Sun
Travel
AQA A2
Business Studies
BUSS3 - Strategies
for Success
Revision Workshop
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In November 2011, as part of a refinancing led by SunTravel’s
banks, holiday industry veteran Marcus Klose was appointed
Chairman. Marcus’s main objective is to improve SunTravel’s profit
quality and significantly increase the share price over the next 3 years by achieving market
leadership in the overseas holiday market. SunTravel’s bankers and major shareholders have
serious concerns about the high level of gearing and financial under-performance compared
with the market leader – GOSTAY Travel plc.
In May 2012 the Board appointed Hazel Blair as CEO. Hazel has no travel industry
experience but she has a reputation for effective cost-cutting in a range of industries. Hazel
has spent the first few months in her role assessing the scope for significant cost reductions
and ways to reduce SunTravel's large debts.
Key Features of the UK Tour Operating Market
SunTravel operates in a very large market. In the UK alone, consumer spending on overseas
holidays is around £30bn.
SunTravel is a vertically-integrated business. In addition to the SunTravel holiday brand, it
owns and operates a large fleet of aircraft and sells many of its own holidays via SunTravel
Holiday Shop - (the UK’s largest chain of travel agents), SunTravel Direct and SunTravel.com
Tour operating is a high risk and capital intensive business. To earn profits, operators need
economies of scale to minimise unit costs and earn a good profit margin. Tour operators
usually commit to their capacity (hotel rooms & flights) well in advance by estimating what
the likely demand will be. As a result, fixed costs are high and losses can be heavy if demand
does not meet supply. The industry has a long history of low profit margins and business
failure; since 2011 over 20 operators have gone bust leaving thousands of holidaymakers
stranded or without a holiday.
2 AQA A2 BUSS3 Revision Workshop
SunTravel’s core market appears to be in long-term decline. Since 1999, the number of
overseas packaged holidays taken by UK travellers has fallen consistently and now stands
at 36million p.a. Holidays of the kind offered by SunTravel and its competitors have suffered
during the economic downturn, with a 20% decline in holidays taken between 2008 and 2011.
The mainstream (mass market) packaged holiday industry is not just affected by the state of the
economy. The behaviour of holidaymakers is changing too, both in the type of holidays sought
and their approach to booking. These key changes in customer behaviour include:
• Less likely to book a traditional flight and accommodation package, with more customers
happy to book the components of a holiday separately from online distributors and
low-cost airlines;
• A tendency to book much later (closer to departure) and to be more price-sensitive;
• Research and book holidays online rather than relying on the service of travel agents. In
the last 5 years, the number of overseas holidays booked through travel agents has fallen
by 20%;
• Increasing success of niche operators who offer more specialised holidays and have more
flexibility over their flight and accommodation arrangements.
The packaged holiday market has increasingly been split into two main segments:
Mainstream
Holidays
Classic package of charter flight and hotel accommodation (half-board) to
popular destinations in the Mediterranean. Still popular with older customers
and those in the C1C2D socio-economic groups. Key to success in this
market is to operate at low-cost.
Differentiated
Holidays
More specialised holidays which add more value by addressing specific
customer needs – e.g. all-inclusive, activity-based, experiences. Appeals to
a more affluent consumer who expects a differentiated experience.
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Hazel’s Cost Minimisation Strategy
Hazel believes that the most important short-term objective is to reduce
operating costs in order to improve cash flow and reduce the risk of business
failure.
Working with a firm of external consultants, Hazel has developed a plan named
“Project Take-off” which aims to make SunTravel the lowest-cost operator in
the market. Hazel proposes that the business:
• Close up to 250 of SunTravel’s portfolio of 660 travel agencies, some of
which are loss-making; the remaining leases will be renegotiated with
landlords;
• Implement delayering amongst senior and middle management throughout the Group,
including at Head Office;
• Outsource 50% of SunTravel’s holiday flying to a low-cost airline (JetSky) and sell up to 20 of
SunTravel’s ageing aircraft fleet;
• End a popular benefit traditionally offered to all staff – heavily discounted holidays for staff, their family
and friends.
Hazel estimates that the total cost of the plan is £150million which will deliver annual cost savings of
£100millon within three years. Hazel anticipates significant resistance to her proposals from the workforce
at SunTravel which is heavily unionised and has been through a period of great upheaval and uncertainty
in recent years. The proposal to end staff discounts is likely to be particularly unpopular.
Marcus expresses his reservations...
His view is that the plan may not be enough to ensure SunTravel's long-term success. Marcus would
prefer to reposition SunTravel as a provider of differentiated holiday products and also invest much more in
developing online sales.
"The reservation I have with your plan Hazel", says Marcus before a crucial Board Meeting, "is that
significant cost-cutting in the short-term will damage our ability to regain market leadership in
the long-term".
Hazel recognises that SunTravel might benefit from a portfolio of holiday brands that are focused on the
faster-growing and more profitable differentiated holiday market segments. However this would involve a
significant investment in innovation, improved staff training and enhancements to the customer experience
throughout their holidays. In her view, SunTravel simply can't afford
product development of this kind until the fundamental problems of
the business are solved.
4 AQA A2 BUSS3 Revision Workshop
Appendices
Appendix 1: Financial Summary
Financial highlights for SunTravel plc & the market leader GoStay Travel plc
£millions
SunTravel plc
2011
8,400
50
2.8
8,280
(260)
4,600
Revenue
Operating Profit
Dividend per share (pence)
Non current liabilities
Net cash inflow / (outflow) in year
Capital Employed
2010
8,900
255
10.7
6,525
(85)
4,500
GOSTAY Travel plc
2011
12,700
495
10.7
4,420
170
6,500
2010
13,520
530
11.0
4,288
215
6,700
Revenues, Operating Profit and Market Share by Customer Location for Sun Travel
UK market
Other Europe
Revenues
2011 (£bn)
6,900
1,500
Operating Profit
2011 (£bn)
40
10
Market Share
26%
7%
Market Growth
Rate p.a. (%)
-3%
+2%
Appendix 2: Key Operations Data
Airline Fleet Capacity & Performance (2012)
Load Factor * in 2012
% on-time arrivals
Number of aircraft
Average Cost per Passenger Flown
SunTravel Air
83%
89%
33
£93
Holiday Industry Average
92%
84%
14
£77
* Load factor is a measure of capacity utilisation in the airline industry. It is calculated by dividing the
number of seats sold by the total number of seats available
Holiday Rating & Customer Service Performance
Average Holiday Ratings 2012 #
Mainstream Product
Differentiated Product
Customer Complaints (% of bookings)
SunTravel
61%
65%
6%
GOSTAY Travel
59%
87%
3%
Industry Average
55%
83%
6%
# % of customers rating their holiday good or excellent in post-holiday customer service questionnaire
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Appendix 3: UK Marketing Data
Marketing data for SunTravel plc compared with the competition
SunTravel
GOSTAY
660
22%
35%
435
41%
51%
Rest of
UK Market
4,180
17%
22%
£1,260
£2,100
£1,370
£3,185
£950
£2,030
Number of travel agent outlets
% of bookings made online
Customer loyalty - & repeat bookings p.a.
Average revenue per booking:
Mainstream product
Differentiated product
Appendix 4: HRM Data and Performance Summary
Staff Turnover: Travel Agencies
Staff Turnover: Tour Reps
Percentage Unionisation
SunTravel
24%
68%
78%
Holiday Industry Average
34%
81%
79%
Recent results of SunTravel Employee Satisfaction Survey (Summer 2012):
I am happy to work for SunTravel
SunTravel offer a competitive remuneration package
I have a clear understanding of SunTravel’s
business objectives
% Respondents
2012
56
35
% Respondents
2011
64
45
15
12
Appendix 5: Summary of Project Takeoff Costs and Returns
The estimated investment and returns of Project Takeoff are:
Outsource flying to JetSky
Rationalise travel agency portfolio
Remove staff travel concessions
Delayer organisation structure
Total for Project
6 AQA A2 BUSS3 Revision Workshop
Total Cost £m
60.0
48.0
2.0
40.0
150.0
Annual Benefit £m
50.0
15.0
15.0
20.0
100.0