ven before Sept. 11, the economic
slowdown of 2001 brought the specter of financial failure back to
the tour operator segment of the travel industry.
The boom of the 1990s had given the tour industry a reprieve
from the failures that often had plagued it in the past. Tour
operators looked good enough to buy, and investment companies came
into the business to consolidate and roll up many prominent,
family-owned businesses.
Signs that the party might be ending began to appear last year.
In a spectacular implosion, Global Vacation Group, the pioneer of
Wall Street roll-ups, retired most of the brands it bought,
including Haddon Holidays, Globetrotters, MTI Vacations and
Friendly Holidays. That left a stripped-down version of the
company, renamed Classic Vacation Group after its most successful
brand operation.
The meltdown didn't result in any default or bankruptcy, but
Global Vacation's miscalculations served as a stern lesson that
low-margin businesses don't offer a large margin for error.
More blips on the radar screen appeared in the first quarter of
this year with the demise of Tuchman Tours, Marco Polo Tours, New
York Apple Tours and Wild Women Adventures. Then, the disastrous
collapse of Kingdom Vacations last May served as further reminder
of the fragile economics of the tour operator business.
The attacks of Sept. 11 and their impact on travel gave tour
operator watchers a case of the jitters but to date, there have
been surprisingly few failures.
Jet Vacations ceased operations in November, and the extent of
consumer losses is yet to be ascertained. The company was not a
member of any major tour association.
A small, Philadelphia-based Caribbean operator named Around Town
Tours also failed in November. Sunmakers ceased operations Oct.
15.
Two other small tour operators, Landmark Tours of Sacramento,
Calif., and Midwest Charter Tours of Chicago, failed in November.
In both cases, consumer losses were covered by the National Tour
Association's consumer protection plan.
Now, an anxious industry is waiting for other shoes to drop.
Like any small business
The tour operator business is subject to many of the same
influences as other small business.
Some fail as start-ups. Some fall victim to questionable
business practices. Some are caught up in the particular snares of
the business.
But the financial vulnerability of the tour operator segment is
due in part to the peculiarities of its cash flow.
According to David Weber, president of R. Crusoe & Son, the
business of tour operation requires much more than travel
experience. Tour operators have to be wise about marketing,
database management and cash flow, he said. They need to know if
they are making money at the end of the day.
Every business has its built-in hazards, but tour operators face
a daunting combination, as the following discussion shows.
Low margins
Tour operators bring in a lot of money, but most of it flows out
again in payments to suppliers, employees, contractors, advertising
media and printers.
"It's low margin at best," said John Stachnik, president of
Mayflower Tours. "Between fixed costs and variable costs, ours are
mostly variable, which means increased volume doesn't always lead
to increased profitability. If I take 60 people to a destination,
it's $100 a person. If I take 80, it's still only $100 a
person."
Gavin Tollman, president of Trafalgar America, agreed, saying,
"It's a low-margin, high-volume business. To make money, we have to
move large volumes of people."
Escorted tour operators work on a larger margin than vacation
packagers because they bundle more components. Profit can be
attached to every component added to the package.
Escorted tour operators try to package as many of the products
or services a customer is likely to buy on the trip as possible.
With volume purchasing, an operator can get a better price than an
individual and make a profit without increasing the cost to the
customer.
Long investment cycles
Developing a tour product and bringing it to market is a long
process, and the risk is compounded by the need for operators to
set their prices at least a year in advance.
Many operators publish their brochures and then keep their
fingers crossed.
In extreme cases, a tour operator can change prices after a
brochure is printed, but usually operators must make one early
assessment of how prices will change. They also must place their
product on the market without knowing whether a competitor will
offer a better price.
Tour operator cash flow also is affected by internal cycles of
investment and return. An operator must invest in developing its
product and marketing it long before ever receiving any money for
it.
Mayflower's Stachnik noted that 90 cents of each marketing
dollar is spent before anything happens.
"There is a high risk involved to put out a program to Europe,
do the marketing, create brochures, have breakfasts for travel
agents, and then you have an Achille Lauro or a hoof-and-mouth
[epidemic] or a Sept. 11 and, boom, it's shot."
For a tour operator, product development means putting together
every piece of the tour, including the itinerary and all its stops,
stays, hotels, attractions, events and transportation. Once the
tour is developed, brochures must be designed, printed and
distributed.
Selling the product requires investing in advertising, in
salaries for salespeople and commissions for travel agents.
Today, operators also must publish brochures on line. The Web
has not yet led to a reduction in brochure costs, as was predicted
in the early days of the Internet.
Instead, the Web has changed the nature of marketing by enabling
consumers to learn more about products before they buy.
"Even though our site has every one of our 350-plus programs on
it, people still request brochures via the Internet," said Bob
Drumm, president of General Tours.
"Brochure requests have actually gone up. We used to produce 10
brochures for every passenger. It's gone up to about 30 over the
last six years. The Web also makes it easier to request
brochures."
Seasonality
The seasonality of the business is a factor that requires tour
operators to distribute their available funds carefully.
Although the peak season for travel has stretched, Americans
still favor the summer months. Most tour operator bookings take
place between February and May, according to Heinz Niederhoff,
former president of Maupintour. That's when the most money is
coming into the company.
"The tough time is always the second half of the year," said
Niederhoff. "The cash crunch comes in August, September and
October. Most tours are sold by then. There's not much to sell
anymore. That is the time of year that separates the boys from the
men."
In the later part of the year, tour operators are operating on a
reduced cash flow. For companies operating on a small capital base,
that is the crucial time of the year to get through.
Cancellations
Tour operators sometimes suffer losses from breakage, or
cancellations. If a client cancels, the deposit might be all the
operator gets out of the deal. The operator might be unable to
refill the seat.
This problem became cataclysmic in the wake of Sept. 11.
One way for operators to deal with breakage is to encourage
clients to buy cancellation insurance. With insurance, if a
passenger must cancel for unforeseen reasons, he or she receives
full payment back. Tour operators also can make some profit from
cancellation insurance.
Cancellations can be minimized, according to Phillip Gordon,
chief operating officer of Globus & Cosmos, by doing good work
in the strategic product planning and inventory planning phases of
the operation.
A well-thought-out range of inventory will insure high
materialization and a high reliability of operation.
Bad news
Among the biggest hazards for tour operators are political
problems and natural disasters at the destinations where they take
customers.
"If you focus on one region, whether it's weather like
hurricanes or political instability like war or terrorism, a lot of
things can happen," said John Galvin, chief financial officer of
Collette Vacations. "You have to keep a close eye."
The risk is especially bad for operators that specialize in a
single destination.
In most localized conflicts, an operator with a diverse product
line can adjust by rechanneling business to other destinations and
avoid major damage. But for tour operators that are specialists in
a single destination, a single event can bring business to a
standstill.
The phenomenon is exacerbated by the U.S. public's notorious
lack of sophistication about global geography.
During the conflict in Kosovo, for example, tourism suffered in
places hundreds of miles from the site of the violence.
Most operators today insure themselves by avoiding
overspecialization. For example, Drumm of General Tours said his
company used to focus on Russia and eastern Europe.
"Now we're a worldwide company," he said. "We had to become
worldwide for several reasons. The world is complicated. If there
are difficulties in one place, you need to have other places to
travel to."
Currency
International tour operators must deal with currency exchange
and its impact on consumers and suppliers.
If the exchange rate at a particular destination is favorable to
Americans, it will stimulate travel to that region.
But operators themselves are vulnerable to currency fluctuations
because they have to set their prices in advance. If the exchange
rate goes the wrong way after the brochure goes to press, it can
wipe out the profit margin.
Most international tour operators take steps to stabilize
exchange rates for themselves by securing futures from a bank,
which locks them into a rate and protects the firm from
fluctuations.
"There are tour operators that will play the hedge and gamble on
it," said Stachnik.
"I'm not one of them. I take a conservative approach. I'm not in
business to hedge bets on something like that. I consider it
another business that I don't know enough about."
Advantages
But with all these downsides to running tours for fun and
profit, why do people do it?
Operators admit the business also has its own set of interesting
advantages.
One is the absence of fixed assets. Operators don't have to
invest in or maintain much in the way of equipment. Motorcoaches
can be chartered or leased. Although vertical integration is common
in Europe, operators in North America tend not to be the owners of
hotels or airplanes.
Also, the cash flow does work in the operator's favor some of
the time. You do collect revenue well ahead of the time you
disperse payments to suppliers and vendors, said Gordon of Globus
& Cosmos.
Of course, this requires some cash-management skills. "There's a
lot of cash, and you have to manage it in a businesslike way," said
William La Macchia, chief executive of the Mark Travel Corp.
Most tour operators try to make the most of the float time
between receiving deposits and paying suppliers, but it's a tricky
business.
"The trend toward shorter bookings is affecting them," said Bob
Whitley, president of the U.S. Tour Operators Association. "For the
ones living on the float, it's getting narrower."
For La Macchia, the final advantage of being a tour operator is
that you're not a travel agent.
Being a tour operator is not as tough as being a retail agent,
according to La Macchia, who has been both.
"When I think of small margins, I think of travel agents," he
said. "I grew up in the travel agency business. That's the toughest
of all possible worlds."
La Macchia said he is hopeful about the future of both agents
and operators.
"There are so many opportunities. It's an exciting time to be
part of this industry. But the economic times are horrendous. It's
important to be very focused on business."
Quick exit by investors a costly new
phenomenon
hat made the Kingdom Vacations
failure worse for the tour operator industry than most previous
failures was that it racked up nearly $10 million in consumer debt,
which overwhelmed the U.S. Tour Operators Association's $1 million
consumer protection plan.
Until Kingdom Vacations, no member failure had ever cost
consumers money.
Kingdom's collapse sent the USTOA back to the drawing board to
rewrite not only its consumer protection plan but also its
membership requirements.
"It forced us to reconsider everything," said Bob Whitley, USTOA
president.
Kingdom represented a new phenomenon in the tour industry. Tour
operations historically were run by small businessmen. Operators
tended to be individualistic, labor intensive, low margin and
highly dependent on the energy and passion of their owners.
The 1990s witnessed the entrance of investment firms into the
tour industry. When the stock market was booming and there was
capital to invest, investors turned their attention to the tour
industry.
It was an industry that previously eluded investors because it
consisted of many small businesses, and it was considered
unattractive due to small margins. But in the 1990s, several
investment firms began buying tour operators, working on the theory
that consolidation would yield synergies, economies of scale and
price advantages through increased buying power.
Ultimately, the acquisition plan of an investment company
includes an exit strategy, a way of recouping the investment either
through selling the company or taking it public.
Kingdom Vacations was a small Disney operator that was bought by
Vista Travel Ventures, a company backed by investment group Thoma
Cressey Equity Partners.
After 18 months, when results failed to live up to Thoma
Cressey's expectations, it exited the travel industry, pulling its
financial backing from Kingdom and leaving millions of dollars in
debt.