It's no fluke that Tui Travel outperformed the UK market this summer, says chief executive Peter Long and deputy Johan Lundgren. They spoke to Ian Taylor
Tui Travel’s latest trading figures show UK mainstream revenue up 5% this summer despite the company carrying 4% fewer customers than last year.
The figures are no fluke, say group head Peter Long and deputy chief executive Johan Lundgren, who runs the mainstream business.
UK passenger numbers for the season to mid-September were down by less than the year-on-year reduction in capacity (by two percentage points) while average selling prices rose 10%. That is not bad against the backdrop of an economy which Bank of England governor Mervyn King described as experiencing “the worst recession since the 1930s” and “the biggest and longest squeeze in real take-home pay for almost a century”.
Tui Travel’s forward bookings show no sign of moving more in line with the economy, either. Long says: “We’ve had a good start to 2013. Next summer is looking really good for us.”
The performance is driven by a focus on differentiated and exclusive resorts. Differentiated product – the SplashWorld, Sensatori, Holiday Village and Couples hotels and resorts – accounted for 63% of UK summer holidays sold to the end of July, up from 56% a year earlier.
The properties can be exclusive to the group, but don’t have to be, and may be developed from existing resorts or newly built.
Lundgren says: “Differentiated product produces a virtuous circle. It has taken years to develop, which is why no one else can do it. We’ve invested significantly in this and believe we have the best people. It’s about the service we offer, children’s clubs, entertainment, food and beverage, and what hotels should look like.
“These hotels book significantly earlier and have generally higher occupancy. Customer satisfaction and retention are significantly higher. We have a premium margin on this because we invest in it.”
UK sales of differentiated product have grown 5%-10% a year, they say, and are probably reaching the limit as a proportion of total mainstream bookings. Long says: “It won’t go much higher.” He estimates the limit at 65%-70% of mainstream sales.
Differentiated does not have to mean exclusive, although “it might be exclusive in one market”, says Long. He puts the limit for exclusive product at 20%-25%.
Lundgren responds to a suggestion that some in the trade are concerned about the trend by saying: “Hotel suppliers are making a call, thinking ‘who do I want to be with’ in a shaky environment. People can see it’s a success and want to be part of it.”
Long argues: “If we all sell the same product, we’re in a commodity business. That is the space traditional operators and low-cost airlines are in. It’s not the space we want to be in.”
An increase in all-inclusive product – to 52% of summer holidays sold to the end of July – and making First Choice a solely all-inclusive operator form additional strands of the strategy.
Lundgren insists there is more to all-inclusive demand than customers looking to control spending. “We’re moving away from it being a price-driven proposition,” he says.
Tui signs exclusive properties in a variety of ways. Lundgren says: “Where we have 20 to 30-year relationships with properties, they may come to us and say: ‘We’ve got a great plot.’ Or we might say: ‘We’re under-represented in this destination’. Five-year deals with extensions are the norm.”
Long says: “A lot of what we do is new-build . . . [or] we work with existing partners who convert a hotel to our specifications.”
Some hotels are exclusive to UK holidaymakers “because of the scale” of the UK market. “Others have several source markets and the group takes exclusivity,” says Long. “We have the scale across 15 source markets [to do this].”
Lundgren says: “We can go to a partner and say: ‘We’ll take the whole area: the UK here, the Germans there’, all in one resort.”
However, Long notes: “Most people want a common language: English, German or French. The Dutch and Belgian markets are happy with more international resorts and with English.”
Lundgren rejects criticism of all-inclusive resorts, arguing: “We have revitalised areas of the Caribbean and Egypt, and a lot of money stays in the destination.” Long agrees: “It’s driven by demand.” Yet he adds: “All-inclusive will never be the whole market. Some people will want to go to a little fishing village.”
He says “roughly half” the 10% rise in UK average selling price this summer is due to cost inflation and half to all-inclusive sales. But he insists: “It’s not customers being charged 10% more; clients are spending 10% more with us.”
The strategy has seen Tui Travel sail serenely through the most difficult UK outbound market in memory. Now it is poised to raise capacity for the first time since its creation in 2007 from the merger of Thomson and First Choice.
Long says: “We took out a whole tranche of flight-only and unprofitable capacity. Now we’re at a point where we’re well positioned for growth. We plan, in a measured way, to increase the numbers we take on holiday.”
He insists: “We’re not a cyclical business. We are counter-cyclical. The messages we hear from [other retailers on] the high street are a million miles from what we’re seeing. It takes a lot for our customers to forgo a holiday and that puts us in a position of strength. We’ll be accelerating our strategy. We plan to grow next summer, and this is a change.”
Long declines to give details, saying: “Our plans will become clear in December.” He adds: “Lots of companies have gone for growth in the past, but you have to position for growth.
“There is a structural change in the industry and we’re positioning ourselves to benefit. In this market, the strong will get stronger. The traditional operators, online travel agents and low-cost carriers are all in one market. Their offerings are similar.
“You need a clear position to compete. We have opened a space and we continue to accentuate that. We believe it’s the way to build a long-term position and build relationships with customers.
“We’re gaining high satisfaction scores and building high-level repeat business, giving us a unique position. We have brand strength, a leading position and a team that understands every aspect of the business. We’re well financed and we are not managing decline.”
Long rejects the suggestion Tui Travel has benefited from Thomas Cook’s troubles. He reels off a list of problems the group has had to contend with – sterling’s weakness, North Africa, Greece, high oil prices – and says: “An environment where the economy is weaker enables the strong to get stronger.
“We are not blasé, but we’re not overly concerned about the euro or oil price. Others are suffering because they do not have a strong, clear position in the market.”
Lundgren adds: “Thomas Cook is not what keeps us awake at night. We think about Priceline and Expedia, Apple and Google and what they are doing. The whole landscape has changed.”