Transat ­ Our vertical integration strategy
Tour operators are, first and foremost, buyers of tourism services, which they “assemble” and market in the form
of packages. They purchase significant quantities of components in advance and at wholesale prices that are not
available on the retail market. This model enables the providers of these services - such as hotels selling
accommodation or airlines selling seats - to transfer some of their business risk to a third party (the tour
operator), often far in advance of the tourist season. It then becomes the tour operator's responsibility to sell
these products, which by definition are “perishable,” on the market because firm commitments have been made.
This method enables suppliers to “secure” their profit margins; however, tour operators continue to face a few
risks, such as the possibility of not being able to sell all the inventory, thereby registering a shortfall, even a loss.
They also run the risk of running low on inventories and therefore having to relinquish market shares to
competitors. Given that it is difficult to change the inventory position and impossible to find the most popular
products during the tourist season, they must be very astute in order to be able to gauge demand at least one
season in advance. Tour operators must also have a preferential relationship with the best suppliers available.
Later on in the process, they will need sales and marketing skills, as well as the ability to manage supply and
demand. In brief, the job of the tour operator is both scientific and artistic; it requires instinct and reasoning. It is
largely based on the concept of economies of scale: volume offsets modest unit margins.
In theory, tour operators do not need to be asset-rich; rather, they need a good address book and a lot of
know-how. The entry barriers are relatively low; the markets are fragmented and the competition is intense.
A vertically integrated tour operator such as Transat is one that is in a position to source its supplies not only
from third parties (Transat has thousands of tourism services suppliers, including many airlines), but also from
the tourism-related operations it has developed within the Company. Consequently, Transat owns an airline
(Air Transat), destination services companies, as well as an interest in a hotel chain. This aspect of vertical
integration ensures better control of costs and helps protect profits which would otherwise go into the pockets of
third parties. It also helps ensure that we provide our customers with high-quality products and memorable
experiences and enables us to be more flexible in an industry where efficiency often makes a significant
difference. In short, an integrated tour operator is better equipped to adapt, perform and stand apart.
Distribution is the other aspect of vertical integration. Many tour operators have no control over the retail
distribution of their products and find themselves having to depend on partners. Transat has always operated
travel agencies. Today, although a majority of its products are still sold by third parties, Transat has
approximately 485 wholly owned or franchised travel agencies in Canada, as well as a significant Internet
presence. In addition to the financial advantages that this structure provides, it creates proximity to the
customer, which is very important, and a direct connection with the market.
To be a tour operator, a company must have a solid understanding of consumer expectations, as well as of
products and destinations. Transat, for instance, has long been aware that the French, British, Quebecers and
Western Canadians have different travel habits in terms of destinations, formulas and seasonal preferences. Tour
operators often provide the guidance and ground services needed to reassure many travelers. Their staffers are
on hand to greet customers and, in some cases, accompany them on their journey to ensure they connect with
other suppliers, and to manage any unforeseen circumstances. They have therefore developed, over time,
extensive knowledge of the institutions and the methods used at each destination; they also have relationships,
often preferential, with local authorities.
Tour operators serve as distributors/consolidators, who sell services from faraway companies in a given market.
In fact, tour operators, which can be described as wholesalers, literally keep the tourism industry moving; they
search the world and purchase services that suppliers would otherwise not be able to distribute using their own
means in markets that are often distant and fragmented. This is the reason why, once they have the critical
mass, partnerships with tour operators are very sought-after by “suppliers.”
Suppliers have therefore understood that there is no comparison between an integrated tour operator and a
“regular” airline company… they are two very different worlds. In addition, there are marked differences
between an integrated tour operator and one that is not. Other examples of vertically integrated tour operators
are TUI Travel Plc and Thomas Cook Group Plc, two of the largest in the world.
© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 2016