Price cuts are not necessarily the best response to the continuing slump in German holiday bookings, argues Paul Needham.
The continuing drop in holiday sales on the German market due to the impact of terror attacks on consumer confidence has been confirmed by various figures from researchers and companies in the last couple of weeks. Some of these figures look alarming. Travel agency sales of package holidays dropped by 8% in December, according to the well-respected monthly representative survey by market researchers GfK, and by 13% in January, according to the separate monthly survey by services company TATS. (The GfK figures for January have not yet been published.)
Both TUI and Thomas Cook confirmed this week that summer 2016 bookings in Germany have fallen due to “difficult trading conditions”, although neither released exact figures. Their winter bookings are also down, by 3% at TUI and 8% at Cook. Other tour operators also have lower sales, although they too are holding back with precise numbers.
Six weeks into 2016, at a time when bookings are normally coming in thick and fast, the main destination trends are clear. Turkey, Egypt and Tunisia have high double-digit falls following the terrorist attacks in those countries. (TUI’s dramatic figure of -40% for Turkey captured headlines across Europe.) Spain is powering ahead as the obvious alternative destination, Greece is starting to make a comeback, and Bulgaria is rapidly establishing itself as an alternative for price-sensitive customers. And many Germans may simply decide to holiday at home this year instead of going abroad.
However, there are limits to the ability of the alternatives to provide sufficient capacity if the three struggling destinations continue to lose sales at such dramatic rates. In particular, Turkey, with 4 million German holidaymakers last year, is simply “too big to fail” as a destination, many experts believe.
The normal industry response would be to flood the market with cheap offers for Turkey, Egypt and Tunisia to try to stimulate demand through low-margin or even loss-making holidays simply to fill capacity. There are already signs of this happening and various tour operators are prominently launching special offers and extra discounts. This will inevitably push down average prices to those destinations. For example, the average price of package holiday bookings to Tunisia’s Einfidha airport dropped by 12% in January, according to figures from Traveltainment.
There are two ways to look at the challenge. From the perspective of destinations and hoteliers, it is generally better to fill capacity cheaply than not at all, and to live with lower revenues while maintaining a flow of visitors, especially to support employment levels. So we can expect to see plenty of rate reductions from their side in the coming weeks. The longer-term challenge, of course, is then to push rates back up again once demand for a destination recovers.
For the German travel industry the picture is more complex. Fundamentally, underlying consumer demand is solid due to high levels of available income, rising wages and low unemployment. Price is not the problem. As surveys repeatedly show, Germans want to travel but are uncertain about where and when due to fears about potential risks. So, it is in the financial interests of tour operators and travel agents to promote alternative destinations, including higher-priced long-haul trips, rather than cut-price deals to troubled destinations. This means many ‘special offers’ may be marketed more strongly through portals and online channels than through travel agencies.
While predictions are extremely difficult at present, it would appear likely that there will be a divergence in sales this year, with a clear shift in destination preferences. The majority will probably book ‘safe options’ such as the Western Mediterranean, cruises, domestic, self-drive or long-haul trips. Many consumers with less cash for travel may decide to wait longer for price cuts and then book cheap last-minute holidays in Turkey, Egypt or Tunisia. Either way, uncertainty and swings in demand seem likely to continue right through until the summer months.