Is Vertical Integration in Canada a Threat to Agents?

An increase in vertical integration among Canadian suppliers has some travel agents concerned.

Although vertical integration in Canada’s travel industry is hardly new – Transat A.T. has pursued the strategy for years – it has come into focus with Sunwing Travel Group’s expansion beyond its tour and airline operations into the hotel sector.

In late 2011, Sunwing launched Blue Diamond Hotels & Resorts, and it has been moving quickly to develop destination resorts, just this month acquiring Breezes Grand Negril Resort & Spa in Jamaica.

What’s at stake
While not everyone in Canada sees vertical integration accelerating, when suppliers operate across diverse sectors it does bring up a variety of concerns, ranging from pricing to inventory control.

“It means that because one company has control of that product, it’s not available through other channels, and it means that it’s very possible that they can control the inventory,” said John Featherstone, president of Featherstone Travel Plus in Simcoe, Ontario.

Vertical integration does have its benefits, he said. “The quality can be kept at a certain level. The negative thing is that they control it. You have to buy it from them.”

Competitive worries
Some agents worry that in the future they’ll be put at a disadvantage when competing against travel companies that encompass both suppliers and retail distribution outlets.

“What’s going to start happening is these tour operators will give their vertically integrated companies better rates. Let’s say the package is $999. They’re at $969. How am I going to make up that difference? Do I charge a service fee?” said Alan Zacca of Holiday Market Travel, an Ensemble agency in Etobicoke, Ontario.

Even without vertical integration, suppliers’ increased focus on direct-to-consumer sales is a concern, Zacca said.

“It’s getting tougher and tougher to make money in this business because of the vertical integration,” he said.

Fact of life
Ron Pradinuk, president of Renaissance Travel, an Ensemble Travel Group affiliate in Winnipeg, Manitoba, said he had mixed feelings about whether vertical integration poses a growing problem for agents. “The competitive environment may take care of it,” he said.

Vertical integration is a “fact of life,” Pradinuk said, adding, “It’s too late to close the box.

“There is a reality that they own the airline, the tour operator, the hotel, and sooner or later we do get boxed into a control issue from the supplier to us. No matter how you look at it, it is not a good thing.”

Big player
The most visible example of vertical integration in Canada is Transat A.T., Inc., a $3.8 billion company whose operations encompass inbound and outbound tour wholesalers, hotels, air transportation, airport and ground operations – and retail distribution, including some 600 travel agencies.

But Transat said travel agents need not worry.  

“We do not provide preferential pricing to the Transat retail network, and they are subject to the same policies as our external retail partners – for example, Transat’s no-discounting policy,” said Denise Heffron, vice president, national sales & commercial, for Transat Tours Canada.

“While we have continued to build our retail network over the years, we have also grown our business and maintained excellent working relations with external retail partners,” Heffron said.
 
“Transat values all of its partners and will continue to support travel retailers, whether internal or external, as we have for many years.”

Synergies
Heffron noted that vertical integration “has always been a fundamental part of Transat’s strategy – wholesale, retail, airline, airport and ground operations.”

“We do try to maximize synergies between all of our integrated companies whenever possible,” she said. “Our integrated approach provides us with many client touch points and allows us to positively influence the customer experience throughout the shopping and travelling experience.”
 
Oil and water
One travel agency executive anticipates that vertically integrated companies will come up against challenges on the retail side of their operations.

“A lot of tour operators overpaid for these retail businesses; they undermanaged the building of client relationships, and it didn’t really work the way they thought it would. I think they’ll try and divest them,” said Michael Merrithew, chairman and CEO of Toronto-based Merit Travel Group, a Signature agency.

“Retailers are retailers, and vertically integrated companies like Transat are not retailers, they’re tour operators. That’s where they started. That’s what they’re good at. To bring the two together is like oil and water,” Merrithew said.

“I think they’ll downsize their retail locations. I think you will see them try and sell their retail locations.”

Service is the solution
Nick Ceravalo, president of Options Voyages in Montreal, said he did not perceive a heightened threat from vertical integration.

“I don’t think this vertical integration is anything new, but we shouldn’t be surprised about anything that the airlines, wholesalers or any of these companies do today,” said Ceravalo, whose agency is a member of TRAVELSAVERS.

In any case, he said, the way for agents to succeed in the face of such competition is a continued focus on customer service, he said.

“The only way to deal with it is to make sure the client deals with you because of your service. They don’t deal with you because you give them the best price available – you’re giving them service. That’s the only thing you can do.”