Tour Firms Face Challenges, but Agents’ Role Is Secure

Travel agents will continue to serve as the dominant distribution channel for traditional tour operators, but agents looking to the tour segment for big growth may need to temper their expectations. Changing business dynamics are slowing the growth of packaged travel, according to a new study.

While the total U.S. travel market grew by a healthy 5% in 2014 and 2015, growth in sales of packaged travel by both tour operators and OTAs trailed the overall market by two percentage points in both years, according to Phocuswright’s newly released U.S. Online Travel Overview Report, Fifteenth Edition.

In 2016 and 2017, packaged travel will lag even further, shrinking as a percentage of the whole, the research firm said. Total U.S. travel sales are predicted to grow by 6% in 2016 and 2017, but growth in packaged travel is expected to slow to just 2% in each of those years.

Tour operators, which Phocuswright calls “traditional vacation packagers,” dominate the market, accounting for 69% of package sales in 2014, but OTAs are gaining share through sales of dynamically packaged vacations. By 2017, traditional tour operators’ share of the market will drop to 67%, it predicted.

Still, there’s good news for agents here. Faced with multiple challenges, traditional tour firms will focus on their current strengths, and these include working closely with travel agents, Phocuswright said. 

Supply-side issues
Even without the incursion of OTAs, traditional tour operators face a number of challenges. In addition to heightened competition posed by expanding cruise inventory, tour firms must contend with tough trends in their own supply stream.

On the hotel front, strong occupancies and healthy rates are prompting hoteliers to pull back on the volume of discounted rooms they make available to tour packagers, or to negotiate higher rates for those rooms.

Tour firms face a similar challenge on the airline front, where tighter capacity creates much the same dynamic.

For tour firms and other packagers, restricted access to discounted inventory translates to slimmer margins and/or less-attractive package prices.

In this challenging environment, Phocuswright foresees continued consolidation among tour firms, as smaller tour operators lose out to bigger firms that have more negotiating power and healthier margins.

Tour firms also will see business erode as OTAs increase their share of the packaged travel market. Phocuswright found that demand is growing for dynamically packaged vacations, a product type dominated by OTAs, while demand for the prepackaged vacations and tours sold by traditional tour firms has remained flat.

So while traditional tour firms will continue to work closely with travel agencies, incursion by OTAs into the overall packaged travel market means that travel agents’ share of packaged travel sales will drop from 46% in 2014 to 45% through 2017, Phocuswright said.

Tour ops and agents
In the next two years, more than two-thirds (67%) of tour-operator sales will be made via traditional travel agencies, Phocuswright said.

Travel agents’ own emphasis on tour sales is a key factor. Tour packages can be big-ticket purchases, second only to cruise in terms of average spend per traveler, making them an attractive sale for agents, Phocuswright noted.

It also pointed to the continuing trend among former cruise-only agents to diversify into tour sales in order to net their more generous commissions. 

Complex product
Traditional multi-component packaged tours are also a complex product involving a complex sales process. For tour firms, that has proved a hindrance to moving consumer sales online. But they seem likely to ensure a continued role for agents, especially at the higher end of the market.

“While OTAs focus on exploiting the advantages of dynamic packaging, traditional travel agencies are helping travelers with more complex and upscale itineraries,” Phocuswright noted. “Successful agents, procuring complete trips or specific components a la carte, are able to create highly customized itineraries tailored to the needs of discerning travelers.

“The more complex, expensive, exotic, or customized a package may be, the more likely a travel agent or specialized tour operator will be involved,” it said.

Strong points
Phocuswright identified younger travelers as a strong market for packaged travel. It found that Millennials and travelers ages 35 to 44 were more likely to book these types of vacations than travelers ages 45 and up.

“Older, more experienced travelers may prefer to purchase travel a la carte to suit their more sophisticated tastes,” it concluded.