Why We Love Group Travel

We love Group Travel.

But wait a second, who is we? It’s definitely not WeAreHolidays. It’s the Large Travel Company whose ad you see in the newspaper every other day. Yes, the full page colourful ad with loads of weird holiday package names - an ample sprinkling of Amazing Europe, Thrilling Maldives, couple of Discover USAs, some Enchanting Australias & a few Pearls of Asia thrown in. And lots of numbers, I mean prices, all of which seem to be on discount.

Well first let’s see what is Group Travel. The holiday leisure market is broadly split between Group Travel & FIT Travel. FIT is a industry acronym for Free Independent Traveller, which in plain English means Customized or Personalized packages. Basically the holiday package is created around your specific requirements and customized and personalized to your tastes. Group travel on the other hand, as the name suggests, consists of a group of supposedly like minded people travelling together. A group could be as small as 3 – 4 people travelling together or as large as 100+ people, though most travel agents will consider 10 or more people travelling together as a group. The reason for this is, you can book at most 9 people on a single PNR (Passenger Name Record, sort of a transaction id number issued by the airline or the system issuing the ticket on behalf of the airline) while booking a air ticket. 10 or more people on a single PNR qualify as a Group PNR.

So how does Group come to play such a important role in the holiday market. Think about it, I mentioned earlier that Holidays are complicated products (to put together and sell). Since these are high involvement purchases, customers tend to spend a lot of time planning and going back and forth with the travel company. This requires the person selling (‘seller’ in travel lingo) to be well versed in the finer nuances of the holiday, the various individual components of the holiday (read, It’s Complicated) and know the destinations the customer is interested in, inside out. Turns out, getting such Sellers is easier said than done. And rightly so. It’s very difficult to train and educate a large number of Sellers who know their destinations, various travel products, have the ability to understand the customer’s requirements (said & unsaid), put together a holiday itinerary, have the patience to go back and forth with the customer’s every changing needs / requirements over time and also meet their sales targets. Such Sellers do exist, but only to serve customers who will pay for their skills. Researching and planning a holiday is no mean task. So how does the Large Travel Company we were talking of in the beginning sell holidays. Short answer is, if you can’t find the Super Seller to sell a Complicated Holiday Product get a Average Seller to sell a Less Complicated Holiday Product. Enter product standardization.

Anyone whose ever being near a B School, would never forget the endless case studies on product standardization as a means to scale up business. A prime example is McDonalds. A fixed limited menu helps maintain a consistent experience across thousands of McDonalds stores across the world. Same way, the Large Travel Company standardizes the holiday packages on offer. Once standardization sets in, suddenly its much easier to create a handful of such holiday products, train and educate sellers about them and get them to sell. And now unit economics of each sale also makes sense, since you don’t need the Super Seller now, the Average Seller does just fine. But to make money out of a handful of standardized products requires you to sell a lot of those products (a la McDonalds – you need to sell a lot of McAloo Tikkis & McChickens). So what next? Enter groups of people.

 

Since the Large Travel Company now needs to sell a lot of these standardized holiday packages, it needs to attract a lot of holiday consumers. So how to do it – advertise advertise, advertise (remember the full page ads) and offer a attractive price (much lower than what a consumer would get on his own). And as a extension, why not also standardize the operational fulfilment of the actual holiday. Instead of selling packages with departure date at the discretion of the customer, if the departures can be clubbed for a large number of customers and they all be sent together suddenly the operational complexity and service costs fall dramatically. What sounds better – 10 people going everyday of the week from Mumbai to Bangkok (daily airport transfers, check ins, different people in different cities on different days in Thailand and their coordination, etc.) versus 70 people going every Sunday (imagine, everyone travels from airport to hotel in 2 coaches, checks in together, eats together, travels further in Thailand together, etc.). The second case in which demand for the entire week is clubbed to a single departure day as a group of 70 people allows for much lower operational fulfilment and service costs. Thus is born the concept of Fixed Departures (or FDs), i.e. departure on fixed dates. But how to still get a attractive price for the consumer and also make loads of money on top of it. Remember, the group is travelling together, and the Large Travel Company needs to arrange for air tickets / hotel rooms in bulk. Another opportunity to squeeze out choice? Yes!! Enter pre buying.

Airlines and hotels contribute the most in terms of value to a typical holiday package. And both of them are capital intensive businesses, i.e. they need large amounts of capital (money) to sustain themselves since a large part of their costs is fixed. Remember Kingfisher Airlines? For a airline the cost of equipment (airplanes), navigation charges, human resource costs (pilots are some of the highest paid professionals around!), fuel costs form majority of the costs and most of them are quasi fixed in nature (fuel costs vary, but once a plane takes off, a empty seat does little to compensate for it). And the commodity they sell is perishable – an airline seat. Once an airplane takes off with a empty seat it’s a loss difficult to recoup. For hotels, the cost of land, the property itself, maintenance of the property, furnishings and utilities form bulk of the fixed costs. And the commodity they sell is perishable as well – an hotel room night. Once night falls without the room being filled, it’s a loss difficult to recoup as well. That is why airlines are obsessed with load factors (%age of seats sold / total seats available) and hotels with occupancy rate (%age of room nights sold / total room nights available). And the Large Travel Company knows this pretty well. So if it can put money (capital) on the table and pre buy air tickets and hotel room nights for those 70 people every week it can drive a huge bargain. The airline and hotel folks are pretty happy since they can offload a chunk of their inventory much ahead of time and also receive money for it in advance. This also allows them to forecast their own sales needs and average prices at which they need to sell the remainder of the inventory to ensure acceptable Average Value per Seat / Room Night. To help the airline and hotel to maintain their own prices, the Large Travel Company promises not to undercut them or to reveal the actual price of the air ticket or hotel room night to the customer. Thus you will always get a package price in that newspaper ad. Never an air ticket price and/or an hotel room price separately in the package price. Say hello to Opaque Pricing.

But the problem facing the Large Travel Company is, it did get a great deal on the air ticket and hotel rooms but it now must bear the inventory risk. If it fails to sell these 70 packages, it will lose money since it has already paid for those air tickets and hotel rooms. So the Large Travel Company now needs to go out of its way to ensure it liquidates this inventory come what may. So every seller selling a holiday for the Large Travel Company has his/her incentive linked to number of such packages he/she can sell. So he/she is going to bombard you with packages he/she has vested interest to sell than what you may truly require. As a sweetener to you, you’ll be offered a *good price* to compromise a bit and travel with *like minded* folks and stay in hotels the Large Travel Company has pre bought for all of the masses and travel on a day and time the Large Travel Company appointed for you and do things the Large Travel Company feels are good for this *like minded* group of people and eat what the Large Travel Company feels the *like minded* group of people may want to eat and all travelling on a strict military schedule itinerary where the bus leaves every morning at 8 AM, whether you like it or not. Oh, and did I say privacy. You get as much privacy as you get standing in the middle of a Mumbai Local or Delhi Metro during the morning rush hour. That’s also travel, no?

So what’s the problem?

I mean really, is that what’s your idea of a holiday was when you started thinking about it? If you didn’t realize it already 2 things happened – one, the experiential holiday you were planning to take is no more than a standardized one size fits all holiday package, a la McAloo Tikki and McChicken at McDonalds (and at times may feature not so like minded group of co travellers all travelling on a strict schedule and itinerary) and second, you end up going on a holiday package the Large Travel Company wants to sell to you, not necessarily the one you wanted to buy. It turned into a seller’s market very quietly and without you ever realizing along the way what was happening.

But I always have a choice?

Ah ha. And I have a personal space ship. The problem in a world where the airline, hotel and the Large Travel Company are sleeping in bed together is the Large Travel Company is artificially keeping the price of the group packages low (to make it attractive, generate volumes, minimize inventory risk) at the expense of the FIT (customized / personalized) packages. Or to state it another way, the price of  FIT (customized / personalized) packages are artificially kept high to give a clear incentive to the consumer to go in for a group package in spite of it being not the best choice.

So what’s the solution?

If I had a ready made solution (that was also a cake walk to implement), I would have been in place of the Large Travel Company, and someone else would have been writing blog posts about how bad I was. But that said, its fairly obvious that:

• Consumers are more aware than they ever were. They have access to all the information of the world in their hands. So Opaque Pricing is not sustainable in the long run unless it delivers *real value*. And opaque pricing is what keeps the group package together.
• The means to scale business does not necessarily have to lead to lack of choice for the consumer. Product standardization is not the only solution, nor is it in the best interests of all consumers. A holiday is a experiential product, high on emotions. Its not a burger! Technology can create a Super Seller out of a Average Seller or even no seller for less complicated products.
• People don’t undertake a leisure holiday to travel. Travel is only a means to an end and not the end itself. Take the classic analogy of how railroads went out of business in the US when national highways were built. What they didn’t realise was that they were in the transportation business and not in the Railways business.

Think about it.

 

Image Credit: McDonald’s Corporation