Study Sees Shrinking Profits on Package Sales

At a time when leisure travel agents are increasingly focused on selling land vacations, a new PhoCusWright study indicates that trouble is brewing in the traditional vacation package segment.

The outlook is not all bad. Travel agents are still the preferred source for booking traditional vacation packages and are likely to retain their command of this segment over the next few years, according to PhoCusWright’s U.S. Travel Online Review 13th Edition.

But traditional vacation packages show little growth potential, and they are becoming less profitable for suppliers and agents alike, according to PCW’s annual study of the U.S. online leisure and unmanaged business travel marketplace.

Complexity is best
For travel agents, packages “with the most complex and long-haul itineraries hold the most business potential – as is also true of cruises,” PhoCusWright (PCW) analyst Maggie Rauch told Travel Market Report. “So to the extent that this type of travel grows, it’s good for agents.”

Squeezed margins
But the study noted that agents will continue to see margins squeezed on package travel.

“Wholesalers are challenged to source air at discount prices, leaving less profit to share with travel agencies through commissions,” it said.

Flat market
Other key findings in the PCW study regarding vacation packages include:

•    The U.S. packaged travel marketplace was flat in 2012. The market is expected to achieve 2% to 3% year-over-year growth in 2013 to 2015.

•    Traditional travel agencies remain the largest distribution channel for packages (67%) despite growth in online packaging and supplier direct sales.

•    Travel agency share of traditional vacation packages sales will be virtually flat from 2013 through 2015.

•    OTAs’ share of the packaged travel market fell from 32% in 2011 to 31% in 2012, and it will remain at that level for the next few years.

•    Only some of the largest vacation packager brands have meaningful amounts of website bookings; online direct sales account for only 7% of all traditional vacation package bookings.

Web-direct sales
While the study noted that most vacation package suppliers have had limited success with online sales, it also said that as suppliers continue to “update their websites and expand in-destination ancillary bookings, direct sales are likely to grow.”

The website sales of traditional vacation packagers hit $800 million in 2012 and are expected to increase by 4% to $835 million in 2013, eventually reaching $922 million in 2015, according to the study.

Despite these gains, website sales of traditional vacation packagers will represent just 5% of all packaged travel revenue through 2015.

Little growth overall
In general, traditional vacation packages are stagnating as more travelers have begun to seek Internet options to create their own vacations, the study said.

According to PCW, the segment is having particular difficulty in appealing to younger consumers.

However, it said that “a handful of TVPs [traditional vacation packages] that serve faithful niches and/or appeal to upscale travelers looking for unique experiences have survived – some have even thrived.”