German tour operators are heading for problems after expanding their long-haul programmes too optimistically this winter, and a price war now looks inevitable.
Some basic laws of economics are difficult to ignore. For example, if you have excess supply and insufficient demand, then you have to reduce prices to generate sales. German tour operators appear to rediscovering this law at the moment – to their cost.
Just a few months ago, market leaders such as TUI, Thomas Cook, DER Touristik and FTI all presented their winter 2015/16 programme with significant expansions of their long-haul programmes. They boldly declared that the forthcoming season would be “the winter of long-haul travel”, driven by rising demand for exotic destinations.
TUI said it wanted to overtake DER as long-haul market leader, with lower prices and taking advantage of its cooperation with Lufthansa’s new budget subsidiary Eurowings for flights to the Caribbean, Dubai and Thailand. Similarly, Thomas Cook expanded its long-haul programme but put up prices for the Maldives, Cuba, Mexico and the Dominican Republic by 4-6% and left Thailand unchanged. DER reported strong demand for long-haul holidays this year, including high double-digit growth for the Caribbean, and confidently predicted further growth this winter.
These forecasts are now looking over-optimistic and it seems that tour operators may have miscalculated demand – and also prices. There is significant excess flight capacity on many routes from Germany at present, particularly on leisure routes to the Caribbean, which is 50% higher, the UAE and south-east Asia. The increase in flight capacity is running well ahead of the growth in bookings, and flight prices are tumbling as a result, reportedly by 20% to the Caribbean.
In response, tour operators have been forced into renegotiating rates with hoteliers to bring down the overall price of long-haul packages, and thus try to boost demand. Some of the reductions are quite dramatic. FTI has cut prices to Asia, Indian Ocean, South Africa and South America by up to 20%. Thomas Cook has slashed UAE prices by 35% and has cut prices for various hotels in the Dominican Republic and Thailand.
That won’t be the end of the story. Other tour operators may have to make similar price cuts, resulting in a general price war that would inevitably hit margins. The bigger losers, however, are likely to be the leisure airlines flying too many empty seats on long-haul routes with high operational costs. It is too late for them to scale back capacity now but many will already be thinking about whether to reduce their long-haul capacity in winter 2016/17 to avoid a similar fate.
The winners will be those customers who wait a few more weeks to see how far prices drop and then book their winter sun holiday for the coming months.