sale of tour packages, buying large volumes of products from a variety of travel suppliers. These products may include air travel, accommodations, meals, entertainment, ground transportation, sightseeing tours, and special entrance fees for attractions. The products are grouped by the wholesaler to form attractive tour packages which are made available to travel agents for sale to the end consumer.

The Role of WholesalerWholesalers generate a large part of the revenues in the travel industry since purchasing in bulk increases their buying power and ability to negotiate discounts. In this respect, larger wholesalers have a leveraged advantage over their smaller competitors. The cost savings is ultimately passed to the consumer by making tour packages available at prices lower than the sum cost of all components bought separately at retail.In addition, wholesalers provide advantages to the suppliers of tourist products who enjoy the financial security of having advance sales commitments for large blocks of rooms, seats, or other products.Wholesalers make a significant contribution to the travel agent and customer alike by developing and making available an array of tour packages to satisfy different travel customer tastes and income levels (Gee, Boberg, Choy, & Makens, 1990, p. 49).

Types of WholesalersTour wholesalers can be classified in various ways including the following:• The inbound wholesaler arranges tour packages for tourists visiting the country where the wholesaler is based. Inbound wholesalers do not necessarily operate only in the country where they offer tours and some maintain sales branches in other countries.• The outbound wholesaler arranges packaged travel for tourists who wish to travel to destinations outside the country where the wholesaler is located. Unlike the inbound wholesaler, the outbound wholesaler does not usually focus on a single destination, but may offer a wide variety of packages and destinations. However, both of these wholesalers tend to cater to the needs of the mass market in order to have the necessary volume leverage.• The domestic wholesaler designs and packages tours for local residents who travel within the country where the wholesaler operates.• The specialty wholesaler centralizes its business in making tours available for special-interest groups (e.g. retirees, singles) or focuses on particular destinations, accommodations, or alternative forms of tourism of interest to adventure travelers, culture seekers, or nature enthusiasts.• The airline wholesaler can be either a subsidiary selling the seats of a particular airline or a wholesale business that has formed a brokerage relationship with an airline.• The wholesale travel agent is a travel agent who puts together customized versions of tour packages to satisfy the needs of market niches within their customer base. These travel agents such as American Express Travel Related Services and Thomas Cook Travel often assume the retail and wholesaler roles at the same time.

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Similarly, the wholesaler may sometimes act as a travel agent by operating retail outlets.• The travel clubs and incentive travel companies arrange travel packages in ways similar to the wholesalers. However, these packages do not become available for general consumption and are only offered to their individual members.

The Economics of WholesalersUnlike travel retailers which benefit from commissions, wholesalers generate their gross profits using a 20-25% markup. The markup is applied only in the ground services portion of the tour. Although 90% of wholesale packages include air transportation, in general, wholesalers do not make any profit on this part of the package. This part, which represents almost 50% of the total price of the package, generates profits that go to the travel agent in the form of commission. For the wholesaler, after the subtraction of its operating expenses, there remains an average 3% percent before-tax profit out of the total price of an all-inclusive tour.Consequently, high volumes of sales have to be reached in order for a wholesale business to be profitable. Additionally, strong sales are required in order to reach the average break-even point of the industry.More specifically, before it starts generating a profit, a wholesaler must sell as much as 85% of its packages (Coltman, 1989, pp. 326-327). In contrast to the low return-on-sales that characterizes the business, wholesalers benefit by a favorable return-on-equity ratio. This is due to the low requirements in initial investment.The travel wholesaler is not required to pay in full when booking from a supplier. For example, only a minimum deposit is necessary to secure the desired number of rooms of a hotel for a certain period. Next, the wholesaler can redeem his cash in the form of deposits and/or payments submitted to him by the travel agent when individual travelers buy the packages. It should be emphasized that while the customers pay the wholesaler for their trips in advance, the wholesaler does not usually pay off the supplier until after the trip is completed.Thus, the wholesaler can take advantage of the excess funds also called the “float,” before it actually pays the supplier in full.Despite this cash flow benefit, the wholesaler faces considerable risks as well. Factors such as changing preferences, unfavorable weather conditions, safety concerns, or political upheavals can destabilize markets and render destinations unsaleable. Moreover, when making a large number of advance reservations with a supplier, the wholesaler must enter into a sales contract for which he is bonded. Despite the inclusion of typical cancellation clauses in a contract, the wholesaler may still incur significant losses from forgone deposits and prepayments, and the closer the cancellation is to the departure date, the greater the reduction of the deposits.

Trends Affecting WholesalersIn the growing tourism market, wholesalers are likely to face increased competition coming mostly from the suppliers.

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For example, after the deregulation of the U.S. airline industry in 1978, airlines began arranging their own tours by combining their services with those of other suppliers. In addition, lower prices offered by various suppliers, such as discount airfares made available by airlines, have had an impact on the wholesale business. Lower airline ticket prices allow the option of creating a personalized tour with a total price that could be comparable to the one offered by wholesalers. Moreover, wholesalers may be affected by changes in consumer tastes as experienced travelers move away from the typical group travel that characterized the last two decades toward independent travel.In recent years, wholesalers have also been increasingly subject to lawsuits from consumers who are better educated and aware of their rights. False advertising has become a problem together with the growth of the tour business, largely attributable to the exploding demand for tours that has allowed the entrance of many new and inexperienced wholesalers.Sometimes, the claims and promises made by the advertising of wholesalers are in conflict with what the consumer ultimately receives. Other problems that wholesalers are sued for may be changes in the scheduled flights or the prices of packages or hotel rooms. Even though wholesalers might not be the only ones responsible for those changes, which can be the result of airline schedule changes, exchange rate variation, or hotel errors, they are the ones that consumers can usually hold liable.The future of the wholesale business will also be affected by the impact of the communication revolution in the travel industry. For example, information experts suggest that a good tour is one that can be booked quickly, preferably in four minutes.Inevitably, computers become mandatory for the accomplishment of this task, and the hiring of more technical personnel by wholesalers has already been observed as a result of technological changes.

B.2 Tour OperatorsIn the travel world, the term wholesaler is often used interchangeably with the term tour operator. Even though these two terms describe similar types of intermediaries, a distinction should be made in order to avoid confusion. In general, the tour operator, also referred to as ground operator, can be thought of as a tour wholesaler with a smaller scale of operations. The word operator indicates the main function of tour operators which is to “operate” or run tour packages. In other words, tour operators are responsible for the delivery of the parts of a tour as promised to the buyer of the tour. To deliver services, operators may employ their own ground equipment and facilities, such as motorcoaches and accommodations, or rent these from other tour operators or individual providers (Gee et al., 1990, p. 50).In contrast to a wholesaler who designs and offers a large number of tours, the tour operator can offer only a limited number of tours on a yearly basis.These tours in combination are referred to as the tour program. While the wholesaler will typically include transportation to and from a destination, the tour operator offers his/her services only at the destination itself. The tour operator’s defined business is to make the land arrangements at the

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destination encompassing hotel transfers, accommodations, sightseeing, prepaid admissions, and other special arrangements. Much like the wholesaler, the tour operators are free to design and offer their own packages which can be geared to all travelers. In some cases, however, operators have to comply with the specific preferences of the wholesaler interested in buying their services. In other instances, they compete with wholesalers who operate packages of their own.In recent years there has been a trend for tour operators to specialize.For example, companies might concentrate in incentive travel or others may focus on sailboat charters. Due to a progressively higher segmentation and the sizable free and independent traveler (FIT) market whose customers travel independently of a group, the need for additional specializations of tour operators has increased.

B.3 The Travel AgentTraditionally, the role of the retailer in the travel industry has been played by the travel agent. The travel agent is the final link in the consumption process, connecting the receiver (the consumer) and the source (either the supplier or the wholesaler) of various tourism goods and services.The travel agent is also the visible intermediary in the distribution chain selling transportation, accommodations, meals, activities, attractions, and other travel elements directly to the public. These products can be sold individually, in various combinations, or as tour packages to the clients. It is the responsibility of the travel agent to act on behalf of prospective travelers and understand their desires in order to satisfy them by arranging the necessary parts of the trip (Gee et al., 1990, p. 48).Legally, the travel agent is a commissioned “agent” or an authorized representative who is approved to sell the products of a company in a certain geographic area. In terms of distribution, the travel agent maintains a delicate balance between serving the client and promoting the interests of the principal the agent represents. Above all, a travel agent has to use knowledge and expertise in responsible ways to successfully plan and secure a safe and enjoyable trip. This may involve carrying out numerous detailed activities including but not limited to preparing individual itineraries, informing about travel insurance, documents, and immunization requirements, as well as giving descriptions of destinations, hotels, and local customs. The demands on the agent have increased as the product mix has expanded. Even though almost every agent can sell the products of all sorts of suppliers, there are agents who choose to specialize in particular areas, and they play many different roles.

Travel Agents as CounselorsThe retail travel agent plays an important role in promoting the efficiency and the quality of the distribution of the various travel products. To the customer, the travel agent is the means for researching, organizing, securing, and realizing a desired trip. The agent’s goal is to understand what satisfies the traveler’s needs and try to provide it. That is why the term counselor is frequently employed to describe the advising service that the agent provides.

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Due to the increasing complexity of the reservation and pricing systems, a client would have to spend substantial time and money to arrange a trip or tour individually. Alternatively, the services of a travel agent may be used which are generally offered free of charge. The travel agent is a specialist who has developed an expertise in researching and collecting large amounts of appropriate and reliable information in very little time.In order to add value to the customer’s travel experience, the agent is required to know or have access, at least, to schedules, prices, different types and qualities of accommodations, airlines, and other travel components. Moreover, the agent has to personalize the results of this knowledge to fit the specific needs of the prospective traveler.Operating as a responsible and trustworthy professional is an integral part of an agent’s mission. The travel agent’s business depends greatly on repeat customers and is severely affected by word-of-mouth. The significance of customer loyalty for the industry is indicated by the fact that approximately 85% of an agent’s clientele consists of repeat customers.

Travel Agents as Sales RepresentativesThe travel agent carries out an equally important function as a salesperson. Ultimately, this is what determines an agency’s financial condition. Most people who seek the travel agent’s advice already know what they want. Because the value-conscious consumer does not hesitate to research and shop around, agents must not only service and sell what he or she requests, but be able to close the sale as well.Maintaining a harmonious relationship between serving a client and selling the products of preferred suppliers has always been a challenge for travel agents. The deregulation of the field has allowed agents to obtain different commissions and even overrides (commission rates that increase according to the level of sales) from different suppliers.To the supplier, the retail travel agent plays a critical role in promoting and selling its products to the ultimate consumer. The agent provides three basic elements that facilitate the suppliers’ business. These include a location where information can be obtained for the suppliers’ products, an outlet where a potential customer can purchase those products, as well as a place were payments can be collected.In the U.S. and elsewhere, airline deregulation and other developments in the industry have had a dramatic effect on travel agencies. In 1995, most of the major U.S. airlines adopted a cap policy limiting commissions in order to cut costs. For example, Delta Air Lines provides travel agents a 10 percent commission on U.S. domestic tickets as long as the total commission per ticket does not exceed the amount of $50. The average commission rates for domestic air sales have declined for travel agents placing increased pressure on agencies to move larger volumes of tickets to attain the same profit. Another concern is the low-fare trend for domestic tickets. When airline price wars are in effect, fares often become so low that the money an average agent makes selling a ticket may be less than what it costs to issue it. Even though this situation is not new, it comprises a serious burden, especially in

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combination with restricted commissions. Because of the commission cap, travel agents cannot balance losses incurred in selling cheap air tickets with higher fare tickets.

B.4 Regulation of Intermediaries

Travel AgentsHistorically, travel agents have been affected by regulations, especially from the airlines which restrict the number of agents because of concern over increased competition for their own sales offices. Until 1959, a travel agency could not be established unless it had the sponsorship of an airline and the approval of two-thirds of the members of the respective domestic or international travel conference. The subsequent rapid expansion of the airline industry forced airlines to rely more heavily on travel agents to reach and service their clientele. Although there has been a relaxation of restrictions since the deregulation of the airline industry in the U.S., even today an agency has to comply to certain regulations before and during the time it is in business.In the U.S., where a travel agency is not legally obliged to be licensed in many states, certification or accreditation consists of the approval from industry conferences. A conference is a regulatory body made up of transportation companies that impose requirements in order to promote certain standards. For the U.S., there are four major conferences: (1) The Airlines Reporting Corporation (ARC) responsible for domestic tickets, (2) The International Airline Travel Agency Network (IATAN) responsible for international tickets, (3) The Cruise Line International Association (CLIA) responsible for cruises, and (4) The National Railroad Passenger Corporation responsible for domestic rail tickets (Mill, 1990, p. 321). An agency which is appointed by one group will usually receive an appointment by the rest of the conferences. Major requirements of ARC, for example, are that agencies carry a minimum bond to cover for the possibility of default and maintain a minimum cash reserve. There are also minimum experience requirements for agency management, and the agency must be accessible to the general public, actively sell tickets, and promote travel.Some states in the U.S. require a license. The license can be obtained by passing an examination given by the state licensing boards.Additionally, a city license and possibly a county license are required in order for a travel agency to be operational. Travel agents may also choose to follow the rules imposed by various trade associations which they have joined as members.The EC (European Community) Travel Directive was initiated in 1993 to eliminate differences in laws among member European states related to group or package travel. The Directive, however, does not replace national laws regarding ground travel, package holidays, tours, and tour operators and agents and leaves implementation to each state (Downes, 1993). Japan’s travel agency law is considered one of the most organized and advanced, and its travel agents are divided into three classifications: general, domestic, and sub-agency. All agencies are required to register with the Ministry of Transport and are bonded (Travel Journal, Inc., 1995, p. 185).

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Travel agents have a legal obligation to perform in a professional manner. They can be held responsible for the quality of the service they provide. The provided service has to be in accordance to the promises made to the customer and consistent with the average industry performance. Agents have to take into consideration any special factors in the destination that may influence the customer such as political stability, health care, and other conditions. According to court rulings, agents can be even held liable in the event a wholesaler goes bankrupt before the trip. The American Society of Travel Agents (ASTA) in the U.S., the Association of Canadian Travel Agents (ACTA) in Canada, the Association of British Travel Agents (ABTA) in the U.K., and the Japan Association of Travel Agents (JATA) in Japan are some of the groups or organizations which set industry standards. International organizations include the International Federation of Travel Agents (IFTA) and the World Association of Travel Agents (WATA).

WholesalersFor a new wholesaler to enter the industry, usually a local business license and compliance with governmental and airline regulations are required.Nevertheless, wholesalers may be subject to additional constraints, some of those monetary, if they choose to join certain professional associations.In the U.S., the tour operator industry is largely self-regulated, and most belong to the U.S. Tour Operators Association (USTOA). The USTOA requires an indemnity bond from its members. This goes toward the Consumer Payment Protection Program which helps refund the money to customers in case the wholesaler goes out of business.

C. PACKAGING THE TOURISM PRODUCT

Packaging tourism products involves several stages which can take several months and sometimes several years. The three main stages are:

1. Market research2. Negotiation3. Commercialization of the tourism product

1. Market research

The aim of market research is to understand and analyze the key elements associated with a particular market and its environment. Because of the specific nature of the tourism product, each market research survey should be tailor-made to the aims of the project. However, the research methodology remains the same. It analyzes the environment of the project, the characteristics of supply and demand, time schedules, controls and costs.The strategic aim of market research is to test different hypothesis so as to identify the most realistic ones. The most important research tool is the questionnaire. Surveys provide a range of information on consumer behavior towards a specific product. They reveal attitudes, reactions and prejudices towards

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destination countries. Three main questions must be addressed to gather information required from a market survey:Who should be questioned? – size of the sample to be surveyed and the sampling method to be used. What should be observed? – nature of the information. It is important to understand who is the potential clientele and to target it. The aim is to identify a potential group of customers in order to adapt products to their needs and mount an efficient promotional campaign. How should it be undertaken? – face-to-face, by telephone, trains, airports etc.

2. Negotiating contracts with different suppliers of tourism products

The product manufacturer assesses the motivation and purchasing power of a potential market by undertaking market studies. Once he is satisfied that he has enough information on the target market’s demand for tourism products, he must:

- design products that match the demand of the target market- create “packages” by negotiating the required services with suppliers

of each of the elements making up the product- finalize contracts with them

2.1. Designing the productFaced with intense international competition, the manufacturer must design his products to meet the requirements of the consumer. He must have a good knowledge of the tourist-generating market and of the quality-price ratio of the products he plans to offer

- knowledge of the marketThis is based on the body of information gathered by the market surveys. It relates to:

- the clientele – segmentation by age, professional category, area, income bracket, lifestyle, usual holiday preference

- the competition – choosing the right elements to differentiate the final product from that of competitors; having the necessary promotion and publicity superstructure available to reach the target clientele

- tourism resources at the destination area – natural resources, cultural resources, superstructure and services, entertainment and excursions

- the best quality-price ratioThe manufacturer’s strategic aim is to offer products that correspond more to consumer demand than those of his competitors.To implement this strategy, he must consider three points:

- competitiveness – the manufacturer must successfully manage a range of products catering to different market segments.

- product range – extending the product range has several benefits: it offers the consumer a wider choice of products; it contains competition by controlling a large enough slice of the market to eventually dissuade competition; it allows necessary adjustments dictated by changes in the market tastes or circumstances to the company’s

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supply; it averts commercial vulnerability to political instability, fluctuations in exchange rates and competitor actions

- strategy – extending the product range must not jeopardize the competitiveness of prices and the efficiency of management. It is therefore essential to formulate a product-range strategy. This must be flexible enough to adapt products to the changing tastes of consumers, to fluctuations in the exchange rates and to variations in the consumer purchasing-power.

2.2. Negotiating the packageThe manufacturer must negotiate with each supplier in order to be able to offer competitively priced quality products to the market place. He makes arrangements with several suppliers: transport companies, suppliers of accommodation, catering and entertainment and those providing services for certain specialized products such as cultural tourism, health tourism, MICE and so on. The tour operator must be financially strong to guarantee the operation of the product and to be in the position to pay his suppliers in advance. The manufacturer will often choose destinations in low-cost countries because of their low labor costs, low taxes, government subsidies, incentives designed to attract foreign visitors or favorable exchange rates. These destinations must however fit consumer tastes and have a good quality-price ratio. Certain tour operators avoid being too dependant on suppliers by integrating some of the services they offer. For instance, an airline company may set up a tour operator and a hotel chain (BA Holidays – top end of the market and city breaks; Italtour (Al Italia); Caravela Tours (TAP Air Portugal)). Several hotel chains and large tour operators also create subsidiary companies to provide them with the necessary services. Thomson, the largest tour operator in UK, distributes its products through its retail arm, Lunn Polly, the largest chain of travel agencies in UK, and fly their clients on their own airline, Britannia, the largest charter airline.The aim of negotiation is to reach the best competitive price for a satisfactory quality-price ratio. The selling price of the tourism product includes commissions to travel agents or other distributors, marketing costs, administration costs and the risk cost of falling short of the forecasted sales volume for the product.

2.3. Finalizing international contractsOnce negotiations have been successfully concluded, international contracts are drawn up with different service suppliers: agency contracts with travel agencies at the destination countries; contracts with hotels; charter agreements.These contracts allocate responsibilities to spread the commercial risk between suppliers and the operator. Generally, the tour operator is responsible for the package he has designed. He must pay for services he has ordered (booked), notably transport and accommodation allocations that he has not used. This risk is built into catalog prices, which are calculated on an 80-90% take-up rate.

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This is one of the biggest risk factors for tour operators. For this reason it is essential that he develops a range of very diverse products to many different destinations to compensate for any downfall due to political instability, fluctuations in the exchange rate etc, as well as bad choices of product or errors committed in product packaging.As a general rule, the elements that make up the cost of a trip in Europe can be broken down as shown in the table below:

Package tour costing example (London-Canary Islands, one week, half board, 3-star hotel)

Service High season (Euro) Low season (Euro)7 days HB/person- transfers- ground handling- Sub-total

225126

243

135126

153Flight(London – Tenerife – London)Other costsSub-total

270

15285

195

15210

CommissionsTour operator 8%Travel agent 10%

4257

2939

Total selling price 627 431

Cost elements of an original tripDistribution (travel agent commission)Tour operator marginCost of production:

- administration/management- accommodation- transport

Cost

8-1224-4230-50

10882

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However, competition has forced many service suppliers and particularly tour operators to reduce their margins. Leading tour operators have been compelled to reduce their margins as low as less than 1% for some products.

Tour operator profit margin in a highly competitive situation (based on an average price of 411E for a 15-day package to Portugal

Cost (euro)Travel agencyAirline companyAdministrationTransferHotelTour operator profit

421573071723

3. Commercialization of the tourism product

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The travel distribution systemsWe usually associate a product with its production and consumption stages, often overlooking an intervening process which moves the product from production to the consumption stage. This process is called distribution. Theoretically, the distribution of the tourist product resembles that of other industries. It involves the participation of wholesalers, retailers, and other intermediaries or middlemen, all responsible for bringing the product from the supplier to the consumer in a sales distribution system. In practice, however, two factors make the distribution of the tourist product unique. First, unlike manufactured products which can be transported to the consumer, it is usually the consumer that has to be transported to the point of consumption for the tourist product.Second, unlike tangible products with a shelf-life, the tourist product is highly perishable. An unsold hotel room, meal or tour bus seat has no income value in the marketplace the day after.Collectively, these factors make the selling of the tourist product a challenging task. Thus, in order to better understand the mechanics of the tourism market and its economic significance, it is important to gain a basic understanding of the sales distribution systems and their role in influencing sales.

3.1. Historical BackgroundToday’s travel distribution system can trace its origins to the 1840s when Thomas Cook organized what could be called the ancestor of today’s tours. An ambitious entrepreneur and innovator, Cook also introduced several types of tours including the first pleasure tour to North America in 1866 and the first around-the-world tour in 1872. In the 19th century, tours were almost exclusively for the upper classes, but Cook tried to reduce the cost of traveling by chartering entire ships and booking blocks of rooms in hotels. In 1874, Cook was also the first to introduce circular notes to be used by travelers. These were accepted by foreign banks and hotels and relieved travelers from carrying large amounts of cash. They were a simple version of the traveler’s checks of today (Milne, 1991, p. 78).Before the introduction of the travel agencies at the end of the 19thcentury, it was common for hotel porters to make steamship and rail reservations on behalf of hotel guests. Hotels usually were built close to rail stations and ports where hotel porters were sent to make reservations and bring back the tickets in return for a commission by the supplier and a delivery charge from the client.To compete with the railroads, commercial airlines starting operations in the 1920s also used hotel porters as their agents, paying them a 5% commission. Later, airlines began establishing their own sales offices in hotels in an effort to avoid paying out commissions.As international and leisure travel increased following World War II, the travel agency business expanded rapidly. Tours also dramatically increased in popularity with the introduction of jet aircraft in 1958.

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The advent of wide-bodied planes in the 1970s further reduced the price of air travel which increased the affordability of tour packages. The demand for tours also expanded as the disposable incomes of people in the U.S., Europe, and parts of Asia rose, and consumers became aware of the advantages of buying a complete tour package instead of organizing their own itineraries and bookings.

3.2. Types of Distribution SystemsThere are two broad categories of sales distribution systems, direct and indirect, which involve different variations and combinations, depending on the number of intermediaries used by suppliers in the distribution pipeline. Suppliers include hotels, airlines, cruise ship companies, car rental companies, railroads, and sightseeing operators.While most of the suppliers are part of the private sector distribution system, many destinations also have public sector distribution systems in tourism. Some governments run travel agencies such as Saigontourist and Vietnamtourist in Vietnam, railways, and hotels. African Tours and Hotels Limited, for example, is a leading quasi-governmental hotel management company which runs properties throughout Kenya. Each of the systems offers advantages and disadvantages, depending on the type of customers to be served.

3.2.1 Direct Distribution SystemIn the direct distribution system, sales are realized through direct contact between the supplier and the customer without any intermediary (see Figure). An example is a prospective traveler who calls the reservation department of a hotel to book a room or who walks up to the airline ticket counter at the airport to purchase a ticket.The advantages of this method include:• Time Savings. There is a direct communication between the two parties and the transaction is a simple one.• Increased Profits. Suppliers are not required to give a commission to any middlemen resulting in greater profit per unit.• Flexibility. Direct communication with the supplier offers the traveler the option to make possible changes in the itinerary. This becomes more complicated or even impossible when, for example, the traveler buys a tour package from a travel agent where the itinerary is usually fixed.• Greater Control. For a number of customers, buying from the supplier and confirming a booking directly provide a feeling of comfort and security in the transaction. For the supplier, dealing directly with the customer provides an opportunity for recommendations and promotions of additional products.There are also some disadvantages of the direct distribution system.• First is the high cost that the supplier faces in order to maintain a permanent sales force. • Another disadvantage is the possible reaction of the dissatisfied intermediary, since the supplier attracts customers that could otherwise be served by them. • Finally, if the supplier uses this distribution method exclusively, it risks losing an opportunity to increase its revenues by selling to travelers who prefer to use an intermediary (Collier, 1994, p. 198).

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3.2.2 Indirect Distribution SystemIn the indirect distribution system, the supplier makes use of one or more travel intermediaries in order to reach the consumer. For example, a travel wholesaler can book a large number of rooms for a certain period, and these rooms are made available by the wholesaler as part of a tour package. The customer can then book the tour package through the travel agent who serves as the intermediary between the supplier and the customer. Some benefits of this distribution method for the consumer include:• Professional Consultation. Working through intermediaries, the consumer can get a professional opinion about the comparative advantages of different options. The travel agent, for example, can provide the traveler with unbiased and personalized guidance, advice, and expertise.• Greater Variety. Dealing with a number of different suppliers allows the middlemen to offer a wider array of product options that the consumer might not have the necessary knowledge or resources to explore individually.• Lower Price. Travel intermediaries are often able to negotiate lower rates than otherwise would be available to the consumer.• Single Payment. The customer is charged in advance and pays for all different elements of the trip such as the flight, hotel, or car rental. This increases the convenience of the purchasing process and eliminates the need for the traveler to remit separate payments to different suppliers.The indirect distribution system benefits the supplier as well. • The most significant benefit is the savings from not having to hire sales personnel since the intermediaries function as a sales team. • The collection of sales revenues is also facilitated with the presence of middlemen, and cooperating with middlemen as “preferred” suppliers can help the supplier to generate additional business (Collier, 1994, p. 199).Variations of indirect distribution may involve two or more intermediaries in moving the travel product from the supplier to the end consumer. Where there is a third intermediary, this is usually a specialty channeler. Various types of middlemen can fit under the term specialty channeler. These include, but are not limited to, meeting and convention planners, corporate travel offices, incentive travel agents, and hotel representatives. The added benefits to the consumer coming from the involvement of the specialty channelers are based on the easier flow of information, the provision of customized service (often to large groups of people), and a favorable price of the package.

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D. MARKETING THE TOURISM PRODUCT

The tour operator will either offer his products directly to the market or sell them through travel agents. Whichever method of distribution he chooses, sales will hinge on products being presented in brochures designed by the tour operator and on the marketing and advertising campaign.

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1. The brochureThis is the main marketing tool used to sell tourism packages. The largest tour operators print over 1 million copies of their brochures. These are distributed through travel agencies and their own retail outlets. Brochures are also sent directly to past clients that have been identified by market research.

The advantage of the brochure is that it represents the tangible evidence of a service that will be consumed in the future. Because of the high expense of designing and producing a brochure, only the largest tour operators with strong financial power can afford the cost. Therefore, the supply of tourism packages is concentrated in the hands of a few operators. Furthermore, the lead time necessary to bring a product to the market can be between six months and a year. The risks of inflation, fluctuations in exchange rates and the price of gas makes it difficult to predict prices so far ahead. Tour operators now include the price list separately from their main brochure in order to react to changes whenever necessary. However, this reduces the strategic impact of advertising promotional prices.

2. Marketing by travel agentsTravel agencies are tourism firms whose main activity is to sell tourism products on a commission basis to consumers. The activity of travel agencies is based around transport sales and the marketing of tourism packages.Ticketing is the main activity of most agencies. This involves booking transport space, but also associated travel services.Transportation sales are the bulk of the agency’s business. To sell airline tickets, travel agencies must be accredited by IATA or by an airline company member of IATA. The organization protects both consumers and airline companies against bankruptcy and also serves to regulate the industry.

3. Advertising and promotionMarketing and advertising campaigns are often undertaken by different organizations whose interests are complementary:

- governmental tourism organizations from destination countries are responsible for general information and promotion of the destination

- tour operators and travel agencies mount marketing campaigns to sell their products

National tourist organizations cooperate with tour operators and travel agencies who sell products to their destination. Ultimately, the destination’s success in attracting tourists is linked to the operator’s and agencies’ ability to sell products to the market. Operators who develop products in destinations which are not promoted by a government agency bear the total cost of promoting both their products and the destination. A product made up of several integrated images is promoted on different fronts by each supplier. The marketing costs shouldered by tourism firms are mainly made up of:

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- brochures and leaflets distributed to travel agencies, at trade fairs and travel exhibitions

- posters- advertisements, newspaper features and competitions in the media;- commercials on the radio, TV and cinema- postage of brochures to past and potential clients- the organization of press conferences- familiarization trips for journalists and travel distributors

E. THE TREND TOWARDS CONSOLIDATION

1. The dominance of conglomeratesSince the distribution network is the last sector of the travel industry to move towards consolidation and integration, it is only natural to speculate on the motivations behind the current merger mania. For many players, consolidation is a wise course, made all the easier by the financial community’s view that leisure has become a leading industry. Little by little, major players are divesting themselves of some of their traditional activities to concentrate more on tourism and travel, considered more profitable because of their ability to attract capital investment.To better understand the extent of this consolidation, an overview of the major conglomerates that make up the distribution network is in order.

Preussag –> TUI German group Preussag is the leading European tour operator, although as recently as 1997 it was completely absent from the travel market. Having divested itself of its shipbuilding and mining activities, Preussag has invested heavily to refocus on the travel industry in the last few years. The push began in 1997, when Preussag purchased TUI, the top German tour operator. The company then acquired Thomas Cook and Carlson U.K. of Great Britain in December 1998. Finally, in May 2000, Preussag took over Thomson Travel, the number one British agency, for US$2 billion. However, for this purchase to receive EC approval, Preussag had to promise to sell off Thomas Cook. In France, Preussag acquired a 6% interest in Nouvelles Frontières in November 2000; this share gradually increased to 34% by March 2002. In other transactions, Preussag purchased GTT26, the number one Austrian tour operator, in February 2000. In Spain, after gaining a foothold with the RIU hotel chain, Preussag acquired Viajes Marsans in April 2001. That same month, it acquired all remaining shares of TUI Belgique, thereby becoming sole proprietor. In May 2001, it purchased a 10% interest in Alpitour, Italy’s number one tour operator.In February 2001, Preussag (through its subsidiary, TUI), Maritz Travel Company (U.S.),Internet Travel Group (Australia), Protravel (France) and Britannic Travel (U.K.) joined forces to create a global business travel network: TQ3 Travel Solutions. Sales reached aprox. $9 billion.In 2002, Preussag changed its name to TUI AG and completes the 100 percent take-over of France's leading tour operator Nouvelles Frontières.

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With effect from 1 January 2003 TUI AG takes over the majority holding in the incoming agencies of S.C. Danubius Travel Agency, based in Constanta, Romania, and Mex-Atlántica Tours S.A. de C.V., based in Mexico City. TUI Hotels & Resorts, which operates the World of TUI hotel shareholdings, acquires a 50% stake in Sol y Mar Hotels. In France TUI France - the latest tour operator brand in the World of TUI - starts sales. Discount Travel - the latest retail brand in the Central Europe source market- is launched.In 2004, TUI sells its 10% holding in the Italian Alpitour group. The transaction also includes the sale of the 50% interest in the Italian airline Neos. TUI sells its share of the vacation ownership provider Anfi del Mar. TUI takes over with immediate effect the 49% share in TUI Suisse held by Kuoni Reisen Holding AG. TUI AG again holds a 100% stake in its Swiss subsidiary. TUI enters the Russian tour operator market and builds up TMR (TUI Mostravel Russia), a joint venture of TUI and Russian tour operator Mostravel. This company starts work on 1 August 2004. TUI holds a 34% share in TMR. In UK, TUI launches a new airline under the brand Thomsonfly on 31 March 2004. In connection with this new business Coventry airport in central England is aquired. In Belgium, TUI launches its own carrier TUI Airlines Belgium on 1 April 2004.TUI increased to 100 percent its holding in the Austrian club holiday provider Magic Life with effect from 31 October 2004. TUI increased to 100 percent its holding in the TV Travel Shop Germany GmbH with effect from 31 December 2004.In 2005 TUI enters the Indian market and now holds a 50% share in the incoming agency ’Le Passage to India Ltd'. TUI also acquires on the American stock market 9.03 percent of the American Travel Management Company Navigant International Inc., Denver.TUI starts with its own airline – TUI Airlines Nederland – which will operate under the brand name of Arkefly on 21 April 2005. TUI acquires a 51% holding in the incoming agency Acampora Travel S.r.l., Sorrento, Italy with effect retrospectively from 1 January 2005. The rail logistics business, pooled under VTG AG, was divested to the Compagnie Européenne de Wagons in June 2005. In 2007, TUI AG and First Choice Holidays PLC agree to merge TUI Tourism and First Choice Holidays PLC to form TUI Travel PLC. In December 2007, TUI Travel PLC enters FTSE 100 index. In 2008, TUI Travel PLC signs Memorandum of Understanding with S-Group Capital Management Limited to jointly develop a Russian and CIS leisure tourism presence.In 2009, TUI Travel PLC announces a strategic cooperation between Air Berlin and TUI Travel’s German aviation business TUIfly

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Condor & Neckermann Touristik AG –> Thomas CookC & N Touristik AG was founded in 1998 when Germany company Karstadt Quelle decided to create a major tour operator by merging its travel division, NUR Touristik GmbH (Germany’s number two tour operator), with Condor Flugdienst GmbH, Lufthansa’s charter airline. Each founding company holds a 50% share in the new group. Karstadt Quelle is Europe’s largest retail and mail-order corporation. Its new business activities include travel services, ecommerce and over-the-counter business.C & N Touristik AG has made several successful acquisitions in France, notably Aquatour, Albatros and the leisure travel activities of Havas Tourisme, in April 2000 (American Express acquired Havas Voyage Affaires, the business travel side). However, C & N’s efforts in Great Britain have not been as successful: failed take-overs of both Thomson Travel and Airtours.

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In December 2000, it did acquire Thomas Cook for 885 million euros when Preussag was forced to divest itself of this tour operator as a condition of acquiring Thomson Travel (see above).In other developments, in early May 2001, the number two German tour operator abandoned the off-putting name of C & N to adopt the name of Thomas Cook, a brand within the group that enjoys a higher international profile (see end of document).

Its acquisition of the French travel group Havas Voyages in July 2000 and its take-over of the British travel group Thomas Cook Holdings Ltd. in April 2001 have made the company Europe's second-largest leisure group. In Germany, the business priorities of the company focus on its tour operators with the brands Neckermann Reisen, Air Marin, Aldiana, Bucher Reisen, Condor Individuell, Kreutzer Touristik and Terramar, its own retail business with some

700 travel agencies (Thomas Cook and Holiday Land) and the world's leading holiday airline Condor. With more than five million customers, Neckermann Reisen is not only the group's biggest brand but also the strongest tour operator brand in the European travel market. Terramar is the specialist for four and five star vacations. Aldiana offers premium club holidays. Kreutzer Touristik addresses quality-conscious customers in the mid to up-market segment while Air Marin operates in the low budget segment. Bucher Reisen is the group's successful last minute specialist. The Condor Individuell program allows customers to build their own holiday package from a selection of flights, hotels, car rentals and other travel-related services.

KarstadtQuelle took full control of Thomas Cook AG on 9 February 2007, paying €800m for the halfshare owned by Lufthansa. Lufthansa will, however, maintain a 24.9% stake in Condor, the German charter airline division.

Condor, the leading leisure airline in the world, carriers more than eight million passengers per year and serves on average more than 60 international destinations in Europe, Asia, Africa and America. Aside from operating an extensive route network with flights from 21 airports in Germany, Belgium, the Netherlands and Switzerland, the 'sunshine carrier' is noted for its superior service and quality standards as well as its modern fleet of 50 aircraft.

ReweBased in Cologne, German conglomerate Rewe owns a chain of supermarkets (Selgros, Fegro, Penny, MiniMal etc.). In the past years, this group has developed an interest in travel. In 1999, it created Rewe Touristik, its travel subsidiary, by purchasing German tour operator DER for approximately US$400 million. The group acquired a 51% interest in LTU Touristik, the third largest German tour operator, in August 2000 when LTU’s primary

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shareholder, Swissair, was experiencing financial difficulties. Several years ago it had no interest in the travel sector and now Rewe ranks third among German tour operators with an impressive distribution network throughout the country.The REWE Travel and Tourism division is becoming increasingly important. It includes more then 695 travel agencies (ATLAS REISEN, DER or DERPART) as well as tour operators (DERTOUR, ITS Reisen, JAHN REISEN, TJAEREBORG, smile&fly, ADAC Reisen, Meier’s Weltreisen, ITS BILLA).With AVIGO, the cross-brand travel portal, REWE Travel and Tourism is committing itself to the future market in new media.

The U.S. market

The U.S. distribution network differs from the European network in a number of ways. Unlike Europe, the United States has very few vertically integrated groups. Carlson Companies is one exception, offering a complete array of travel services: restaurants, hotels, cruises and branded travel agencies.The U.S. network is also characterized by the dominance of the airlines. Given the high volume of domestic air traffic, the airlines are constantly deploying various strategies to maintain or increase their market shares. The major U.S. airlines are represented by giant corporations capable of exerting pressure on the entire distribution network. This is why the American Society of Travel Agents (ASTA) is wary of certain airline initiatives, such as the creation of Orbitz, an e-commerce travel site controlled by several airline companies.Strategies involving the electronic distribution network are of crucial importance in the United States where this market has reached maturity faster than anywhere else in the world. These conditions helped favor strong market entries of exclusively electronic distributors such as Travelocity.com and Expedia. The following table illustrates their rapid ascent to the heights of the U.S. distribution market.The U.S. market is also noteworthy because of the importance of specialized services for small businesses and business travelers. Companies like American Express, Carlson and Rosenbluth devote a considerable portion of their activities to developing this lucrative market, which explains why they are among the top American travel services groups. Industry associations like the American Society of Travel Agents (ASTA) and the American Bus Association also play a key role, acting as powerful lobbies for their members, much like the influence wielded by associations of franchisees.

Largest US distributors of travel services

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Although existing companies have not yet adopted vertical integration to the extent seen in Europe, the situation seems to be changing. In the last years, several major European tour operators have attempted to penetrate the U.S. market. British company Airtours is one such example, strengthening its North American presence with the acquisition of Travel Services International (TSI) in May 2000. This merger enabled Airtours to unite its cruise, air transportation, car rental, travel agency and resort services under a single brand. At the time of the transaction, TSI’s estimated sales were approximately US$1.1 billion. Airtours began its assault on the U.S. market in 1997 by acquiring Suntrip. It then took over Vacation Express in a 1998 deal carried out by its Canadian subsidiary, North American Leisure Group (NALG).In other developments, in October 2000 Navigant International, the fourth largest U.S. travel solutions company, acquired Toronto-based GTS Global Travel Solutions, which had estimated sales of nearly C$145 million. The deal helped Navigant strengthen its presence in Canada and position itself as one of the top distributors of plane tickets. It sells more than US$3 billion in plane tickets yearly through its 635 travel bureaus in the United States, Canada, the United Kingdom and South America.Many experts wonder whether deals such as these signal the beginning of a North American wave of consolidation like that seen in Europe. However, no one seems certain as yet.

The Asia-Pacific marketThe distribution network is extremely fragmented in the Asia-Pacific region, which has approximately 20,000 travel agencies. Of these, some 9,000 are members of the IATA. The recent surge in tourists from China, which opened its first travel agency in 1995, is largely responsible for the explosion in the number of independent agencies in this part of the world.It would seem that the Asia-Pacific region is not yet ripe for consolidation, although the number of new travel agencies has stagnated in most countries in the area, with the exception of China. While China is the primary source of the overall increase in agencies in the area, Japan has the most concentrated market: the top three tour operators share over 60% of the market held by the eight largest tour operators in the country.

3. Alliances, mergers and acquisitions in the distribution network

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Although the distribution network was the last tourism sector to move towards alliances, mergers and acquisitions, it is now undeniably a very concentrated sector where the primary players hold major market shares. Many corporate entities have changed and managerial structures themselves have evolved, creating a trend towards brand-name products.

Vertical integration: Necessary for profitabilityDespite sales growth, travel wholesalers are having a hard time increasing their profit margin, which tends to hover somewhere under 5% and, in certain cases, under 1%Tour operators seeking to ensure profits are using vertical integration to better control the various links in the chain of distribution. An operator can more easily produce and distribute its vacation packages when it exercises some control over a fleet of planes (like Airtours, the largest British tour operator), a network of agencies, cruise lines or an impressive number of hotels. World leaders like German tour operators Preussag and Condor & Neckermann Touristik control elements throughout the entire chain of distribution and are constantly increasing their market share. Independent operators still offering vacation packages with no specific niche are finding the major players provide stiff competition. It is nearly impossible to compete in price while there is no comparison at all in marketing efforts. Even though consumers remain attached to and appreciate the services of independent travel agencies, they do look primarily for the low prices offered by major operators.

The domination of Germany and the United Kingdom - the race to consolidate continues

Efforts to expand and take over the entire chain of distribution really took off in Europe where almost all the major markets are now controlled by a handful of tour operators. The five largest European groups account for more than 67% of total tour operator sales, estimated at US$30 billion. The industry is largely dominated by colossal German and British companies. In Germany, five wholesalers control 76% of the market, while in Britain, the four largest companies generate nearly 80% of travel package sales. By using charter flights, these tour operators rack up significant profits because they are not subject to the pricing policies of regular carriers.

The push towards acquisitions should continue as the British market has achieved maturity and consolidation has reached a peak in Germany. The major tour operators, in particular the British and German conglomerates, are absorbing major losses in the pursuit of an intensive market penetration strategy to solidify their future hold on Europe. Integration is also taking place in other European countries such as France where the industry is less structured.France has no large conglomerates and the companies there make few foreign acquisitions.French tour operators are not truly powerful and are more likely to be bought out by other companies. Family-run firms are often targeted first by large integrated foreign groups looking to expand.

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For the time being, the United States and Japan are seeing fewer acquisitions because vacation packages are less popular among consumers there than they are in Europe.However, these countries are likely to be targeted by the expansionist designs of a few major players, notably the German companies TUI — the leading European service provider — and Thomas Cook.The following chart illustrates the market shares of the top five tour operators in the primary European tourist-generating countries.

In fact, acquiring companies are often willing to pay an inflated share price rather than see a company go to a competitor. This is exactly what happened when Preussag purchased Thomson Travel. Since Preussag wanted at all cost to prevent Thomson from becoming part of Karstadt Quelle (Condor & Neckermann Touristik A.G.), the price negotiated was equal to twice the earnings per share traditionally found in the travel sector.It is difficult to accurately predict who will come out on top in this frantic rush to consolidate.For the time being, consumers should enjoy some benefits due to an emerging price war that could well persist. One thing is certain: the main winners at the moment are the shareholders of the companies purchased who are seeing their stock values skyrocket.

4. Impacts of consolidation in the distribution network

4.1. Large integrated groups: the goals of consolidation

Economies of scaleGrappling with incredibly slim profit margins and increasing pressure from the expanding Internet which threatens to cut these margins even further, large travel groups see economies of scale as the best way to protect themselves against future upsets. For example, the ability to negotiate a better price for airplane fuel gives one a major competitive edge when setting prices for one’s services. For travel agencies, being part of a large group means taking advantage of the stronger buying power of the parent

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company, which can use the group’s size to negotiate exclusive agreements with clients such as airlines and global distribution systems.

Increased visibilityConsolidation can help companies improve efficiency in activities such as reservations, accounting, marketing and advertising; it also helps attract many potential investors to this sector. Large groups can more easily carry out the major marketing efforts required to increase product recognition among consumers, which, in turn, contributes to the overall growth of the industry.

Market presenceMany tour operators opt to set up shop in a large number of countries to significantly minimize the risk of industry upheavals, since structural changes do not occur at the same rate everywhere. By concentrating their activities within a single conglomerate, partners have an advantage when it comes to distribution, which offers a wide variety of channels (travel agencies, the Internet, call centers, interactive TV, etc.). By integrating the Internet into their operations, tour operators find they can save time and money even if they continue to make most of their sales through traditional channels.

Controlling distribution and monitoring the competitionCompanies working within a single corporate structure enjoy more flexible payment terms and better guarantees when it comes to making air travel arrangements. It is also much easier for an integrated group to follow its clients’ needs because it controls each segment in the chain of distribution. It is easy to set up an efficient process for monitoring the competition by rigorously following up on sales, which is a major advantage over competitors who are not vertically integrated. By setting up yield management tools, a company can foresee the capacities required and quickly produce the relevant brochures.

4.2 impacts on independent agencies

Differentiation strategiesPlayers in the distribution network who are not yet under the thumb of large conglomerates work to adopt individual differentiation strategies to enable them to compete where they can.Personalized service has always been very important in the travel industry. Small tour operators must therefore focus on specific niches and build on their firm’s strengths. They also have the advantage of being able to quickly adapt to change, especially when it comes to consumer needs.

Price warsHowever, small tour operators must deal with barriers that increase with industry consolidation, in particular price wars. Since they do not belong to an integrated group with its own fleet of planes, independent operators can be shut out of the market because of their inability to find cheap chartered seats. Since they are often obliged to resort to the regular airlines, they have

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to charge their clients more. Even worse, in addition to increasing their own sales, integrated groups can control, and indeed block, the distribution of certain competitive products because their agency networks also sell packages for other tour operators.Be that as it may, direct sales are never enough, even for the largest groups. Thomson makes approximately 68% of its sales through its distribution agency, Lunn Poly. Tour operators must turn to independent agencies and other competing networks to sell all their products. Competing tour operators must reach a certain market balance that enables them to sell all of each other’s excess inventory.

5. Opportunities for the distribution networkThe threat posed by a consolidated distribution network is very real to small independent businesses. These companies must exhibit ingenuity and adaptability if they want to hold their own against major industry players and the airlines who have steadily lowered travel agent commissions and reduced the cost of issuing tickets by relying increasingly on electronic ticketing. The travel agencies who are increasing revenues and surviving are those who are diversifying their products and services while charging consumers service fees to issue plane tickets. The waves of consolidation have also created new opportunities for operators in the form of new market niches.

5. 1 Diversification of products and servicesTo offset the impact of consolidation, networks of independent agencies must develop effective strategies for exploiting the inherent weaknesses of large conglomerates. After all, since larger companies have trouble attracting niche markets or specialized products like ecotourism, educational tours or exotic locales, they must focus their efforts on creating packages for the mass market. Wholesalers who carefully select a well-defined niche market can compete with the major players by fulfilling the specific requirements of the target clientele.Another option is to target a specific market segment, such as young people, business travelers or senior citizens. To more effectively deploy its strategy for penetrating these market niches, an agency or wholesaler must seek out partners who can enhance the product. The added value will create the profitability needed for the agency to survive, despite a much lower sales volume. Savvy consumers are, in fact, prepared to pay more for high quality experiences that better meet their needs.

5.2 NetworkingAgencies who make alliances with local businesses can very effectively improve the products they offer and even develop theme tours. For example, a tour operator specialized in adventure tourism could create a varied and satisfying tourist experience by joining forces with a sled dog breeder, a restaurant serving local gourmet cuisine, an outfitter and a few other regional businesses. This type of complementary alliance among players in a given region or between neighboring regions could produce a synergy effect that could even exceed the expectations of the target clientele. Some examples of high-potential niches are health tourism, eco-tourism, religious tourism, agricultural tourism, sports tourism, native tourism and adventure tourism.

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Summary

Wholesaler travel firm which assembles various travel services producer of all inclusive package tour contracts with service suppliers aircraft seats, hotel beds, ground services buys services “in bulk”, thus receiving reduced rates prepares prearranged tour packages according to expected demand pays in advance to service suppliers has stocks before the actual demand arises its earning - profit

Tour Operator (local, ground TO): prepares land arrangements; provides destination tourism services as a package to the TO; handles the tourists from arrival to departure; operates the local services; organizes familiarization and information tours; gives advice to FTO on locally available services; controls the services; contracts to buy local services.

Travel agency operates on behalf of the travel service supplier sells tourism services under an agency contract its revenue – commission an intermediary – a subcontractor provides services when a demand arises retailer – does not have stocks do not work with profit margin – can occasionally charge a “handling fee” a travel agent’ stock – information and brochures

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