PhoCusWright FYI: Tour operators have steadily lost market share to online travel agencies
But do not count them out
Even more striking about the U.S. packaged travel market is just how much it has changed. As shown in Figure 2 below, the market has been turned on its head by a handful of major online travel agencies who have grown their package business from effectively zero in 1999 to a more than US$6 billion segment in 2008, representing 17% of their total gross bookings. Online travel agencies (OTAs) have taken share from traditional vacation packagers, or tour operators, over the past decade; their dynamic packaging business has generated a compound annual growth rate (CAGR) of more the 50%, while tour operators have languished at a CAGR of -5% (see Figure 2).
What is behind this startling growth in OTA packaging? A simple, four-word sentence (accompanied by some aggressive hotel rate contracts and dynamic packaging technology): "Book together and save," or some variation thereof, has for several years appeared across the home pages of just about every major OTA. Noticeably absent from their messaging: "package" and "tour," and the consumer preconceptions of the limitations on flexibility that come with a packaged tour.
Book Together and SavePrevious PhoCusWright consumer research has identified two preeminent drivers that, above all else, compel consumers to consider purchasing a package online: convenience ("book together") and price ("save"). This obviously simple message taps directly into the most important issues that drive consumers around packages; online travel's biggest players very smartly educated the marketplace and changed customer behavior. More and more consumers have understood that booking an online package—whoops, booking the flight and hotel together—saves money without sacrificing flexibility.
Those tour operators that compete on—you guessed it—convenience and price have been hit the hardest. They lack the scale to compete head-to-head with the major OTAs (and the vast majority does not have scale—74% of tour operators do less than $10 million in total gross bookings, and well over 90% sell under $100 million). Those tour operators who cater to the lower and middle segments of the vacation market, who make their money on low margins of high volume sales of relatively simple packages to tier-one vacation destinations (e.g. Florida, Las Vegas, the Caribbean, Mexico, etc.), have been very hard pressed to compete with the scale, marketing muscle and negotiating power of the likes of Expedia, Travelocity and their ilk.
But do not count traditional tour operators out, not by a long shot. Most tour operators today have made the critical strategic shift to compete on more than price. Many have shifted to focus on a specialization, such as a destination, travel theme (sports tours, adventure travel, family travel, weddings and honeymoons, group travel, etc.), category (i.e. luxury) or level of service and personalization. In fact, only 8% of tour operators identified sun and beach-themed packages as a trend for their business in 2009 and 2010. Why so low? Well, when consumers are looking for a sun and beach package, it is basically just a flight plus hotel. That is right—just book together and save.
For detailed data and analysis on the packaged travel market, purchase The U.S. Packaged Travel Landscape: 2006-2010, commissioned by the American Society of Travel Agents (ASTA) and researched and produced by PhoCusWright (US$699).
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