THREATS AND OPPORTUNITIES FOR EUROPEAN TOUR OPERATORS

1.0 Introduction

 1.1 The travel and tourism (T&T) industry is one of the most important economic sectors in the global economy. With a rising affluence and changing demographic worldwide many more people are traveling than ever before. This may be for business or leisure (European Commission, 2010). Consequently, the industry has become increasingly competitive on a regional and global scale. This report looks at the threats and opportunities for European tour operators in this industry. The main analytical methods used are PESTEL analysis to examine the general external environment and Porter’s Five Forces analysis to examine the competitiveness of the industry. The focus is mainly on a regional European bases.

2.0 PESTEL Market Analysis

 2.1 Political. The political environment for tour operators within the European Union (EU) is highly conducive in terms of priorities by providing legislative framework in the form of EC directives. The T&T Industry has become a priority in Europe due to the nature of the EU as a free trade block allowing the free movement of people and goods (European Commission, 2010). The European Commission (EC), recognizing the importance of the T&T industry to the European economy, is working toward an consolidated political framework in the Europe 2020 strategy to promote a common European heritage and to remain the world’s top travel destination (European Commission, 2010).

2.2 Economic. T&T is a hugely significant economic contributor in the European economy. The industry employs between 12 and 14 million people across Europe and represents over 5% of total EU GDP (European Commission, 2013b). The Global Financial Crisis (GFC) during 2008 and the current Euro crisis have taken their toll on the T&T industry (Alegre, Mateo and Pou, 2013; Viardot, 2011). However, there are some signs of resilience and recovery. For example, 5 million more arrivals have been recorded in 2011 compared with 2010 (European Commission, 2013a).

2.3 Social. The social aspect is important in the T&T industry. For example, the general economic down turn creating unemployment affects people ability to partake in tourism activities (Alegre, Mateo and Pou, 2013). This is consistent with Smeral (2009) who argue that financial and economic crisis affects tourism demand. Another effect is that people who are employed in the industry are subject to the changeable nature of this sector. This is particularly true in popular travel destinations when conditions such as environmental change or health and safety or economic issues keep tourists away (Mazilu, Avram and Ispas, 2011; Scott, 2011).

2.4 Technological. Technology is also a major factor in the development of the T&T industry. Consumers can now buy their tickets or hotel booking via internet without leaving their house and seeing a travel agent thus giving them a lot of buyer power (Berne, Garcia-Gonzalez and Migica, 2012). This has also a huge impact on how T&T companies such as tour operators do their business. Online buying and selling of products is now part and parcel among tour operators and travel agents (Rosselló and Riera, 2012; Viardot, 2011). The internet as a source of information and marketing tool also represents a significant cost redactor (Boffa and Succurro, 2012).

2.5 Environmental. The environment and environmental change is perhaps one of the most important factors in the T&T industry as many destinations rely on the sustainability of their local natural environment. Climate change, for example, is a highly topical issue in tourism and destination management (Dwyer et al., 2009) and could have adverse effects on these destinations and associated businesses (Stradas, 2010). Individual businesses are recognizing the importance addressing this issue and are adopting environmental policies to increase the sustainability of their business (Bohdanowicz, Zientara and Novotna, 2011).

2.6 Legal. Legislation pertaining to the international T&T industry has a wide ranging scope and could include labour laws, taxation, insurance, general business compliance and environmental laws. All of these have an impact on business in the sector. Environmental laws are important for reasons of environmental protection and responsible business practices and behavior of visitors. Although many environmental laws are already in place researchers have been questioning their effectiveness and are calling for a tightening of such policies and legislations (Scott and Becken, 2010). An unchecked and unlegislated greenhouse gas emission will lead to environmental problems that cause a significant increase of costs to tour operators due to falling revenues in this industry (European Commission, 2010).

3.0 Five Forces Analysis

 Porter’s Five Forces model is used to assess the Travel and Tourism (T&T) industry’s competitiveness and what it holds for Eurpoean tour operators.

3.1 Competition. The T&T industry tends to be highly competitive with many tour operators active as a global population has become increasingly mobile and affluent. There are many small niche operators specializing in particular type areas such as business travel, nature travel, mountaineering, bird watching, etc. However, on the whole the industry is dominated by a few large operators, particularly TUI and Thomas Cook obtaining a combined European market share of 20.5% (Viardot, 2011). These two companies have grown through aggressive merger and acquisition strategies. Economies of scale has made pricing a competitive tool for these companies. However, lower priced competitors from outside Europe pose a growing threat (European Commission, 2013b). Globally the threat is high.

3.2 Threat of Entry. TUI and Thomas Cook are by far the largest competitors in Europe and both companies hold substantial assets that give them a competitive advantage. Such assets include hotels, cruise ships, airplanes and in addition have a vast network of strategic partners in all sub-sectors of the T&T industry (Viardot, 2011). To match this requires substantial initial investment for any new entrant thus setting the entry bar very high. This reduces the risk of new entrants into the European market and should be seen as low.

3.3 Supplier Power. As far as the European market in concerned the two named companies and a few other larger tour companies are dominating the market to such an extent that they can command low buying prices for tourism products. Therefore, smaller suppliers such as niche tour operators, bed & breakfast, etc. do not have much power if they want a steady business from established larger companies. Supplier power should thus be seen as low.

3.4 Buyer Power. The high availability of tourism products not only in Europe but globally and the strong usage of the internet puts the consumer in a strong position (Berne, Garcia-Gonzalez and Migica, 201). There are therefore low switching costs. Cheap destinations in emerging economies such as India or China in combination with the increase in low cost airline direct ticket sales increases the buyer power substantially (Rosselló and Riera, 2012). Moreover, the growing demand for environmentally sustainable tourism also puts pressure on destinations and operators (European Commission, 2010, 2013b). Buyer power is therefore high.

3.5 Substitution. In terms of substitution the T&T industry seems generally safe in its existence. The only alternative for people to travel is to stay at home. This is virtually impossible in a highly mobile world be it domestically or internationally. However, in terms of destination there are many alternatives. Europe is highly diverse with Nordic climates, Mediterranean climates, beaches, mountains, forests, ancient cities, different cultures, etc. combined with excellent infrastructure makes Europe highly competitive (Blanke and Chiesa, 2011). However, emerging economies in South America and Africa are seen as viable alternatives for European travelers (Viardot, 2011; European Commission, 2013b). In this respect, the threat of substitution is relatively high.

Overall, the Five Forces analysis showed that the industry is very competitive and that operators must address the relevant issues.

4.0 Threats and Opportunities

 4.1 Threats. There are two main threats identified in this report, i.e. environmental change and competition. Environmental change could be detrimental to certain destinations that rely on particular environments such as snow in the mountains or warm pristine beaches. Climate change due to greenhouse gas emissions could cause long term damage to tour business involved in such destinations requiring structural change (United Nations, 2007; Bürki, Elsasser, and Abegg, 2003; Peeters and Dubois, 2010). Equally, the threat of non-European competitors due to low cost products and the use of the internet is significant. European operators therefore need to ensure they address their competitiveness in relation to their global competitors (Go and Govers, 2000; European Commission, 2010).

4.2 Opportunities. There are thus opportunities that European tour operators can realize. Committing resources and priorities to support environmentally sustainable travel and tourism is one such opportunity. Working together with destinations and individual business of like mind by engaging, for example, in carbon trading would encourage selective consumers to choose such operators (United Nations, 2007; Dwyer, et al., 2009; Bohdanowicz, Zientara and Novotna, 2011). Developing a stronger online business as is done in the USA may also help in stemming the tide of external competitors. Europe has a strong brand image and with appropriate destination marketing, focusing on the environment, tour operators have a strong opportunity to maintain their pole position in the industry (Chen, Chen and Lee, 2011; Kozak and Martin, 2012; Rosselló and Riera, 2012).

5.0 Conclusion

5.1 The European travel and tourism (T&T) industry is dominated by only a few large tour operators, particularly TUI and Thomas Cook, while Europe is the world’s top tourist destination. However, there are two major threats represented by rapid climate change and external competition. There exist opportunity to address these threats. European tour operators need to engage in environmentally sustainable practices together with destinations and partners. They also need to lower their cost base by engaging more in online promotion and selling in relation to their external competitors.

6.0 References

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