Holiday Pricing: are parents getting a bad deal?

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You can all always tell from newspaper stories when the peak holiday season is approaching. There will inevitably be two different types of lead story:

  • The positive: Record numbers of passengers using airports, ferry ports or other modes of transport, typically put out by the airports, ferry ports etc to demonstrate how well they are doing
  • The negative: holidaymakers are being “ripped off” by having to pay excessive prices to travel in the school holiday periods.

 

The latter issue has come into sharper focus this year as a result of government policy that parents should be fined if they take their children on holiday in term time – even though at one point in the Autumn the Department for Education denied that this was a formal government policy.

 

2014 has also seen an E-Petition launched seeking to “Stop holiday companies charging extra in school holidays”, and that petition received 170,928 signatures up to its closing date in February 2014 – this is clearly an issue of concern for parents.

 

When petitions of this nature receive significant numbers of signatures, government has to respond to the petition.  Interestingly, the response from the Department of Business, Innovation and Skills mirrors the industry position extremely well – and is worded in a way that I agree with – and actually looks very like something I wrote to a previous Consumer Affairs Minister some years ago:

 

In a competitive market it is for business to decide the market worth of their products and to price accordingly. In the holiday market there is fierce competition for custom. Prices rises in peak periods are a reflection of the international competition holiday companies face for hotel accommodation and other services in destinations which are popular with consumers from many other countries and where there are limits to capacity. These consumers also wish to holiday during these peak periods. We are advised also that holiday companies must seek to make a reasonable profit during the peak periods so that they are able to operate throughout the year when demand and therefore prices and profits are lower. 

 

The industry can therefore give itself a small pat on the back that we have managed to get government to understand the background to this issue – and that for once, a clear, consistent message to government has worked. However, we still have to convince consumers and the consumer media why this is both a reasonable and appropriate response.

 

As an industry, we do have a fundamental problem, in that we work with wasting assets. If a hotel bed or aircraft seat remains unfilled, the owner of the hotel or the aircraft still has a cost attached to that bed or seat, so it is in their interest to attempt to fill every seat or bed, even if only to make a contribution to the cost of operation. True, hotels can close down in the low season, or aircraft can sit on the ground. However, there is still a cost of ownership when this happens, so the hotelier or airline has a vested interest in earning something from their asset at all times.

 

As there are inevitable peaks and troughs in demand, this results in hotels and flights being offered for sale at significantly below the real cost of operation at certain times of the year, simply to obtain some contribution to the cost of ownership. In theory, an airline could move its fleet to a country where demand is counter-cyclical, and 10 or 15 years ago, a number of charter airlines operated their fleets from Canada in the winter, to reflect the fact that this was peak season for Canadian tourists. As the number of aircraft in the world increases, the opportunity to take that step is reduced, and this now rarely happens.

 

The net effect of this is that travel businesses generally – whether that be tour operators, airlines or hotels, end up trying to secure whatever price they can for the holiday products they sell in the low season – and often end up selling significantly below the real cost of sale, simply to secure some contribution on their fixed assets.

 

The BIS response, quoted above, also highlights the extent of the peak season – it is not just Brits who go on holiday in August, but most European citizens. I am a great fan of the tourism data produced by Eurostat, the European Statistical office. Due to some of their challenges in collecting data from 27 EU member states, they can be a little slow in producing reports, but the contents are frequently really interesting. Their data is readily available online[1] and contains a number of gems. In this context, Eurostat have consistently reported that around 25% of all holiday trips across all EU member states are taken in July and August, and even more than this, around one third of total annual bed nights are taken I those 2 months. It is therefore clear that the squeeze on beds in the peak season occurs across Europe. As a result, and in line with simple economic theory, as demand increases with a relatively fixed level of supply, the only factor that can change is that prices increase.

 

Therefore, consumers end up facing a double whammy – holidays being sold below cost in the low season, and high demand leading to high prices in the peak season – and it is the contrast which leads to an understandable level of consumer discontent.

 

For me, the issue is not that different to train prices. As a regular user of the rail network in the UK, I always get irritated by the price differential between peak and off peak prices. Ignoring Advance fares for a second, as these are the rail industry’s method of flogging stock which might otherwise go empty, the “normal” fare (by which I mean the off peak fare) from Manchester to London is £79.20. If I want to travel in the peak period, this rises to £321.00 – more than four times the cost. My irritation comes from the fact that peak is bizarrely defined as arriving in London not earlier than 11:30, or leaving London between 15:15 and 18:45 – which results in trains arriving in London at 11:00 either running virtually empty, or being partly filled with passengers on cheap Advance or other tickets.  However, on the basis that the government regulates rail fares, it has clearly accepted that a 4:1 price differential is acceptable for rail fares – and it would be difficult for it to argue otherwise for holiday prices.

 

If the truth is told, a large price differential is not really in anyone’s interests. It makes travel businesses very dependent upon peak season sales at full price to be profitable – and in the long term, there is probably more profit to be achieved by having higher demand year round, making it possible to sell at low season at something more reflective of the real cost of operation.  As an industry, we struggle to work out how to achieve this. Our message to government has been that they should spread school holidays, as in Germany and other countries, to extend the peak season. That may help a little, in that it may stop the high points of the peak period being quite so great, but it doesn’t address the fundamental problem that sun and beach remains the main reason for holiday travel, and frankly, there isn’t a lot of sun around in the northern hemisphere in November and January. Equally, we cannot change the date of Christmas and the New Year, so the peak then will always be the same.

 

The best we can probably hope to achieve is to try to shorten the low season as far as possible – encouraging people to travel in the shoulder months by focussing on the complementary offer. However, the family market will continue to be excluded from these opportunities all the while that government continues with its policy of fining parents who take their children out of school in term time.

 

It has long been a mantra of the more enlightened members of the travel industry that for tourism to be successful, there has to be a genuine partnership between government, local authorities and the private sector. The whole issue of peak season pricing, as part of the broader issue of seasonality, can only be addressed by that partnership.

 

Until that happens, the industry will continue to face headlines accusing us of ripping off holidaymakers who want or need to travel during the peak season.

[1] See in particular http://ec.europa.eu/eurostat/statistics-explained/index.php/Seasonality_in_tourism_demand