19 Mar, 2001

European Tour Operators In Feeding Frenzy, But Beware The Result

Imtiaz Muqbil

1. European tour operators in feeding frenzy but….Who’s gobbling up who is the talk of the town in Europe as giant tour operators embark upon a frenzy of mergers and takeovers in pursuit of market share, vertical and horizontal integration. This report by the Travel Business Partnership outlines what’s going on.

2. …..Beware The Result: Watching this M&A frenzy with concern, the UN Conference on Trade and Development (UNCTAD) is warning developing countries that they could be left holding the short end of the stick in the final outcome.

Dispatch from ITB Berlin 2001, the world’s largest travel trade show

1. European tour operators in feeding frenzy but….

From the ITB Daily report produced by the TRAVEL BUSINESS PARTNERSHIP

Vertical integration and internationalisation of European tour operators forged ahead in 1992. In the context of higher passenger numbers but stagnant yields the major package tour operators are shifting their focus. Notwithstanding the investments they are making in on-line and phone sales, they have generally been expanding their distribution networks, adding in-house airline capacity and taking a greater interest in the profitable business of hotels.

C&N Touristic garnered a major distribution network in France with its purchase of Havas Voyages; TUI’s purchases of Thomson Travel and Nouvelles Frontières gave it almost 100 planes and Britain’s Airtours now has a portfolio of 93 hotels and a total of 48,000 rooms following its purchase of Spain’s Hotetur club.

The UK and France were the main focus of take-overs in 2000. In mid-May 2000 Preussag outbid C&N Touristic to buy Thomson Travel for £1.8 million (Euro 2.8 million). C&N Touristic countered with the purchase of Havas Voyages. Whereupon Preussag hit back by buying a stake in Nouvelles Frontières and an option to buy more. Nouvelles Frontières is France’s largest integrated tourism business.

C&N Touristic found an alternative route into the British market at end- year by purchasing Thomas Cook, the number three in the British market, for £555 million (Euro 875 million). The seller was Preussag, which was required by the competition authorities to divest itself of Thomas Cook as a condition of its purchase of Airtours. That made it two all to the German leaders. Next stops are Spain and Italy.

Preussag has already put out feelers in Spain, where its existing operations are too small to give it critical mass. It is talking to Viajes Marsans as a route to obtaining a significant position in the Spanish travel retailing and outbound markets. It has also entered the time share business with the take-over of Anfi del mar on the Canaries.

The remaining British companies were not idle. First Choice bought ten tour of Turkey and entered into an alliance with Barceló in Spain. Airtours, on the other hand, has pulled its horns somewhat in the wake of poor results from its German and Belgian subsidiaries and has withdrawn from the Belgian market altogether. Its only significant expansive move was its purchase of Hotetur.

Kuoni also adopted a ‘wait-and-see’ attitude to the European market in 2000 following its unsuccessful, and costly, bid for first choice in 1999. It completed its internal restructuring, purchased Sita World Travel in India and T Pro in the United States. Kuoni attracted particular attention with its alliance with TRX Inc of the United States. They have set up TRX Central Europe in Zurich. This will be a fulfilment operation checking on-line airline ticket orders and issuing the tickets and the invoices automatically. It will initially target the Swiss and German on-line markets.

In Italy, the Agnelli family took total control of market leader Alpitour (1.2 million passengers, Euro 1 billion sales) in the middle of 2000 after steadily increasing its stake through its investment vehicle over a period of years. As the Agnelli family also owns 20.3% of Club Mediterranee, this inevitably gave rise to speculation that the two groups will work more together more closely.

Germany

While Preussag and C&N Touristic were busy expanding internationally, Rewe Touristik had its eyes firmly on the German market. It sewed up its take-over of DER at the beginning of 2000 and then embarked on talks with the SAir Group, which culminated in January 2001 with the take-over of LTU. However, it has taken only a 40% stake in the airline arm of LTU and has apparently not taken on any of the airline’s debt burden.

Rewe also brought ADAC-Reise into its family by acquiring 51% of this former subsidiary of motoring organisation, ADAC. Comparisons are difficult until Rewe publishes the first results that consolidate all its purchases, but it seems possible that it has caught up with the German number two, C&N Touristic, on the German market. Rewe’s only international operation to date is in Austria, but it does not rule out European expansion in future.

C&N Touristic is clearly now the number two European operator (behind Preussag) with turnover of DM 15.1 billion (Euro 7.7 billion). It remains to be seen how it builds its tour operating business in its two new markets, the UK and France, since both Thomas Cook and Havas Voyages are notably stronger in the travel agency side of the business than they are in tour operating.

Preussag remains the undisputed market leader in Germany and Europe. Its TUI Group tourism subsidiary now accounts for more than half of the company’s turnover and it is hoped to lift this to 80% by 2002. Total Preussag turnover in 2000 was Euro 21.8 billion (+32%). Of this, Euro 10.6 billion (52%) was from tourism. The purchase of Thomson Travel Group (TTG) will bring the objective of increasing the importance of tourism to the group closer even though it had to sell its 50% stake in Thomas Cook to satisfy the competition authorities. The non-tourism side will also be reduced by selling certain businesses.

The group is also being restructured internally. The TUI Group will disappear and tourism will become a direct part of the Preussag group alongside the oil and gas, and logistics businesses which the company intends to keep. The heads of both TUI and TTG (Ralf Corsten and Charles Gurassa) have assumed joint responsibility for tourism and will join the Preussag board. They will be responsible for developing synergies with Nouvelles Frontières as TUI builds its stake progressively to 34.4% by next year.

United Kingdom

The British market was in a state of some turmoil following the take- over of the Thomson Travel Group by Preussag, two profit warnings by Airtours and ongoing speculation as to what would happen to Preussag’s 50% stake in Thomas Cook as this holding was incompatible with the purchase of TTG. In the end C&N Touristic snapped up Thomas Cook, including the JMC tour operating and airline business.

It remains to be seen how Airtours (number two) and First Choice (number four) will counter-attack as it is unlikely that they have said their final word. Although Airtours’ pre-tax profit dropped in 2000 to £101.3 million (Euro 161.8 million) from £131.5 million (Euro 206 million) in 1999, it nevertheless increased sales by 18% to £4.4 billion (Euro 6.9 billion) from £3.8 billion (Euro 5.9 billion).

Airtours’ problems came from its German and Belgian operations. Germany subsidiary, FTI, which has been a wholly owned subsidiary since September 2000, increased passenger numbers – but not by as much as the company had projected, so it was left with excess capacity on its hands. FTI lost £9.3 million (Euro 14.6 million). Business was also bad in Belgium and Northern France and in the autumn Airtours’ Belgian subsidiary, Sun International, was shut down.

Airtours nevertheless improved its overall results because it sold its 50% stake in Costa Crociere to its partner Carnival Cruises for £235.8 million (Euro 369.4 million). That left a net profit of £211.4 million (Euro 333.1 million) compared to £125.9 million (Euro 197.2 million) in 1999.

First Choice, on the other hand, is the picture of good health. It increased pre- tax profit by 40% to £88.8 million (Euro 139.1 million) compared to £63.5 million (Euro 99.5 million) in 1999. Turnover was up 28% to £1.88 billion (Euro 2.95 billion) compared to £1.465 billion (Euro 2.295 billion) in 1999.

The company’s strategy was initially to improve its performance rather than expand internationally. It entered into a strategic alliance with Royal Caribbean Cruises in May 2000. This served a dual purpose. It strengthened First Choice’s cruise capability and provided liquidity from the £200 million (Euro 313 million) which Royal Caribbean paid for a stake in First Choice to finance two acquisitions.

The first (in June) was eastern Mediterranean specialist, Ten Tour of Turkey. That brought into the First Choice fold Nazar of Germany, Marmara/Etapes Nouvelles in France, Taurus in Austria and Switzerland and Bosphorus in Belgium. The second was an alliance struck with Barceló of Spain, a long-standing partner of First Choice in inbound operations in Spain. Co-operation is to be expanded into the Spanish outbound market and possibly into hotels. Barceló acquired a 12.7% stake in First Choice as part of this operation.

France

France’s travel industry is now firmly in foreign hands. Italy’s Agnelli family is the largest shareholder in Club Mediterranee, which now also owns Jet Tours. Travel agency chain, Havas Voyages, is part of C&N Touristic, and the business travel arm, Havas-Business Travel is part of American Express. Look Voyages is a subsidiary of Canada’s Transat group, Maramar has been part of First Choice since June 2000, and even Jacques Maillot – the hitherto staunchly independent CEO of Nouvelles Frontières – has now entered into an alliance with Preussag. Discount and on-line travel specialist Degriftour was sold to lastminute.com in August 2000 for Euro 98 million (part in cash and part in shares).

That leaves only two French-owned tour operating businesses. One is the tour operating interests of Accor, whose real core business is hotels, though it is continuing to expand its Accor Travel subsidiary (Carlson Wagonlit Leisure and Business, Frantour, Go Voyages) and has also taken total control of its casino subsidiary. The other is family-owned business, Fram, which has remained independent so far, but which is now indicating that it is open for alliances.

The third largest French operator traditionally releases its results at the end of March, but has indicated that turnover in 2000 was FF3 billion (Euro 450 million) from 611,000 passengers. In 1999, Fram carried 580,000 passengers and had consolidated turnover of FF2.6 billion (Euro 396 million). After-tax profits in 1999 were FFr92 million (Euro 14 million).

Fram has moved to consolidate its position in travel distribution at a time of increasing vertical integration by setting up a travel agency subsidiary, Fram Agences. There are now 25 travel agencies in the chain, largely in the Toulouse region where Fram is based. There are plans for expansion, particularly in the Provence- Alpes-CÔte d’Azur region.

After several difficult years, Club Med was able to announce much better results in January 2001, including a 51% increase in profits to EU R59 million and a 27.9% increase in turnover to Euro 1.47 billion, though this was not enough to satisfy the financial markets. The share price remained well below what it had been the previous September when it plummeted after a profit warning.

Notwithstanding the good results, a restructuring plan is under way, which includes opening some new basic villages, which will be a modern and inexpensive variation on the original Club Med hut villages. Another new concept is the Oyyo Club for young people in the 18 to 24 age group. Night life will be writ large. The motto is “Si tu dors, t’es mort”, or “No quarter will be shown to the indolent.”

The City Club concept (Club Med World), which Club Med has been testing at a location in eastern Paris for well over a year, is to be copied in 2001 in Montreal. These are leisure clubs with a restaurant, theatre, climbing wall and trapeze along with a travel agency and a travel library and bookshop.

France’s market leader Nouvelles Frontières is putting particular emphasis on e- commerce. It has a tourism portal (www.filfog.com) for French, Spanish and Italians. Nouvelles Frontières’ website is in seven languages. As part of the company’s partnership with Preussag, it is planned to include Germany from next year. NF CEO Jacques Maillot now plans that they should expand jointly. Since the Preussag deal, it has already taken over New East, Totem and Class’Reves. These are youth, skiing and weekend specialists respectively.

2. …..Beware The Result

In a paper highlighting some significant downsides of globalisation on the travel and tourism industry, a senior official of the UN Conference on Trade and Development (UNCTAD) has warned that developing countries risk increased leakage of tourism revenues and further marginalisation by the creation of giant industry conglomerates in Europe and the United States.

The paper, presented at a conference on tourism policy organised by the Organisation for Economic Co-operation and Development, suggests that developing countries start familiarising themselves with the anti-competitive and market dominance clauses in the Generalised Agreement on Trade in Services (GATS) and use the clauses to counter this trend.

‘Leakage’ is the process whereby part of the foreign exchange earnings generated in tourism-receiving countries is either retained by tourist-generating countries or repatriated to them in the form of profits, income and royalty remittances, repayment of foreign loans, and imports of equipment, materials, capital and consumer goods to cater for the needs of international tourist and overseas promotional expenditures.

According to David Diaz Benavides, Chief of UNCTAD’s Trade in Services section (speaking entirely in his personal capacity), the average leakage for most developing countries today is between 40 and 50 percent of gross tourism earnings for small economies and between 10 and 20 percent for most advanced and diversified developing countries. The level can depend on the stage of tourism development – low in the first few years of operation and increase significantly as large sums are invested in marketing, rehabilitation of facilities and upgrading of products provided, etc.

In order to correctly evaluate the return on investments, Mr Diaz said developing countries must carry out a cost-of-opportunity study that will establish a “leakage break-even point” as a function of the country’s economic capacity to serve different types of tourism and choose the type most suitable for a project or country.

Furthermore, he said, developing countries can minimise leakages from international tourism by (1) providing incentives to investors to reinvest profits and potential cash transfers that otherwise would be invested abroad; (2) enhance the capacity of tourist destinations to produce goods and services required by tourism; (3) provide incentives to domestic investors to expand their participation in tourism; and (4) enforce domestic competition policy against anti- competitive practices by tour operators.

This last point is particularly important because there is mounting evidence that the globalisation of tour operating companies could lead down the road to a worsening of the ecological and economic sustainability of the tourism destinations themselves.

Mr Diaz noted that in some European countries, a handful of consolidating tour operators were controlling upto 60% of market share, giving them significant bargaining power with tour operators, hotels and suppliers of other products and services in the tourism- receiving countries.

Eventually, this could not only lead to many small and medium- sized operators and hotels being squeezed out but also significantly reduce the money that both the public and private sectors have available to re-invest in product improvement and sustainability.

The competition issue and the treatment of anti-competitive behaviour are at the core of the problems of efficiency, viability and sustainability of tourism in developing countries, Mr Diaz said. “The latter’s ability to deal with those two aspects and to counter their effects is a crucial matter.”

“Firstly, this is because anti-competitive behaviour occurs largely in developed countries, as a result of the fierce competition among a few integrated dominant players with a high market share in their own market and in all segments of tourism industry supply, notably tour operators, travel agencies, hotels etc.

“Secondly, the pattern of globalisation, which is the driving force of many of the developments in the supply of the tourism and air transport, also mostly originates and is controlled in the two leading developed economies, namely the European Union and the United States.

“Consequently, what often appears to be a normal commercial relationship in a developing country may actually be the result of a network of anti-competitive practises arising from a globalised and highly integrated tourism trading environment, dominated by a few suppliers in the originating tourism countries.

“Moreover, other, non-behaviour-related industry issues such as the lack of a domestic competition legal framework in developing countries and the lack of multilateral disciplines and mechanisms within the GATS framework also affect the ability of developing countries to deal with or prevent anti-competitive practices in their tourism sectors.

Mr Diaz added, “For those countries highly dependent on tourism revenue, the benefits of the liberalisation of tourism are being threatened by the predatory practices of a few dominant tourism suppliers in the world tourism market.” The result is an “uneven distribution of benefits, due to the dominant position and market power of integrated suppliers in their own markets and world-wide.”

He said, “The evolution of the GATS disciplines, and the consistency of future commitments of developed countries with the economic, social and environmental sustainability of tourism in developing countries in the GATS 2000 negotiations, should mark a turning point favouring more profitable tourism for all World Trade Organisation members, particularly the most vulnerable small developing countries.”

He said the GATS 2000 negotiations mandated by the Final Act of the Uruguay Round provide developing countries with a unique opportunity to counterbalance the asymmetries. “In this perspective, it is the right time to take advantage of these negotiations to prepare and put forward negotiating proposals on how to make effective use of the provisions of Articles IV and XIX, aimed at increasing participation of developing countries in trade in services and the expansion of their services exports including through the strengthening of their domestic services and its efficiency and competitiveness.”

The two-way process involves not only the refinement of offers, but also the preparation of requests from trading partners as one of the key ways to obtain substantive benefits as result of the GATS 2000 negotiations.

Mr Diaz said developing countries should step up their participation in the GATS rule-making process to ensure: (a) An adequate coverage and consistency of commitments in all tourism activities as defined by the Tourism Satellite Account; (b) The prevention of predatory behaviour with anti-competitive practices by dominant integrated suppliers in the originating markets; (c) The effective access and use of information on a non-discriminatory basis; (d) The implementation of an adequate framework for sustainable development of tourism; and (e) Preserve the environmental sustainability of tourism and the cultural heritage.

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